Why those working in the financial sector need to tell the truth about the crisis

1 11 2010

When Vince Cable recently attacked the ‘spivs and gamblers who did harm to the British economy while paying themselves outrageous bonuses’ he summed up what many think is the problem with the finance sector. Politicians like Cable have led the way in blaming the banks for taking too many risks out of greed and thereby causing the recession. We all love to find scapegoats for our problems and the banking industry has become the main scapegoat for our economic woes.

The reality is somewhat different from the story. The  banks’  massive extension of credit was in fact a government backed attempt to stimulate stagnating western economies artificially by pumping up consumption. The slicing and dicing of credit in the form of derivatives and other financial instruments prior to the recession was an attempt to spread the risk of this explosion of credit. The real problem is that investment in productive areas of the economy requires genuine risk and not enough of that kind of risk is being taken in western economies. Spending money on new research and technologies has no guaranteed pay off, it’s far easier to sink your cash into property and hope for a steady return.

Bankers operate within the parameters set by those whose money they manage. The supposed surprise that politicians now express at the way banks behaved is disingenuous. All the main parties were fully behind the credit boom. To express surprise and shock now as Cable and others have done is simply dishonest. Blaming greed is foolish and hypocritical. Indeed many of the same people who blame greedy bankers and consumers in the west for our problems are urging the Chinese and others to increase consumption so they will buy more of our exports.

The Hotwire survey reveals a great deal of defensiveness within the financial sector. While this may not be surprising it is unfortunate. The financial sector has attracted many of the brightest people in the UK. These people need to be more upfront about what really needs to be done to help our society move on. The Hotwire respondents felt for example that too much transparency may not be good for the industry; let us hear this argument being made more forcefully in the face of those who believe that more and more regulation is the answer.

Blamed for the crisis and also seen as responsible for the way out of it, some bankers hope that better corporate responsibility will restore trust. But in truth, the message that bankers need to get across is that economic stagnation cannot be solved by more regulation of banks but requires a much more fundamental reappraisal of how the west is run. Rather than spending their efforts on persuading us they are not greedy, those working in the financial sector would be better spelling out the real economic dangers we face. This would be taking real social responsibility.

*This is the preface I wrote for a report by Hotwire PR which was launched at this event, at which I was also speaking

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Our fight is not with the Chinese, but amongst ourselves

4 02 2010

 “Since the crisis, developing countries have lost interest in the old Washington consensus that promoted democracy and liberal economics. Wherever I go in the world, governments and business leaders talk about the new Beijing consensus — the Chinese route to prosperity and power. The West must come up with a new model of capitalism that’s consistent with our political values. Either we reinvent ourselves or we will lose.” Times

The recession may be over, and I stress the ‘may’, but the deep damage done to the confidence of western leaders remains. Anatole Kaletsky’s article in today’s Times, written as a review of the mood at Davos last week, reveals how deep the loss of confidence is. Let us review what forms the damage has taken.

Firstly, the recession has accelerated the economic balance towards China and the east. Secondly, it has destroyed the Reagan/Thatcher rhetorical commitment to free markets which underpinned most western economies. Thirdly it has revealed the ideological bankruptcy of western political parties. Kaletsky is right to point out that the failure of the meetings at Davos, and we could add of all of the global summits since the recession started, to address these issues is symptomatic of the crisis itself. There has been a studied refusal to properly debate the recession and its consequences. The western ruling elite has spent its time in the modern equivalent of a bar room brawl rather than addressing the main issues.

Kaletsky’s proposed solution is that western capitalism should reinvent itself. His suggested routes for doing this are themselves a symptom of the limited imagination that exists within the western elite. In fact, while appearing to want to challenge the Chinese model, Kaletsky’s solutions look suspiciously as if he wants to get as close to it as possible.

Do Western political systems need to be reformed to make them more conducive to compromise and rapid, consensual decision- making instead of the political paralysis that now threatens the US? Do we need an economy in which government plays a bigger role in finance, energy, environment and strategic infrastructure investment, but actually reduces public spending and taxes by backing away from some of its traditional, and ruinously expensive, responsibilities for health, pensions and education?

A political system which is based on consensus is what the Chinese Communist party enjoys. It is the antithesis of openly contested democracy. The ‘political paralysis’ which infects western governments is a product of the lack of any coherent political programme for change which can force its way on to the political agenda and persuade the majority in a democracy to support it. It is not more compromise that is needed, but more contestation.

