What the City has done for Britain
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“Discontent as bank bonuses shrink in London,” began a story in Wednesday’s International Herald Tribune. It’s been a rough year for the City. Bonuses – usually ranging from £100,000 to many millions – are said to be down 16% this year. Those who toil in the shadow of the Gherkin are unhappy.
But the trouble with recent news from the City is that the press doesn’t know what to do with it. Should it go with the crime stories? Or in the health section? Is it a matter for the police to deal with, in other words – or psychiatrists?
England was made mighty prosperous by its dark, satanic mills. But now, spiders build their webs in front of the mill doors, confident of being unmolested. In the City, meanwhile, people come and go in such fury of busyness that the whole world stands back in admiration or disgust. The City’s new Jerusalem makes up one third of Britain’s entire economic output, and last year accounted for nearly half of UK GDP growth. It pays one third of all corporation tax, contributes a surplus of nearly £20bn to the trade balance, and there are now more finance workers in Britain than there are construction workers, farmers and factory workers combined. So rich and important has the City become that you cannot drive through it drunk without running over a millionaire. Every day, it turns over a third of the entire world’s foreign exchange – more than $1trn.
“London has 40% of the global foreign equity market... trades 70% of all Eurobonds... and is the world’s leading market for international insurance,” reports the Fleet Street Letter. “Currently the business and finance sector accounts for 28% of Britain’s GDP... some £306bn per year... That’s 21 times more money contributed to the economy than the construction industry... 35 times more money than the automotive sector... 47 times more money than the pharmaceuticals industry...” But what kind of City on a hill has the City built?
One of the great conceits of the credit expansion was that “finance” was, if not a noble trade, at least an honest one. Mothers wanted their babies to grow up to work for Goldman Sachs. Why not? Nothing paid better – and there was no heavy lifting. But what do they actually do ‘in finance’ and how come they get paid so much for it? They ‘add value’ by ‘allocating capital efficiently’, comes the answer. But what kind of value has actually been added to Britain’s economy?
Personal debt in Britain has reached £1.3trn – up 137% since 1993 and greater than the UK’s GDP for the very first time. Much of that debt is the notorious subprime mortgage debt. Nearly 20% of all new UK mortgages written last year were either subprime, or were “made to a homebuyer who offered no proof of income”, reports the FT. Consequently, 21% more people were forcibly evicted from their homes in 2007 than 2006. More than 500,000 Britons have missed a mortgage payment in the last six months.
On the institutional side, the G7 put losses from subprime lending alone at $400bn. So far, only $120bn has been revealed. If the estimate is correct, there is surely more subprime debt hiding in a City basement. Colleague John Stepek puts it this way: “Our consumers are in more debt than their American counterparts. Our houses are more over-valued. We are even more dependent on a small niche area of the economy – the City of London – than Americans are. So we have even further to fall.” He might have added that the FTSE 100 is already down 13% this year, while the Dow is down only 8%. And while the dollar has rallied, the pound has fallen.
Blame the City? Call in the cops to investigate? Practically all the City’s deals have a bit of Ponzi in them. As long as the volume of credit kept expanding, an investor could hope that a greater fool would buy out his positions at a higher price. Subprime mortgages, liar’s loans, private-equity finance, Chinese stocks, residential housing, SIVs, CDOs – they all needed more and more leverage, more and more finance, just to stay even.
Many of the City’s products, too, were based on false pretenses. Mathematicians crossed their fingers, calculated the odds based on historical prices, and then passed off the results as though they were as reliable as the periodic tables. If wheat had never traded at $10 a bushel, the $10 figure was an “outlier”, not worth worrying about.
What they didn’t realise, or didn’t admit, was that prices are neither fixed nor random – but subject to influence. By speculating on “normal” patterns, they were leaning against the very price curves they said were eternal. And when enough speculators crowded in, the price curve bent, and then collapsed under their weight. “Stability creates instability,” as Hyman Minsky used to say.
But prosecutors would have a hard case. No one held a gun to investors’ heads. Instead, they asked for it. The whole show was more a slapstick farce than a police thriller.
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