Peter Mandelson once remarked that he was "supremely relaxed about people getting filthy rich – so long as they pay their taxes".
Mark Carney reminded me of Mandelson when I saw him give a major speech on the future of the City of London last month. In a nutshell, the Bank of England's Governor informed us that he is supremely relaxed about our banks growing extremely large – so long as they are also safe.
One figure stuck in the mind from that evening: nine. Mr Carney mentioned the prospect of the assets of our banks growing to nine times the size of the UK's annual GDP by the middle of the century, up from their present level of around five times (see the chart below). As the Governor pointed out, that is the destination if our mega banks – the likes of Barclays, the Royal Bank of Scotland and HSBC — continue accumulating assets at the same rate as they have since the early 1990s.
"Some would react to this prospect with horror," noted Mr Carney. "They would prefer that the UK financial services industry be slimmed down if not shut down … but, if organised properly, a vibrant financial sector brings substantial benefits."
Mr Carney has generally been a gust of fresh air at the Bank of England. His forward guidance policy on interest rates has been unfairly criticised. He has exhibited an admirable concern for the plight not only of those who are unemployed, but those millions who are underemployed too. Unlike many in the City he doesn't hail three successive quarters of acceptable growth in the wake of the deepest recession on record as a glorious new dawn. He, rightly, demands a proper and long-lasting recovery, grasping that his task is not just to get national output back to where we were in 2008, but to return us somewhere vaguely close to the path we were on before the global financial crisis struck. That underpins his commitment, in the face of hectoring from inflation nutters and supply pessimists, that there will be no premature tightening of monetary policy.
Yet Mr Carney's relaxed attitude to the explosive growth of our banks relative to the rest of our economy fills me with disappointment and, indeed, confirms some of the doubts I harboured on the appointment of this Goldman Sachs alumnus to the peak of the British financial regulatory establishment.
In short, the attitude that the gross size of our banking sector does not really matter so long as there is robust regulation is dangerous folly. It is folly because it represents a colossal bet that regulators will be prescient enough (and politically independent enough) to puncture dangerous asset bubbles at an early stage in future. It represents a colossal bet that the system will be robust enough to deal with a sudden liquidity drought or the failure of a key institution like Lehman Brothers in 2008 without requiring a public rescue. Mr Carney has pledged to eradicate the "too big to fail" problem. But we will not know whether he has succeeded until a new cataclysm hits, by which stage it could be too late. And even if one over-extended bank could theoretically be wound down without a taxpayer rescue in a crisis would the whole sector really be "resolvable" in this way? After all we have been through in recent years this is surely an irresponsible wager. And our agonising experience argues for policymakers to be highly wary about the aggregate size of the balance sheets of our deposit-taking British banks.
Mr Carney's insouciance is folly in another sense because there is mounting evidence that the rapid growth of debt relative to GDP in advanced economies, so-called "financial deepening", does not in fact bring the "substantial benefits" for wider society that the Governor referred to. At a speech in Chicago last night Adair Turner, the former chair of the (now defunct) Financial Services Authority, outlined that case, pointing out that much of the growth of debt in advanced economies has not represented new lending to the real economy, but socially useless trading of existing assets between banks. Lord Turner also pointed out that rapid growth of household debt has tended to be associated with a build-up of financial risk and also stagnation in the aftermath of recession.
"If what we mean is an increase in total private sector credit to GDP, or of banking (and shadow banking) assets as a percent of GDP, it is almost certain that beyond some level further 'financial deepening' can be negative for long-term growth and human welfare," he said.
Lord Turner was a candidate to succeed Mervyn King as Governor. In the end Mr Carney, as George Osborne's hand-picked choice, beat him to Threadneedle Street. But Mr Carney, who in some respects has had a good start at the Bank, should read his old rival's speech. And perhaps invite him in for a cup of tea.