It is not at all clear what western societies need to do in order to continue to make general progress. At present it seems as if the market is the only route. It may be, as Kaletsky suggests, that the state needs to play a more central role in developing the economy. But if this is the case there is even more need for a vigorous democracy to exist which can challenge and guide the state. At the very least we need an open public debate about the role of the state. It is not the form of politics which needs to be changed, but the content. Giving the state more powers without strengthening democratic control over it takes us closer again to the Chinese model.

Even Kaletsky’s final summation of the ‘choice’ facing us is wrongly framed. What we are trying to win against the Chinese is not continued global dominance by the west over the east. If it were only that why we would care? Capitalism is firmly entrenched in China and there is no threat to the market. If the stakes were only about which capitalist country comes out on top then most of us probably would not care very much. What is at stake is the future of democracy.

The experiment in democratic politics, which began with the Greeks and was taken up much later mainly in the west, is now weaker and feebler than at any time in the past sixty years. We do have a fight on our hands, but it is not with the Chinese. It is with our own narrow perceptions of what is possible. We suffer from a failure of political imagination and a climate of low expectations which infect every area of life. Any challenge to the status quo has to begin by taking on the pessimistic, risk obsessed cultures of the west.





What next for UK banking? Not learning from the past apparently

15 12 2009

uk after the recessionI was at this event yesterday jointly organised by the New Statesman and Barclays Bank and addressed by representatives by the three main political parties. John Varley, the Chief Executive of Barclays Bank, began by arguing that banks should adopt more social responsibility, by which I think he means not to get into the same mess as last year again.

Two things struck me from the discussion. The first is that there is hardly a cigarette paper’s difference between the three parties on the issue of banks or by implication in their understanding of the recession. They all supported the populist tax on bonuses (described privately to me by one senior banker there as ‘puerile’). They all agree that there should be more competition in banking, better management of risk  and better regulation. One wonders yet again why there are three parties when there are virtually no policy differences between them. The cosy atmosphere was upset only marginally by John Snow asking why no bankers were in jail yet.

The second problem is that in this discussion, supposedly about the future of banking, there was disappointingly no discussion about the role that banks could be playing in the regeneration of the UK economy.  The whole discussion was about  not repeating the mistakes of the past rather than tackling the problems of the future. Lord Myners, Labour’s  Financial Services Secretary to the Treasury, mentioned in passing that there no longer appeared to be a blockage in banks financing business, although the cost of credit was perhaps too high. The banks say that there is less demand for credit from business. If there is little demand for credit this should warn us that the economy is unlikely to see a fast recovery from the recession.

The main lessons from the recession appear to be passing the parties by. The financial bubble, as I have argued before, was not the product of too much risk taking but too much risk aversion. Investors were seeking ways of making money through apparently safe new financial ‘products’ rather than through investment in apparently riskier new industries and new technologies.

The government now effectively controls two of the major banks in the UK. It would be a good idea if it could enter into some major planning exercise to encourage investment from these banks in the kind of infrastructural projects that the UK desperately needs. It would also be a good idea to encourage these banks to set more investment aside for innovation and those areas of the UK economy which have the most promise.

None of the parties is facing up to the real problem facing the UK economy, what is going to be the engine of growth if financial services does not recover its dynamism, a prospect which appears to be receding all the time. Banks have a role in solving this problem, but the leadership has to come from politicians and there is precious little sign of that at the moment.





Economic growth and its discontents

2 11 2009

Speech given by me at Battle of Ideas Conference 31 October 2009 in debate with Lord Skidelsky and others

Continued economic growth is important because it means that the productivity of labour increases, we get more for less, we get more control over our lives and we become less vulnerable to the vagaries of nature and of fortune.

The whole idea of economic growth is under attack from many quarters. Sociologists such as Richard Layard represent an anti-consumerist trend. Layard argues that economic growth and its consequent material benefits do not make us happy. I would like Layard to do a survey of the millions made unemployed through this recession to see how much happier they are now that they have lost the benefits of a wage. Do we really think that poverty will make us happier?

Environmentalists argue that economic growth is inducing climate change and irrevocably damaging the world around us. These people are in reality scientific progress deniers. They do not believe that we can grow our way out of problems. Yet it is China, the fastest growing economy in the world, which is adopting and developing alternative forms of energy at a faster rate than anywhere else. It is economic growth that is driving this and making it possible.

There are also those who argue that scientific and material progress are too prone to risks and dangers to pursue safely. They question whether such things as GM foods, nuclear power or the pharmaceutical industry are not doing more harm than good. Their campaigns against scientific progress slow down and discourage investment and development delaying the benefits that progress can bring.

