The continuing government attack on the City of London

Since the financial crisis began in autumn 2007 with the Northern Rock fiasco, a consensus narrative has developed. The central theme is that the crisis is to be blamed not on monetary mismanagement, but on the folly and greed of the banking industry, particularly the international banking activities found particularly in the City of London.

The centrality of banking industry guilt in the consensus narrative goes a long way to explain official emphasis on bank recapitalisation as ‘the answer’ to the crisis. Gordon Brown’s recent book After the Crash confirms that in late 2008 top policy-makers in the leading countries saw punishment of the banks, for their slim capitalization and excessive pay, as the first item on their agenda.

Needless to say, the banks and their staff were very unhappy with the treatment they were receiving, but could do little – in the UK or elsewhere – except to threaten to move operations to other places, such as Switzerland and various Asian centres.

Nevertheless, J. P. Morgan has recently announced that it is purchasing the former Lehman building and taking new office space in the City, implying that it continues to see London as an important operational hub. According to Robert Peston, the BBC Business Editor, in his blog, ‘The idea that we should be reading the last rites for the City and the UK’s financial services industry, because of new constraints on how and what top bankers are paid, doesn’t seem quite right’ in the context  of the J. P. Morgan announcement.

So what are the facts?

Quarterly data for the first half of 2010 shows that exports of financial services were running at about £10bn a quarter, down by about a third from the all-time peak of almost £15bn in Q4 2008.

No doubt though commentators like Peston could argue that these activities are highly cyclical and that the retreat in the UK is part of a global pattern which has been matched in other locations. As it happens, 2010 has in fact been a year of very strong growth for the world economy as a whole (although not for the traditional industrial area of North American and Europe), and the output of the financial services sectors in Hong Kong, Singapore and Shanghai has been booming, even as London struggles to recover.

The blunt truth is that UK output of international financial services is down by 20% from its recent peak and, in terms of absolute value, by about £10bn a year.

Of course no one knows the exact path of UK financial service exports in coming years. The industries involved undoubtedly enjoy excellent long-term growth potential, as financial services tend to grow faster than GDP in the long run. Nevertheless, the jeremiahs have good reason to worry about the UK losing its leading market share in these activities, just as it has lost market share in manufacturing industries for many decades. To stigmatize the banking industry and ‘bankers’ (even if they are in fact brokers and fund managers), and to impose such restrictions on their business as to oblige them to move elsewhere, damages the UK’s prospects for economic growth, undermines an industry in which we have a comparative advantage and leads to reduced invisible exports.

There is no evidence that any member of the government – or indeed of the UK policy-making apparatus as a whole – doubts the benefits of shrinking the financial sector, despite the fact that half its output is exported and that financial service exports are 20% of the UK’s total receipts from exports of goods and services.

The continuing official hostility to banking and the City of London seems largely motivated by politicians wishing to posture to gain political advantage and has nothing to do with good government or good economics.

Shadow Monetary Policy Committee

Tim Congdon CBE is an economist and businessman, who has for over 30 years been a strong advocate of sound money and free markets in the UK’s public policy debates. He was a member of the Treasury Panel of Independent Forecasters (the so-called “wise men”) between 1992 and 1997, which advised the Chancellor of the Exchequer on economic policy. He founded Lombard Street Research, one of the City of London’s leading economic research consultancies, in 1989, and was its Managing Director from 1989 to 2001 and its Chief Economist from 2001 to 2005. He has been a visiting professor at the Cardiff Business School and the City University Business School (now the Cass Business School). He was a Visiting Research Fellow at the London School of Economics between 2005 and 2007. He was awarded the CBE for services to economic debate in 1997. His books include Monetarism: an Essay in Definition (London: Centre for Policy Studies, 1978), Monetary Control in Britain (London: Macmillan, 1982), The Debt Threat (Oxford and New York: Blackwell, 1988) and Reflections on Monetarism (Cheltenham: Edward Elgar, 1992). In 2005 the Institute of Economic Affairs published his monograph on Money and Asset Prices in Boom and Bust, and in 2009 it published a further monograph on Central Banking in a Free Society. A collection of papers on Keynes, the Keynesians and Monetarism (Cheltenham: Edward Elgar) appeared in September 2007. His latest book, Money in a Free Society (New York: Encounter Books, 2011), is more specifically a response to the Great Recession. In June 2009 Tim Congdon set up a new economic consultancy, International Monetary Research Ltd., of which he is now chief executive. Tim Congdon was honorary secretary of the Political Economy Club from 1999 to 2010.

1 thought on “The continuing government attack on the City of London”

  1. Posted 04/01/2011 at 17:00 | Permalink

    I believe this is one of the best, if not the best, summary of the position being taken by the npolitical class. It seems they have collectively lost their rationality on this issue as they have several others of late (man made global warming, BP oil rig and of course, the EU).

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