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Opinion

The City is no golden goose

By Mark Mansfield
The City of London

Jonathan Edwards

Following the Great Recession of 2008, Gordon Brown reinvented himself as the saviour of the global economy.

He was praised by one of my favourite economists Paul Krugman in the New York Times on October 12 2008 as having “defined the character of the worldwide rescue effort…”.

The Labour Party naturally jumped on this as a narrative to preserve Brown’s reputation while neglecting to highlight that the policy effectively meant throwing the kitchen sink at stopping the banks from going under in the shape of public loans, grants and guarantees equating 100% of GDP – around £1.4 trillion at the time.

It also failed to mention the role that the New Labour philosophy of light touch regulation of the City played in creating the conditions for why the UK population found themselves having to bail out the bankers.

Brown’s strategy was to let the City run rip in the hope that it would generate sufficient revenues that could then be redistributed. The City ballooned in its relative importance to the UK economy, resulting in gross sectoral and geographical imbalances.

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Disastrous

It was a disastrous approach which effectively meant that people in poor performing economic areas such as Wales didn’t enjoy the bounty years and ended up paying the price of the recklessness of the bankers.

George Osborne briefly flirted with a suggestion I offered in the Commons, of Icelandic style prosecutions against bankers and politicians responsible for the crash. However in reality Westminster did little to curb the excesses of the bankers.

Gradually as the years went by and restrictions, such as those on bonuses, were removed.

Chancellor Reeves was a Central Banker before becoming an MP, and you would hope she would understand the need to avoid the moral hazard of private financial enterprises thinking they can act with impunity.

Of concern therefore is the way that she has gone even further than the reforms introduced by the previous Tory administration in December 2023, which removed all protections put in place following the 2008 crash.

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Rationality

It could be argued that the Brown strategy had an element of rationality behind it and generated annual GDP growth of around 3%.

Compared to today’s stagnant economy, the Chancellor would give her right arm for such a performance, even if it was as geographically concentrated as under Brown in the south east of England.

If Brown can be excused for being taken in by the hype of the self-proclaimed masters of the universe, the current Chancellor has no similar defence.

Her decision to change the remit of the financial regulator (the Financial Conduct Authority) to promote financial sector growth, as opposed to solely protecting consumers, is a worrying development.

Fifty prominent economists, including another rock star economist Joseph Stiglitz, have warned that history repeatedly shows that the financial sector can only grow beyond a certain point by taking ever more risks.

They also argue that an over emphasis on the banking sector sucks talent away from potentially more productive enterprises as well as directing finance at assets such as houses inflating their value as opposed to investing in meaningful business activity.

DJ Davies, my political hero, made a similar warning in his masterpiece The Economics of Welsh Self Government, written in 1931.

Turbo charges

Even if the Chancellor managed to place turbo charges under the financial sector, it would likely lead to increasing wealth inequalities on a geographical and personal basis.

The Labour strategy of fiscal transfers to poor performing areas failed during the New Labour “boom” years. There is no reason to think it will work now. Inequalities within the UK is one of the reasons that the far right are in the ascendancy. How does the UK Government expect the left behind to react?

Regrettably, Westminster is hooked on high finance. The City is no golden goose as it likes to see itself. However they do hold a golden gun to the collective head of the UK population due to the cowardice of Westminster.

What did Marx say about history repeating itself?

Jonathan Edwards was the MP for Carmarthen East and Dinefwr, 2010-2024

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15 comments

Steve. Thomas

Excellent article by Jonathan yet again

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Linda Jones

Excellent article, spot on

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Geraint

Head lines such as the ' biggest exit since the global financial crisis' and the ' stark reality of the LSE exodus' are starting to appear in our press. The recent trend of companies delisting for the London stock exchange and moving to the USA to me fits in with your arguement. The only difference is that the effect on the nations and regions in the UK is now begining to be felt in the Square Mile.

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Pedro Griffiths

Gordon Brown gave away our gold.

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hdavies15

"....in reality Westminster did little to curb the excesses of the bankers." I'd say that they did nothing. Brown's tenure and the Tory/LibDem regime were both guilty of colluding with greedy banks and their senior executives in protecting them from their own gaffes and earlier poor policy decisions while inflicting the costs on the general public. Oh say their apologists it set up a long period of low borrowing costs. So it did but that benefitted big business, the institutions and government borrowing far more than poor old Joe and Jane Public who still paid eye watering rates on unsecured lending and saw property prices rise dramatically driven by low interest rates and poor supply side. That did lasting damage to the entire economy making it even more lopsided than ever before.

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Dewi

This is truly thought-provoking. I’m deeply concerned about the Republic of Ireland 🇮🇪 now that it has caught the “English disease,” allowing property prices to spiral out of control even after the painful experience of bailing out the banks in 2008. It’s the same story: nationalise the losses, privatise the profits. Meanwhile, Britain remains far too dependent on the City of London, with Thatcher’s policies having decimated our manufacturing base. As for JE, it’s clear he’s seeking a platform where his considerable talent and experience can make a real impact. Couldn’t he take the reins at YesCymru, at least temporarily, until Plaid Cymru recognises its mistakes and follows through on the implied agreement brokered by the clean hands of Dafydd Iwan for the benefit of Wales? That said, should JE even be allowed to return to the fold in 2026? His involvement could bring much-needed energy and focus, but Plaid Cymru must weigh whether his return would unify or divide the movement further.

