Monday 26 October 2009
Bruce Anderson: Let's have more rich bankers, not fewer
Assuming the recovery is under way, we need long-term thinking to ensure it is sustained
Gordon Brown never has any luck. In economic terms, the gap between minus 0.4 per cent growth and plus 0.1 per cent is within the margin of error. Politically, there is a great difference. Instead of headlines about green shoots, we read about the longest slump since records were kept, while the PM is teased about biscuits. Yet it does not feel as if the economy is still in recession. It is hard to reconcile the quarterly growth figures with some of the monthly data. It would not be surprising if the latest figures were eventually revised upwards. But that would be too late to save Gordon's biscuit.
Assuming that recovery is under way, we need long-term thinking, to ensure that it is sustained. Three principles should underlie this. First, we should be delighted that the banks are out of intensive care. Second, politicians should work with the banks to keep them healthy. Third, banking is not enough.
But banking is essential. Without it, this country would be trapped in poverty. Over the past year, we learnt that a crisis in the City leads to a fiscal crisis, as tax revenues implode. There are still a few lefties who would rather that Britain were poor and socialist than prosperous and free-market. Desperate to exploit the politics of envy to close down the banks and reopen the shipyards, they cannot bear the thought that, yet again, the terminal crisis of capitalism appears to have been postponed. We should leave these relics to their fantasies, and confront reality.
Bankers are in it for the money. If they cannot make money here, they will leave. London is an international financial centre, which means that banks and bankers end up paying a lot of UK tax on a large number of transactions that have nothing to do with Britain. There is no law of nature which decrees that this is inevitable. If the tax demands are too high, the bees will move to another hive.
Envy is the least attractive of the deadly sins. Though all the rest could be pleasurable or at least creative, envy is never more than a canker in the vitals of content. But when we hear of the enormous sums that bankers can earn, most of us are tempted to become ... wistful. Such feelings should be kept in check. Balance them with dwelling on the enormous sums that a strong City will pay in tax. Think of the number of schools and hospitals that owe their existence to the largesse of the international financial system. Think of the indispensable contribution bankers will make to Britain's recovery, on one condition: that they are allowed to become indecently rich. It is a small price to pay.
As they will gladly acknowledge, bankers themselves will have to pay a price: a regulatory system that commands confidence. But it must not be based on envy, spite and undeserved blame. Although the bankers must take some responsibility for the recent degringolade, so must politicians and central bankers. The crisis was not caused by bankers' bonuses. The principal cause was sub-prime mortgages in the US. They went out of control because Congressional Democrats forced US banks to give out mortgages to poor people without investigating their circumstances (that said, no one compelled European banks to treat the poor people's paper as an AAA security).
It is worth dwelling on the sub-prime question, and not merely in order to spread the blame more equitably. The whole episode reveals a recurrent regulatory problem. Those who run central banks tend to be middle-aged, comfortably-off white men. Some of them enjoy telling hungry sheep about the price of grass. Others feel inhibited. At times, the central banker ought to take away the punch bowl when the party is still in full swing. This is not easy when those who are enjoying themselves are struggling young families, often from racial minorities. Telling them that they have had too much of a good thing would provoke obvious retorts, especially from left-wing politicians.
That is why central banks are independent. It also explains the difficulty in exercising that independence. For years, Alan Greenspan of the Federal Reserve grumbled about "irrational exuberance". So why did he not hit it over the head with high interest rates? It may be that he did not want to be the curmudgeon who came between the poor and huddled masses and their share of the American dream.
It would be easier for Mr Greenspan's successors to find the moral courage to do their duty if the science of economics were further advanced. We know what we want from central bankers: to regulate the expansion of money and credit in order to ensure steady economic growth, low inflation and no crises. But that apparently simple task may require an intellectual revolution. As a dominant theory, Keynesianism came out of the Great Depression; monetarism out of the collapse of Bretton Woods and the inflation of the Seventies. We now need a Hegelian synthesis. The economist who creates it will have earned his Nobel Prize.
Two related sub-Nobel ideas might be worth considering. The first is asset prices. Earlier in the decade, the Bank of England paid little attention to the rise in asset prices, because this was outside its counter-inflationary remit. In fact, it was a better storm warning than consumer-price inflation.
The second is banks' reserve-asset ratios as a means of controlling monetary growth. In the Eighties, Ted Heath used to argue that a one club policy – interest rates alone – was too crude a way of dealing with inflation. Because he was the Incredible Sulk whose own counter-inflationary credentials were risible, it was easy to ignore him. But even Ted Heath was not always wrong.
Apropos of banks' assets, the current government's mishandling of quantitative easing could be creating a new asset-price bubble. It is not enough to flood the banks with money. QE will only work if the cash reaches the corporate sector. Because the banks were feeling risk-averse – not surprisingly – this needed the stimulus of a loan guarantee scheme. The government would not agree, because the Tories had thought of it first. As a result, a lot of the lending that is taking place ends up with high net-worth individuals: hence some of the recent rises in asset prices. This set of Ministers should stick to biscuits.
A banking recovery is vital, but insufficient. Financial services alone cannot provide enough new jobs. Britain needs a manufacturing sector, and there might be a role for government. In the early Eighties, a number of Tories took a covert interest in Miti, the Japanese ministry for industrial strategy, and its French equivalent, Codes. But Mrs Thatcher was scornful. One can understand why. Over the decades, British industrial policy had been a chronic failure. The phrase "picking winners" was used to justify it, while billions were wasted in picking losers.
Yet it may be time to re-examine some of those old debates. Manufacturing needs attention. But we will still need rich bankers to buy the Rollers.
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