City Limits
by Kitty Ussher
Bashing the bankers can feel like a healthy recreational activity in Britain, but is it actually good for us? Today Demos is publishing my Open Left pamphlet entitled City Limits, and holding an event, open to the public, to explore what is really going on in the area of banking policy. The idea is to separate our understandable anger at the fact that we all had to face a recession from a set of problems that originated in the highest paid part of the economy, from a rational conversation about the policy insights that come from the experience we have been through.
The research consisted of a review of existing information and some new interviews of a range of people from senior practitioners to front-line bank branch staff as well as some personal perspectives gained from my experience inside government from 2007-09. The main insight is that politicians worried about the potential negative effect of the financial services sector should seek to strengthen banks as institutions, rather than weaken bankers as individuals. It follows that trying to wreak some kind of revenge on the banks by breaking them up is not necessarily in our national interest; there was no clear correlation between the size of an institution that determined its strength.
On pay we draw the distinction between discretionary bonuses, which should be discouraged by taxation, and good performance management through incentives including bonuses which is an effective way of running a business. Note that the Hutton review of civil service pay published yesterday recommended doing just this in the public sector. More work should be done to understand why this industry, unlike others, supports such high levels of pay; to ensure there is not a cartel in operation the new competition authority should have its remit broadened to consider Labour market issues.
We also recommend that the experience of recent years means governments should be far braver in taxing housing bubbles, be it through stamp duty or capital gains tax on primary residences. The importance of the City to the UK economy and the delivery of public services is real and cannot be ignored; neither can the fact that the industry believes London has become a less attractive place to work due to banker bashing, compounding an already existing erosion of competitiveness. This may or may not be a problem but it needs to be recognised up front as an issue. Finally, the pamphlet recommends that the UK government be far more proactive in leading the EU agenda in this whole area.
This is an Open Left discussion, not least because the Left needs to be able to have a proper conversation about this. You can join our conversation by coming to Ironmongers Hall in the Barbican at 2pm today to have your say.
Edmuind O'Sullivan
Dear Ms Ussher,
Congratulations on your report.
A couple of conceptual issues need to be tackled first.
1 In intangibles (services), price doesn't work as a regulator of production or consumption. Intangibles have no physical characteristics and only exist in your mind. That means they can vary in value unpredictably (like sub-prime mortgages have). Everything finance deals with is intangible. No financial product can't be objectively priced. Therefore, no one can evaluate the risk associated with any financial product. Most bank balance sheets attempt to tangibilise dreams and can never be sorted out, no matter how clever the managers or the regulators are (or are not!).
2 Money, as you know, has three functions; store of wealth, medium of exchange, measure of value. These are inherently contradictory. Money as a store of wealth allows a claim to be made by the owner of the money on something (or service) the money owner wants, either now or in the future. It's a relationship. and by definition subjective. and it can't be automated.
The other two are processes. They can be automated.
The financial system manages money in the economy.
Automation has made possible the separation of the relationship function of money from its process functions.
Banks therefore should follow suit and do one of two things:
* Manage wealth through a relationship with customers in the form of advice paid for through fees.
* Provide transactional services via an electronic system.
Most people use banks (and money) principally for transaction purposes. Their needs can be served by a single institution transferring money (in reality digital information) from consumers to shops and from shops to wholesalers etc. This could be done by a non-financial organisation (Google comes to mind; it deals with digital information instantly and costlessly and generally far faster than most banks do). The transaction bank would not be allowed to use any of the resources in the system to lend. It's there only to facilitate payments.
Banks should be confined to providing advice and they should not be allowed to control the payment system. This entails a conflict of interest out of which the crisis of 2007/09 arose. They should also be stripped of the support of a lender or last resort. If they provide bad advice and lose money as a result, they go out of business.
The other thing is that intangible assets should not be allowed in balance sheets. Full stop. They don't exist and can't be valued. Such a step would automatically make banks smaller and easier to manage and regulate. It would also encourage institutions from outside the finance system (IT firms and relationship firms like hotel business) to enter the market for financial advice and exercise downward pressure on banks fees.
These are radical and egalitarian suggestions that would make banking more efficient.
Anders
Whilst I welcome certain aspects of your report, such as the suggestion of aligning tax more closely with asset values as an automatic stabiliser, I am disappointed in two aspects. I would have expected Demos to take a step back and consider the question of how big the financial sector - which is to say the activities of liquidity provision and capital allocation - should be, relative to the real economy. It's easy to conclude that these activities are important and should exist, but one struggles to see how other economies with smaller financial sectors than ours perform any worse as a result. The financial sector is a flawed provider of liquidity (often too much or too little) and a flawed allocator of capital (witness the various asset bubbles). The larger and more unbridled it gets, the less functional and the more parasitic it seems likely to become on the real economy.
Secondly, you appear to have taken at face value the self-serving threats by bankers that there could be a brain drain unless they are treated well. No exodus will happen suddenly; the government should properly regulate and tax the industry and monitor for any ill-effects, rather than being deterred from doing so by bankers' fearmongering upfront.
Best wishes
Anders