All of these trends have one thing in common. They represent a loss of belief in humanity and its  ability to change, adapt and grow economically and materially. Why is continued economic growth so essential? I would argue that there is a necessity argument but also  philosophical and social reasons why we need to push for further and faster economic growth.

When is enough enough? Not yet! The average global wage according to the World Bank was around £5000 before the recession began. This means that were growth to stop now and everybody to receive the average wage we would all have the standard of living of a UK pensioner without any savings. Just to get to the reasonable but not luxurious average wage in the UK of £25,000 would mean a fivefold increase globally. This means that we need of necessity further economic growth to raise the average standard of living.

Of course, many millions of people in the developing countries are way below even the average wage and require a bigger leg up. But even in the developed western economies there is still a need for the creation of extra resources. Poverty, deprivation and lack of sufficient services exist in many areas of life. My father-in -law for example was recently refused a life saving operation from the NHS essentially because it was too expensive.

From a philosophical point of view it is important that we understand how inimical anti-growth sentiments are to the whole tradition of western civilisation. The Book of Genesis says that man shall have dominion over nature and urges us to ‘go forth and multiply’. We are turning our back on what has enabled us to crawl from the swamps and into the relative comfort of the modern world, our ability to tame the hostile environment we found ourselves in. David Attenborough made this about turn explicit when he blamed the Bible for climate change earlier this year.

Many of the discontents that people have with economic growth are connected to failures of the market economy rather than growth itself. The market is often an inefficent producer and distributor. It is a system based on production for profit rather than to meet the needs of society. The market can create environmental problems and pollution. It is unstable and contains within it continued recessionary tendencies as we are experiencing now. It is often wasteful and irrational and it produces and reproduces inequality because of the division between those who own wealth and those who do not.

But the problems of how the market economy works should not blind us to the benefits of continued economic growth. We could end up throwing away the growth baby with the market bathwater.

Anti-growth sentiments turn reality on its head. Far from creating problems all human civilisation, culture and progress have been built on economic development. The most economically dynamic and successful countries have always been the most innovative, the most culturally dynamic and the most progressive in every way. The alternative is also true, that economically stagnant or backward countries have less going for them across the board. Turning our back on growth means turning our back on what makes us most human, our ability to exercise dominion over the world we live in.





Mandelson’s ‘industrial activism’ to boost innovation-too little too late

14 10 2009

images[3]I am finding it increasingly difficult not to like Peter. He is a key fixer in a long tradition of manipulative politicians going back to Francis Walsingham under Elizabeth the First. There is an element of pantomime about him, somebody the public likes to boo or hiss when he appears on the stage. He has chosen to throw his weight behind the project to stop Labour sinking without trace. There is something quixotic and admirable about this, whatever one thinks of Labour.

 Listening to him speak at this event yesterday it became clear that he is converted to a policy of ‘industrial activism’, that is the government taking a leading role in the nurturing and development of innovation and investement. This new initiative on bioscience looks on the surface like a good idea. It is important for the state to use its resources and authority to enable economic development as I have argued before on these pages.

The problem with Labour’s  current attempts to move from financial to real engineering is that they are too little too late. The sums of money being made available by the state for assistance to new businesses and innovation are tiny relative to the scale of the problem. Nor is this just a problem at the  state level. As a society the UK has little appetite for risk. As Mandelson pointed out in his speech, investment in research and development in the UK is lower than for many of the UK’s competitors.

Labour has come late to industrial activism. For most of the past twelve years the main focus of government activity has been on boosting spending on health and education. This extra spending was financed largely by the expansion of financial services and an increase in debt, in other words through spending the money that Chinese people have been earning.

At least in part, the focus on health and education was in response to market research which indicated that these were the areas that people in the UK were most concerned about. It is all very well for governments to respond to the wishes of its electorate. To some extent this is both inevitable and desirable. However there is another part of government responsibility which Labour has largely evaded, that of leadership. There are key areas of the UK economy which have required investment and support, such as nuclear power stations, better roads, investment in GM and other new technologies, which the government backed off from because they were unpopular. Rather than trying to win the arguments for these various key projects the government caved in, often ordering lengthy inquiries and further tests rather than risk making itself unpopular.

The Stevenage bioscience project which Mandelson announced yesterday is aimed at boosting the development of the UK’s drug industry. Yet the pharmaceutical industry has been vilified over the years in many quarters and its products, such as the MMR vaccine, held up as public dangers. When Blair was confronted with this vilification he famously declined to say whether he would give his son the MMR vaccine, thus encouraging those who irrationally opposed its use.

