A liberal City of London regime is for the best, but it needs constant vigilance from policymakers

3rd January 2015 by The Harried House Hunter

We know that one Labour minister left a note telling his coalition successors that there was no money left. Yet shouldn’t someone from the Margaret Thatcher administration have passed on concerns that the Big Bang – a huge 1980s shake up in the rules and conventions governing the City of London – could lead to booms, the inevitable busts, and indeed a big increase in unethical behaviour.

The news about the warnings given to and concerns raised by the Thatcher cabinet came out as part of information released under the 30-year rule over Christmas.

In terms of the Big Bang itself, most experts would say that it secured London as a global financial centre rivalling Wall Street and putting paid to the ambitions of continental European cities such as Frankfurt and Paris which coveted London’s number one position in the European region.

It has brought huge numbers of jobs and increased tax revenue. However there has been a price to pay. London was one of the two main centres of the financial crisis and some of this was due to a failure to understand the downside of three decades of this liberalised regime.

Perhaps the best analogy might be the price a country used to pay for developing one of its ports as an international entrepot – think Rotterdam or indeed in a previous era London itself. With all that revenue from trade comes a downside of increased crime, brothels, opium dens – places and people not conducive to an orderly society.

Of course, when the authorities are alive to the issue, then it can be controlled. It is probably no coincidence that London was one of the first places to develop a properly organised police force.

The problem now in the UK and for London in particular but to a lesser extent Edinburgh too, is that some simple rules could stop many abuses – so for example not just ring fencing investment banking from utility or typically High Street banking but also actually splitting it apart. The difficulty is that bringing in such blunt rules can harm the City economically and with it the economy of the South East of England.

Doing so would certainly help rebalance the economy but rebalancing a shrinking economy isn’t exactly what anyone should be seeking.

However as bank fine follows bank fine, we should all be concerned that the potential cultural failings which the late Prime Minister was warned about has now taken an extraordinary stubborn hold in many financial but especially banking institutions.

Dealing with such issues is as much one of approach and understanding by politicians and regulators as well as about the structure and content of the regulations. One financial journalist famously discussed going before a House of Commons select committee in the 2000s ostensibly to talk about how institutional financial services were and were not working, only to have one MP ask her about his expensive home insurance premiums.

Structure and rules and important and the big regulatory reorganisation brought in by the Coalition has returned a great deal of power back to the Bank of England and is a marked improvement on the FSA. The Financial Policy Committee at the Bank is, for example, specifically tasked with spotting potential crises.

Yet there remain problems with the current political discourse. First banks, including those partially owned by the state, are continuing to make mistakes hand over fist and fines apart, it is difficult to know if the raft of regulatory measures really are really working.

Certainly prevention would be better than cure. But the worry must be whether such a change be effected without even bigger changes in the rules?

Meanwhile the political debate is hardly edifying. The Labour opposition is slated for spending too much money in its time in office. That may be true certainly after say 2002/2003. (True Keynesians ought to know to set money aside in the good years). But it could be argued that the bigger mistake for Labour was a failure to understand that many of the revenues from the City were unsustainable and therefore could not be banked as a permanent increase in Government spending.

Where Labour says that it can’t be blamed for a global financial crisis – it may be true at the level of global imbalances particularly between China and the US – but it isn’t much of a defence at the next level down, in terms of the Labour Government simply not understanding what was happening two miles down the road in the City.

Meanwhile, the issue with the Conservatives is that they are instinctive liberalisers, instinctive cutters of red tape and regulation. That is a fantastic goal for say the small business sector. But in terms of the City, it only makes sense if things don’t go wrong and all the benefits then negated by a subsequent crash.

It would be good if amid all the trite slogans due to be traded by the two main political parties that they have both take some time to demonstrate that they learned some significant lessons about striking the right balance in a liberalised global financial system, with all the required protections and rules but also a sufficient state of alertness about what can go wrong.

This takes us back to the lessons from the Big Bang. A liberalised financial sector is, on balance, best for the UK, but it requires constant vigilance from politicians.

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