Adrian Hamilton: Huge gulf that separates politicians and City

Markets may not get things right, but they are not 'irrational'

Politicians and the City never seem to understand each other. You'd have thought they would. They're in the same business, after all, of gaining public confidence (and its money) and masking naked self-interest in the language of consumer benefit.

But when it comes to it, there is just a huge divide. If you want to see just how the City still doesn't get what is happening to them and what the public and therefore politicians feel, you only need have watched this week's appearance before a Congressional committee of Dick Fuld, boss of the busted Lehman Brothers. His continued defence of the bonus culture and his anger at not being rescued were positively surreal.

But then take the Chancellor Alistair Darling's irritation this week with the way the markets had been marking down bank shares. Their behaviour was "completely irrational", he kept repeating. Well markets may not get things right. They often don't. They can act like a herd. They frequently do. But they're not irrational. Once it had got out that the Government was thinking of taking preferred shares and dividends in return for any help, how were shareholders supposed to respond?

By selling up quick before they were shouldered out by the state. And when the plan was revealed, they also did what was logical. Shares in the weaker companies went up because the shareholders smelled it would be to their benefit for the bank to be propped up, while shares in the stronger banks went down because the shareholders could see they would lose out.

As indeed they will. The unsung victim of this financial catastrophe has not been the customer, the lender or even the borrower, but the shareholder. Their interests have simply been tossed aside on the argument that they knew the risks, got the rewards and should take the pain. But shareholders never got anything like the rewards that the bank managements awarded themselves, which was half the problem.

Nor is it wise at this point to just dismiss the interests of the investor with a dismissive sense that anyone with spare cash to invest has no right to consideration.

But if, as the commentators seem to believe, the economy is going to return to a pre-post-modern state of saving, regulation and caution, then it is to the investor, individual as well as pension and other funds, that the country will need to turn to get things moving again. Telling them that their interests are at the bottom of the pile when it comes to trouble won't help. Nor will confining them to buying only Treasury bonds.

And that reflects a wider problem with the package. This has been a very a domestically directed intervention. What is more, it is a deal hammered out with no more than eight institutions. Now it is true that these are the banks that are at the centre of all the problems in the seizing-up of the money markets. But fronting up £400bn of taxpayers' money on barely more than a half-dozen financial institutions is nervy enough. But relying only on the advice of the big boys in a crisis can pose even greater problems. Barclays, HSBC, Lloyds TSB have their own interests. Their concern is not the wider concern of the City.

Lest we forget, it is the City as a whole, not a few major players, however big, that has accounted for something like a tenth of the country's economic output, and has been responsible for much of the growth in the past decade. Its contribution, in terms of tax revenue, dividend incomes for pension funds and employment, is even larger. And this has been done on the selling point that London is an international financial centre, providing capital markets, players and innovation at way above the city's domestic role at the centre of a middle-sized economy with a relatively limited resource in locally generated funds.

The trouble with concentrating on the woes of a restricted number of domestic deposit-takers is that this doesn't begin to address the wider question of what the future of the City will be after this crisis has died down and what will fill the hole it will leave in government finances, employment and wealth if the City does contract as much as politicians appear to want it to.

It's all very well to slag off the rich and the greedy, to rail against the bonus culture and declare, as Brown did yesterday, that "where there is excessive and irresponsible risk-taking, that has to be punished". But we're not at school, although the Prime Minister was appropriately at a nursery in Bermondsey when he said it. We're in the middle of a meltdown of an entire industry, and one which is peculiarly important to this country. Ranting isn't going to bring back the jobs, or the financial flows.

a.hamilton@independent.co.uk