Banking and Finance in the UK Made Easy: Time to get Angrier

On April 11th the UK’s Independent Commission on Banking will report its interim findings. Although much attention, ink, and blood, has spilled on student loans, spending cuts, and NHS reforms, much less been attention has been directed towards banking and finance. This is remarkable given that the financial sector bares most of the responsibility for the catastrophic recession through which we have been living. Mervyn King is right; it is surprising people are not even angrier than they are.

The reason, I think, people are not angrier, is because they do not know much about the arcane world of finance or what solutions to the problems of financial crises are viable. People want to make sure “it” doesn’t happen again and they want to punish the people responsible, but aren’t sure how.

The next few blog posts on this site will therefore outline why you should be angry and what needs to be done about.  First, why to be angry, this was the easiest one to write; next we will discuss the shape of banking today and why it needs to be changed; after that a post will discuss what we can do about the banks. The final post will sum up and pose the question to those better at campaigning than I “how do we get the government to do what is necessary?”

It is difficult to quantify how much the world or the UK has lost due to the reckless negligence of the financial sector. Neither is it possible to say precisely to what extent regulators failed. The damage caused to the UK Government’s balance sheets is well-known and easily understood, however the damage extends far further than that. The graph below merely illustrates one consequence of bankers for the UK as a whole.

The red line is trend economic growth from the start of the past decade, the blue line is actual economic growth. As you can see the financial crisis caused a massive fall in living standards from which we have yet to fully recover (xls). Worse still, evidence cited by Andrew Haldane (pdf) (something from which I’ll being borrowing extensively for these posts) shows financial crises can cause declines in living standards from which economies never recover – a permanent loss of income.

Depending on how pessimistic you are you can roughly quantify the long-term losses to the pocket books of UK citizens. Anywhere from around £1.8 to £7.4 trillion of wealth may have been permanently forgone as a result of the financial crisis. If that has not already made you angry then consider this. Because large banks have long been considered “too big to fail” they have received an implicit subsidy from us to them, something to the tune of £30 billion pounds a year to the five biggest banks. We have been made permanently poorer by organisation which already enjoy an exorbitant subsidy. It being finance, it of course gets even worse. Those supplicants to the public purse are already lobbying for weaker regulation, and this before the Commission has even reported.

Although it is tempting to use this as a justification for the crushing of financiers beneath the boot heel of indignant rage, sadly we do need bankers. Capital needs to be allocated, risks need to be insured, and prices need to be set and the financial sector does all these productive things, and more. However, financial sector failures generate massive generalised and uninsurable losses for the whole economy and some level of intervention is both just and necessary. That is what is to be discussed, stay tuned.

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