Opinion

James Saft

UK shouldn’t be banker to world: James Saft

October 29, 2013

Oct 29 (Reuters) – Bank of England governor Mark Carney is
kidding himself if he thinks Britain can become banker to the
world without paying high costs and taking even higher risks.

Carney, the newly minted BOE head, gave a remarkably
pro-finance speech last week in London, introducing some
sensible reforms while sounding an extremely relaxed tone about
the prospect of Britain’s finance sector more than doubling
relative to the economy. (You may at this point need reassuring
that yes, we are still in 2013, and yes, we did just undergo a
damaging crisis in which the risks of an overdeveloped banking
sector were terrifyingly demonstrated.)

“Five simple words describe our approach: we are open for
business,” Carney said, describing the central bank’s
willingness to provide cash to banks more easily, less
expensively and by pledging a wider array of securities while
making a case that institutions other than banks should be
allowed access to BOE financing. (here)

While stressing that it isn’t his job to dictate how big the
financial sector is, Carney laid out a future in which, if
current trends hold, banking assets grow by 2050 from four times
the size of annual output to nine times. By comparison, U.S.
banking assets are just a bit bigger than annual GDP.

Allowing that would be a grave mistake. Not only would it
make the political and economic might of the banks so great that
effective regulation might become impossible, it would almost
certainly starve the non-financial parts of the British economy
of focus, talent and even capital.

Carney places great emphasis on creating a more resilient
financial sector, but his approach seems both naive and blind to
recent history.

Financial intermediation in Britain has grown over the past
100 years, especially the last 20, even as its manufacturing
sector has shrunk in relative output. Carney appears to view
this as simply a function of the happy marriage of globalization
and comparative advantage, in which countries develop those
parts of their economy at which they excel and we all grow
richer.

However, if it all goes wrong with the auto industry or
semiconductor fabrication the damage that is wreaked on the home
economy is not as bad as seeing your global titan banking
industry fall to pieces. That’s because bank liabilities, under
the current set-up, are ultimately backstopped by the host
nation.

WHO HOLDS THE BAG?

And while you can argue, and Carney does, that this is all
susceptible to mitigation by international reform, there is no
credible international failed bank resolution regime. Even if
such a thing came into being, it would, in the event of a
crisis, be a bit like a mutual defense pact, sometimes honored
but sometimes, disastrously, not.

There is also no guarantee that globalization continues at
its accustomed pace. Global trade growth has slowed markedly
since the crisis. And even if emerging market countries start to
consume more financial services, what Carney calls a financial
deepening, there are good reasons to fear that their commitment
to the international regulation and the backstopping of British
banks might end abruptly at the next crisis.

If you look at the development of the British economy over
the past quarter century, the argument for supporting the
further development of finance is pretty thin. Finance has
created wealth, but it has been wealth which proves remarkably
difficult to tax, and ultimately to control. That’s especially
unfair as the largest British banks, like their American and
European counterparts, only exist and profit because they enjoy
a government guarantee. That hasn’t changed, and in the absence
of hugely higher capital being held by banks, won’t.

The ascendency of finance has also shaped the country and
its attitudes towards capital and its deployment, and towards
labor and even the application of intelligence. What’s done well
in Britain? Banking, insurance and real estate. Those have also
been the sectors which have attracted the most talent, and found
it easiest to attract capital. The result: a country in which
the average worker can’t really afford the average dwelling and
the state turns to borrowing subsidies to keep the circus in the
air.

If Britain encourages finance to grow, then, there will be a
huge opportunity cost in medicines and 3-D manufacturing
processes which never get invented or commercialized in Britain
because the sharpest minds are busy perfecting securitization
techniques.

None of this is to say that the regulatory reforms Carney
suggests aren’t worth pursuing, within a context of limiting
growth in order to limit risk and allow other sectors room to
develop.

If Britain does become banker to the world, a few will
benefit and many will very likely pay.
(At the time of publication James Saft did not own any direct
investments in securities mentioned in this article. He may be
an owner indirectly as an investor in a fund. You can email him
at jamessaft@jamessaft.com and find more columns at blogs.reuters.com/james-saft)

(Editing by James Dalgleish)

Comments
2 comments so far | RSS Comments RSS

This is like a bad joke. You call him newly minted, he has already been captured. Must be some sort of record.

Posted by Urban_Guerilla | Report as abusive
 

Given the name of the BoE’s governor, a circus is an excellent metaphor.

Posted by smumford | Report as abusive
 

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