If the “filthy rich” are no longer rich, how are we now to describe them?  The question is not a new one; the role of those who gouge wealth out of the rest of us by manipulating existing assets has long been an issue of controversy.  It was Winston Churchill who, as Chancellor of the Exchequer, said in 1925, “I would rather see Finance less proud and Industry more content.”

The importance of the City of London to the British economy dates back more than 150 years.  As the world’s wealthiest country at that time, it was perhaps understandable that we would develop an expertise in maintaining the value of our assets rather than in creating new ones.  For good or ill, the management of financial assets became a more significant feature of our economy than of any other.

The disproportionate influence of the City was a major factor, through issues like exchange rate policy which was always rigged to favour asset-holders rather than wealth-creators, in our decline as a manufacturing country.  It was only thirty years ago, however, that the policy bias really began to bite.

The critical development was the removal of exchange controls by Ronald Reagan and Margaret Thatcher.  In one bound, international capital was free – free from the irksome business of having to comply with the requirements of governments representing democratic electorates, free to roam the world in search of the most favourable (even if short-lived) investment opportunities, free to behave quite irresponsibly since regulation had become a dirty word and a duty of care was owed to no one but the shareholders.

The City seized upon the opportunity.  An expertise in managing, re-arranging, packaging, and creating new financial assets, and clipping the ticket in the process by means of huge bonuses and commissions, became the path to untold riches.   So impressed were governments – and not least New Labour – by the wealth apparently created, so dazzled were they by the super-rich, that they deferred to them in every respect, getting off their knees only occasionally to heap yet more praise upon them.

But while the filthy became rich (and some, as witness Sir Fred Goodwin, remain so), what happened to the rest of us?   Most of us were left far behind in the scramble for the goodies.  The gap between rich and poor widened dangerously, and our masters were left wondering as to why society was no longer as integrated as it had been.

And while a few became rich, our economy was left dangerously dependent on the manipulation of financial assets.  As the masters of the universe topple off the high wire, we now see that the British economy is worse placed to face the crisis than any other.

For much of the global economy, the collapse of financial institutions and services is a crisis of credit and liquidity.  The impact on the productive economy – where real goods and services are produced and sold – has been real enough, but when, sooner or later, the flow of funding is restored, so too will the productive economy recover.

For us, however, the crisis is not just one of liquidity.  It is one of solvency – and the solvency (and future viability) in question is that of a major part of our economy, one that we used to think would go on providing a growing proportion of our export earnings and our real national wealth and income.   

Our problems are intensified because our reliance on financial services has meant a corresponding and catastrophic decline in our capacity to produce real goods and services.  The proportionate contributions of banking and financial services to our GDP and total employment have been growing while those of manufacturing have been falling and that trend had been gathering pace.

The collapse of our banks and financial institutions means that we are left with a gaping hole in our ability to maintain our standard of living.  A whole chunk of what we thought was our capacity to create wealth has literally disintegrated.  Our ability to pay our way in the world may now rest on those activities like manufacturing which have been neglected and starved of investment for so long that we simply cannot breathe life back into them overnight.

Little wonder, as the volume of the government debt incurred to bail out the banks rises, that international commentators see a bleak future for us and advise investors to get their money out of Britain and out of British assets.  Little wonder that the housing market is flat on its back and that the pound has dropped like a stone. 

Even draconian action, like leaving the banks to sort out their own solvency problems and treating the creation of credit as a public rather than private responsibility, would do little to turn things round in the immediate future.  Sir Fred may continue to live the high life on his pension, but the rest of us are paying a heavy price for the greed of a few and for the failures of successive governments to do the job they were elected to do – and we will go on paying that price for a long time to come.

Bryan Gould

14 March 2009

This article was published in the online Guardian on 16 March 2009.