Adrian Hamilton: Stop knocking the banks – they've done us proud

There is a constant refrain among the critics of Gordon Brown that he somehow understands international economics but not the economics of the doorstep. He can tell you the price of a barrel of oil but not what it costs to fill up your car.

Would that it were so. The truth is the opposite. The Prime Minister is an old-fashioned politician who understands full well what it takes to win elections. Hence the u-turns on tax, the dithering over the fuel escalator and the worrying away on vehicle excise duties. Hence too the concerted effort by the Cabinet to blame all the present economic concerns on outside forces: the monopolistic activities of Opec; the slowdown in America; and above all, the irresponsible behaviour of the banks.

Now, I am no supporter of the banks, having once been dropped by one on losing my job (the bank also served my employer, so knew the limited chance of a reasonable pay-off). But if I have a low opinion of our financial institutions, I have an even greater distrust of the media and politicians when they get into their name-and-blame mood.

The banks may have behaved with shameless abandon. They did. They may well have put fee profit above commercial prudence. Indeed they did. But they didn't do it in a vacuum. They didn't do it without implicit accord from the regulators. And they certainly didn't do it as an isolated act of madness divorced from the economic forces around them.

The growth of securitisation, the development of ever more exotic instruments of tradable debt, the rise of investment banks at the expense of traditional retail banking have all been part of a process of globalisation, technological innovation, industrial restructuring and changing trade patterns which have affected all businesses in the last two decades. Exotic instruments were not merely invented to give fee income to their progenitors. They developed in answer to the huge investment flows coming from excess savings and export earnings in Asia and the falling savings and balance of payments deficits in America and Britain. It couldn't go on for ever. But the banks and their exotic instruments made it possible to keep it up far longer than would otherwise have been the case.

And, whilst it went on, western politicians were all too happy to encourage it. For Britain in particular, with its propensity to import, its dependence on consumer spending to sustain its growth and its reliance on the financial industry itself as the major source of new employment and tax income, it has been a godsend. Employees might be forced into private pension provision, the stock markets might gyrate, the North Sea might go into decline, but with cheap mortgages on offer to anyone who wanted, governments could have both rising property prices and widening ownership. Indeed you could argue that if it weren't for the banks and their clever schemes Labour would never have won three elections in a row.

All good things must come to an end, of course, however much the Chancellor might declare the days of boom and bust gone forever. We are now clearly in a period of retrenchment, and restructuring, and it is going to be a very painful one for Britain in particular. The credit crunch isn't over; not by a long chalk.

The first effects have been seen in the UK property market, and they are already proving more severe than predicted. The other impact has been seen in dramatically reduced corporate tax revenues from the banking sector, the mainstay of the past years of ever rising receipts – also much faster than the Treasury had predicted.

The longer term impact of the global restructuring could get even more painful. If the heady days of banking profits signalled the untrammelled globalisation of commerce, their end could equally see a reordering of financial flows, as Asia and the major exporting nations act to curb inflation and retain (and even bring back) more of their surpluses for their own use. In the meantime there is every sign that they will direct their international investments through sovereign funds rather than directly into the banking system.

The most immediate consequence for Britain might well be a decline in the financial pre-eminence of London as the talent along with the funds heads east. The more problematic questions are what a retrenching and inflationary world will do for currencies and interest rates here. But the really thorny poser is how a country which has put so many of its eggs in the service industry's basket – indeed boasted to the world of how we were global leaders in this evolution – can expect to keep up the growth rates of the past.

Throwing brickbats at the banks has its pleasures and its uses. But there may come a time when we look back on their activities, and their excesses, with nostalgia and even a little longing.

a.hamilton@independent.co.uk

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