The UK government going forward has to take a more activist role in planning the shape of the UK economy. Its role has to encompass persuasion and leadership to convince an often sceptical public of the long term benefits of innovation in energy, technology and science.





What is ‘socially useful’ work?

10 09 2009

work[1]Lord Turner of Ecchinswell, an influential figure in the reform of banking rules in London and beyond, said that the City had grown “beyond a socially reasonable size”, accounting for too much of national output and sucking in too many of Britain’s brightest graduates.

“I think some of it is socially useless activity,” he said, adding that the financial sector had “swollen beyond its socially useful size” and seemed to make excessively large profits.

There are actually two distinct things going on in Adair Turner’s statement. Firstly he is saying that the UK financial sector is disproportionally too big for the UK economy, that it is ‘beyond a socially reasonable size’, an issue which we have debated on these pages before.

His second argument, that some aspects of financial services are not socially useful is slightly different. This plays to the idea that there are some kinds of jobs which are socially useful and others which are not. Michael Skapinker took up this aspect of the discussion in a column where he pointed out that

The division of work into “socially useful” and “socially useless” was a particular preoccupation of the post-Woodstock generation. Teaching, trade unions and public interest law were good. The oil industry and investment banking were not.

So should we oppose the financial sector on the basis that it is not socially useful? After all it is hard to see how arbitrage, the ability to shave earnings form tiny changes in exchange rates, for example, contributes much to the health, wealth or happiness of anybody other than the person doing it for a living.

The concept of ‘socially useful’ work is not itself very useful in understanding the nature of work in a capitalist economy. Businesses do not succeed or fail on the basis of whether or not they are ‘socially useful’. They prosper if they make profits and fail if they do not. The question of what specifically they produce is always secondary to the necessity of profit.

Having said that, it is also true that there needs to exist a demand for the products of any business. If there was no demand then the products of that business would be unsaleable. That is why even those  industries and professions which most people would not consider ‘socially useful’, such as the arms trade or estate agents, still do well, because their products are in demand.

Even the most arcane of financial products, such as the derivatives which lay at the heart of the financial crisis, existed because there was a demand from institutions which wanted to derisk their debt. The people who bought them did so because they thought it would make their investments safer. The fact that they failed to do this does not take away the rationality of the original impulse to buy.

Turner may have a point when he says that the UK economy has become too dependent on the financial services industry. As we have argued here before there is a danger that over reliance on financial services could backfire given the ease in which such an industry can be moved around the world. We may also chose as a nation to invest more in exciting new technologies because we think that they are more exciting and future oriented than financial services. But introducing the notion of ‘socially useful’ into the debate does not help to clarify what the real problems are.





Mars Attack-why we need a manned mission to Mars

20 07 2009

mars1This blog has already said most of what it wanted to say about the moon landing long before the 40th anniversary. So let us discuss Mars instead.

Here are ten reasons why we should support a manned mission to Mars as soon as possible.

1. Because it is there.

2. Because setting ourselves this task would prove that we humans have not lost our fundamental urge to explore the world around us. The Times today argues that curing cancer is the modern equivalent of the moon landing. Keeping people alive longer is a laudable mission, but space travel speaks to a different set of human ambitions. It does not have to be one or the other.

3. Because it would require an enormous amount of courage on the part of those taking part which would inspire the whole world. As Buzz Aldrin, one of the moon walkers in 1969 said recently

I believe that a mission to Mars would need a commitment to a permanent settlement of people who have signed up to spend the whole of their career on the planet…we are talking about pilgrims, the sort of people who left (England)on the Mayflower.

4. Because it would require international cooperation on a vast scale.

5. Because in the course of solving the numerous scientific, human and technological problems that currently stand in the way of such a trip we would discover many new things about our world and about ourselves.

6. Because a colony on Mars would be a stepping stone for the exploration of the rest of the Universe.

7. Because we would be taking a calculated risk at a time when risk taking has a bad name. A Mars mission would challenge the safety first culture which dominates many cultures today.

8. Because if any natural disaster affected the earth we would need somewhere to escape to.

9. Because if we do not do it the Chinese will anyway. Not being involved would prove that we in Britain had abandoned any pretence to being of any significance in the modern world. As Buzz Aldrin says, ‘a vibrant nation explores or expires’.

10. Because a colony on Mars would change our perception of ourselves in the Universe.