I am not a defender of the excessive bonus culture, especially when traders are risking the banks’ cash and not their own. Nor would I seek to excuse the irresponsible management that has occurred, particularly by the top executives of some of our banks. I am also concerned that there has been a decline in the integrity of the City (although not universally) since Big Bang.
But in the wake of the banking crisis there have been too many misguided comments on the value of the City to the British economy. In his recent Bruges Group publication, Professor Tim Congdon has rightly written up and quantified the value of the City to the British economy. The “bottom line” is that in 2007 British “business exports” earned £120 billion – a major contribution to paying for all the imports from Asia.
While the City is the biggest component, such business exports also include lawyers, consultants, advertising and marketing agencies and other sophisticated services. It is wholly appropriate for a mature economy such as the UK to earn its keep in the world by its brains, rather than its brawn – which cannot compete with the low wages of Asia. The sophisticated banking services which Lord Turner opined were of little value to the UK economy earned for the UK substantial international revenues, thus indirectly benefiting the UK economy.
When I started my City career in 1970, the City of London was a fraction of the present size and served only the domestic UK economy. It had long lost its pre-World War I position as the financial capital of the world. The remarkable thing is that this has been recovered over the last 40 years. It started with the development of the Euro Dollar market encouraged by the Wilson Government and the Bank of England in the late 1960s. The US had imposed an interest equalisation tax on interest earned in the USA by foreign banks and other institutions – London facilitated tax free interest on Dollar deposits.
This was followed by the development of the Eurobond market; taking over most of the world’s foreign exchange trading (following the abolition of UK exchange controls); and accompanying this, the development of more sophisticated international banking services. Later came Financial Derivatives and the Hedge Fund Managers; and when the US made capital raising costly and difficult with “Sarbaines Oxley”, international capital raising moved to London.
Even more important than the enormous international earnings from these activities, has been the employment and tax revenues which London’s return to being the international financial capital of the world has generated. As a colleague observed to me recently, Britain would be simply mad to throw away what has been built up so successfully in London over the last 40 years.
It is particularly disappointing that Vince Cable, who was virtually the only MP (other than me) to warn of the coming credit crunch, back in 2004, should now be arguing for downsizing the City. His logic rests on the arguments that when things go wrong the costs are too great for an economy of the size of the UK to sustain: and that the impact of a major financial downturn is too large in relation to the UK economy, making economic recovery slower.
As regards the first argument, it is likely to prove the case that it will be the shareholders and not the taxpayer who suffer the losses from the banking bail out. Temporary loans from the Bank of England/Government, in the wake of a banking run, get (and substantially have been) repaid; Government insurance provided to banks is at costly charges and has not been used. Taxpayer investment in banks was made at rock bottom prices, and is likely to reap gains as the banking system recovers. Indeed, the taxpayer may end up, overall, making a profit out of supporting the banking system.
While it will take time for the financial services industry to recover, there is no reason why other parts of the UK economy cannot start growing, particularly with a competitive currency. Also while no central bank or government can guarantee that banks will not run into trouble in the future, the main causes of Britain’s credit/banking crisis were wrong economic, monetary and regulatory policies – all the responsibility of the Labour Government. A rebuilt professional Central Bank ought to be capable of supervising/regulating the banking industry satisfactorily, as it did for over one hundred years from 1870. Correct monetary policy ought to be capable of restraining excessive lending and borrowing.
There is also no evidence that a large financial sector has squeezed resources for other industries. If they are successful, there is indeed an advantage in having the City to raise money domestically and internationally, for new investments. Rather the issue is about what the UK is good at and what it is not very good at. People forget that it was the City and Britain’s international trade which came first, and stimulated the industrial revolution; and that other economies, particularly Germany, had overtaken the UK in manufacturing as early as 1870.
If the UK ends up with a tax and regulatory regime which drives international financial services to other countries, it will be UK citizens who suffer from the loss of the international earnings, the loss of the tax revenues generated and the loss of well paid employees’ spending power.