Twenty three years ago, the City was
excitedly awaiting the Big Bang – the moment which would usher in a new era of self-regulation of the financial services
industry. I had a grandstand view of the impending arrival. The legislation to prepare
for the Big Bang was called the Financial Services Bill, and I spent several intense weeks leading for the Opposition as the
Bill was taken through its Standing Committee stage.
Mrs Thatcher’s government, in line with its free-market philosophy, was very clear that the City could in essence
be trusted to regulate itself. They resisted all attempts to give the regulators some teeth.
The next few years of what some called self-regulation but which was in reality a free-for-all saw a huge expansion
in financial services, in the size of the institutions providing them, in the sums of money involved, and in the rewards “earned”
by those who worked in the City.
those of us who argued at the time that the “free” market was not infallible, and (in line with Keynes, who had
warned that financial markets were peculiarly prone to excess) that the City would require substantial regulation, subsequent
events have come as no surprise. Even we, however, could not have foreseen the size of the money-go-round,
spinning ever faster, that produced outrageous fortunes for a few and, eventually, crash and ruin for many.
Nor could we imagine that it would be a New Labour government
that would become the most enthusiastic cheerleaders for the new lords of the universe. So dazzled were
Ministers by the riches generated in the City that they did not think to enquire as to how many of those they claimed to represent
actually benefited from the new wealth – wealth largely gouged out of the pockets of the rest of us.
The current revulsion at City excesses – the inflated
bonuses, commissions, salaries and perks – is understandable; so, too, the anger at the growing evidence that nothing
has changed and that those responsible for the mess will be paid mega-bucks for (allegedly) cleaning it up.
But the reaction to the greed and irresponsibility
of the financial free-for-all, while natural, is a diversion from the real point. The reason for the government’s
continuing genuflection to the City is that, after 23 years of unregulated City operations, and a growing reliance on financial
services to keep the economy moving forward, the collapse of the City means that there is nothing much left.
The game is given away in the Chancellor’s
statement this week on his plans for future regulation of financial services. His constant references to
the importance of the City to our economy should be seen, not as an endorsement of the course followed over the last 23 years,
but as a confession of failure. It is an admission of how far governmental indulgence of City excesses
has distorted our economy and how big has been the price that the rest of us have had to pay for the rewards that City operators
have milked from that same economy.
real damage suffered as a consequence of the City’s domination of our economy is not to be measured, in other words,
only in terms of the current crash and financial meltdown. The weight given to the City’s interests
over a long period has seriously distorted our economic performance – and the more successful the City seemed, the more
important its earnings to our national accounts, the more other parts of the economy were allowed to wither away.
The problem is not a new one; it was Winston
Churchill who, as Chancellor of the Exchequer, remarked in 1925, “I would rather see Finance less proud and Industry
more content.” An excessive attachment to the interests of those who hold and manipulate existing
assets, at the expense of those who want to create new wealth, is – after all – a characteristic of mature economies
which have substantial assets to protect – and we have been a mature economy for 150 years.
But the era of self-regulation and the demands of the global
market meant that this policy bias became magnified many times over. Economic policy as a whole was tailored
over this period to serve the City’s interests – so consistently, and over such a long time, that it was no longer
recognised as abnormal. There was, we were assured “no alternative”; the global market meant
that if the City were not given free rein, others would muscle in on their territory.
So, monetary policy was given centre stage. The policy
itself was handed over to bankers, so that it was no longer subject to scrutiny and Ministers were no longer accountable for
it, but so that it could be decided for a limited purpose that – arguably – primarily served the purposes of one
part only of the wider economy.
policy was largely abandoned. Keynes was dismissed and forgotten. Interest rates were
pressed into service to maintain the value of the currency and to underpin financial assets that might otherwise have been
regarded as of dubious value. Little or no attention was paid to the competitiveness of the rest of the
British economy, so that any thought of following an exchange rate policy that would stimulate exports, employment and investment
simply never occurred to our policy-makers; manufacturing in particular was allowed to continue its relentless decline. Most
of our economic eggs were placed in the financial services basket and only City operators had access to the golden eggs amongst
That is why the global crisis
has hit the United Kingdom harder than anywhere else. The financial meltdown has meant that we have nothing
much else to fall back on. And that is why the government has gone back – cap in hand – to
the authors of the great misfortune, to ask them to dig us out of the hole. There is no better hole to
Millions will pay the price
of the financial collapse with their jobs, homes and taxes. But many more – and over a much longer
period – will suffer in ways that they do not even recognise as a result of the policy priority given to City fat cats
whose primary focus remains their own privilege rather than the British economy. Whether through indifference
or cowardice, our politicians seem intent on perpetuating a 23 year-old error.
This article was published
in the online Guardian on 9 July