Thursday, 19 March 2009

A Shrinking City?

So the experts who translate these things for us mere mortals are giving Lord Turner's report on financial regulation a decidedly muted reception. Indeed, the idea that there can even be apolitical regulation is coming in for a bit of a bashing more generally. As far as I can make out, Turner's report is an attempt to put Humpty-Dumpty together again, to restore the City of London to a position where it can feasibly reclaim its role as a major - and hugely profitable - world financial centre.

But never mind whether Lord Turner's proposals will help achieve this - is it actually even a plausible long term aim?

One aspect of the current situation is that it is a crisis of international economic power relations: America - and the West more generally - have been living off the surpluses generated by the BRIC countries and oil producers. World trading arrangements and currency dealings have been calibrated to facilitate this. (If I was still a young hot head I'd start muttering about financial imperialism at this point in the argument, but I'll spare you the purple prose). These have broken down to an extent, and the BRIC countries, most especially China, need to be given a greater voice in how the system works. This must imply that, if and when a more stable system is successfully put together again (that might take some time), these countries will get more out of the new status quo than they got out of what went before. So, in relative terms at least, The US and its epigones - like the UK, above all - will get less.

In the light of this, what are we to make of Robert Peston's warning not to throw out the baby with the bathwater? He says,

"We can perhaps all agree that the UK became too dependent on growth generated from the City.During the past few years, when 10% of economic output, a third of growth and many tens of billions in tax revenues were generated by financial services, we did have far too many of our eggs in one basket.Many would say our dependence on the City was the culmination of decades of failure to broaden the base of our economy: an indictment of the industrial policies of successive governments.But to say that the City became relatively too big and important does not mean we should shrink it to nothing.That would be a fast route, almost certainly, to penury."

At one level this is true: over-night change in our basic national economic structure is simply not plausibly. But we can't go back to where we were before. This isn't simply an emotional spasm of leftism in response to the amoral and anti-social behaviour of the financial world (though I'm with Richard on that one).

No: its about a hard-headed sense of what's happening in the world. If the financial system via which savings transfers from East to West is broken, and the East wants more power in any revised system, then our comparative advantage as a nation in these issues will begin to seep away. Not instantly, of course - and perhaps not even without a few false dawns of temporary upswings along the way. But the probable line of development is clear.

So quite apart from the important and necessary debate on what else this country should do, we also need to be clear about what we want to do with the City - a smaller, more humble City sure, but still a financial centre.

Here's a idea: let's have a system of finance with a three fold purpose, enshrined in statute:
  • To direct capital to productive, innovative, employment creating enterprises;
  • To ensure a adequate return on the pension funds of millions of people
  • To provide mortgages at a safe and sensible level.
& a system of regulation which made judgments on these grounds and these grounds alone.

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