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John

The financial/professional services sector generates well over 10% of tax revenue for the UK treasury. If it declines significantly, it's demise will be felt in Wales. The question is why can't you have a strong city of London, and productive regions. Other countries have managed it. In my view, the two are largely unrelated. 30 years ago you wouldn't have complained that Aberdeenshire was creating unproductive regions, just because it was similarly economically successful. I don't think we should be looking to demise of other sectors/regions for improved quality of life in Wales. We should be thinking why private investment is so poor in Wales, why productivity is so low, why wages aren't growing -none of which is addressed in this article. If we address those challenges rather than populist chimeras about 'bad bankers', we might be able to come up with some sensible ways forward for the welsh economy

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hdavies15

Fair point except that it ignores banks growing preference for investing in their own sector or in projects that have a public sector and/or international corporate input. Banks and City institutions have a massive presence in green energy for instance but there is little or no trickle down or splash over onto those areas where the wind turbines are sited. There is huge affinity between the City and big international corporations which suggests a comfort zone for banks to avoid risks.

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John

No sure about your first point, it's not my experience and I don't see any evidence of growing change there. Community benefits packages made by developers of green energy projects to local communities but these are voluntary in the UK. Scotland has some guidelines, which are actually well followed. I've never heard a welsh politician demand that they should be compulsory, though this will be a more worthy cause than some of the nonsense they're seem to pursue.

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Richard Davies

There is a large rewriting of history in this article! Deregulation of banking and finance started under maggie thatcher along with cheap credit (instead of increasing wages) to encourage a consumer economy. The tories wanted gordon brown to go even further to remove what regulation remained and the country would've now been in an even worse state. Following the usa sub-prime mortgage collapse and subsequent worldwide financial meltdown (as a result of the inter-connected financial markets) the EU introduced protections such as limits on bankers bonuses, to remove uncontrolled risk-taking. The Tories removed those protections following brexit!

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Rhy5

banks' risk-taking is controlled by regulatory capital requirements not by limits on their employees' bonuses

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Ernie The Smallholder

We must have our own financial and banking institutions here in Wales. That must also mean we also have democratic full control of our government constitution and political processes. There should be any way the UK can override the democratic institutions in Wales by these reserve powers or denial of wealth such as by the crown estates. These are our assets in Wales. We never agreed to these arrangement with UK/England; It was by military invasion. The UK has a centralised regime designed to serve the oligarchs in the City of London and its intermediates. The UK has a monopoly capitalist system which is actually eating and destroying capitalism itself and any chance of real egalitarian capitalism which will serve the people of Wales, Scotland and England. Stock exchanges should be the tool for public ownership. But, instead is a tool for the bankers and hedge fund managers (often using CFD) to manipulate the markets. Most company shares are now owned by institutions and private equity funds that are unaccountable to its stakeholders. This has got to change and will change when we get our independence from London and the UK. We will need to build our own sovereign wealth.

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Ap Kenneth

There are very few financial institutions based in Wales, three building societies, Principality, Monmouthshire and Swansea, two banks Hodge Bank and Chetwood Financial based in Wrexham. While investing savings into these companies supports jobs and does recirculate monies into housing, they are in reality part of the spider web of connections that the City has for siphoning and funnelling funds. The Welsh Government Bank, The Development Bank of Wales runs a programme of investing for Angel Investors or high net worth individuals. You can of course invest in local co-ops or community investments but they are quite limited. Perhaps we need an Exchange whereby ordinary savers can invest in say Local Governments Bonds, established co-ops or local business bonds for investment but with a government guarantee maybe operated by the Welsh Development Bank. The businesses paying a slightly lower rate than they can get from city institutions and individuals picking up higher rates. Banc Cambria to provide community banking could also be brought to fruition. Money circulating locally has the best boosting effect for the economy not the City of London or online banks or online retailers.

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Walter Hunt

The presumption that led to the global financial crisis was that financial firms could regulate themselves. Did anyone question the wunderkind financial instruments with strange names? Money was being made! Gordon Brown convinced himself that he had ended Tory boom and bust. Perhaps the most damaging and intractable consequence of “light touch regulation” and leaving things to the market, is the housing crisis. Nationally and globally there is an asymmetry of expertise and understanding between the regulators and the industries they attempt to regulate, particularly true of rapidly developing technologies such as biotechnology, ICT and AI.

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Bob

It's never smart to have all your economic eggs in one basket.

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There is a large rewriting of history in this article! Deregulation of banking and finance started under maggie thatcher along with cheap credit (instead of increasing wages) to encourage a consumer economy. The tories wanted gordon b...

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