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.