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3 days ago
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Rachel Reeves’s enthusiasm for the City of London – the “crown jewel in our economy” – raises concerns. Economists were worried enough to publicly warn her this month that liberalising financial sector regulations could undermine the government’s efforts to grow the economy, posing “particular risks to the government’s wider industrial strategy”. They also stressed the importance of not forgetting the painful lessons of the 2008 global financial crisis.
The experts were responding to the chancellor’s November Mansion House speech, in which Ms Reeves suggested that post-crisis regulations have “gone too far”. This is a troubling statement. Those rules were implemented to curb the sector’s excesses, prevent systemic risks and ensure that the Treasury does not have to bail out its failures. Rolling back such measures in the name of economic growth ignores the stability and protection they’ve provided.
The crux of Ms Reeves’s argument is that expanding the sector will increase and broaden economic prosperity. History offers little support for such claims. The financial sector accounts for 9% of GDP, and the chancellor highlighted its success as the second-largest exporter of financial services in the G7. But it has done little to address the UK’s stagnant productivity or its chronic underinvestment. Rather the sector’s rise has come at the expense of the “real economy” by siphoning off resources and talent.
About a million people are employed in financial services. Compare that to the 25 million working-age UK adults classed as manual workers, or the 10 million who work in low-paid, white-collar positions. In the squeezed bottom and middle, pay and social mobility are stagnant. It would be better to promote labour-intensive industries that have long been neglected.
Instead of further deregulation, Britain’s financial sector should return to directing productive investment. Once a tool for economic development, the sector is increasingly detached from its original purpose. The thinktank Positive Money pointed out that in 1960 the assets of UK banks were equivalent to 32% of GDP; by 2022 this figure had jumped to 563%. It highlighted international evidence that “too much finance is robustly found to harm growth”.
The financialisation of the UK economy has contributed to inequality and instability. In housing, an asset bubble means average-priced English homes are affordable only to the richest 10%. There is a danger to the wider economy when speculators ditch caution and chase higher risks. Insiders are sounding alarms. Sir John Kay’s 2015 book Other People’s Money questioned the wisdom of a culture where morality and prudence are subordinate to personal profit. The Financial Conduct Authority’s chief executive, Nikhil Rathi, told MPs in December that loosening the regulator’s remit will let more bad actors through.
A few months earlier, the Bank of England’s governor, Andrew Bailey, had drawn on Greek mythology to make a point about the need to be vigilant over financial services’ excess. He thought the Trojan princess Cassandra, doomed to deliver true but ignored prophecies, might have made a good central banker. Her warnings, said Mr Bailey, chime with the economist Hyman Minsky’s view that memories of crises fade, only to be replaced by illusions of a “new era”. The global financial crisis of 2008 feels distant. But complacency is the real danger. If the chancellor refuses to learn from history, Britain is likely to suffer the same mistakes again.
