Rachel Reeves’s enthusiasm for the City of London as the “crown jewel of our economy” is raising some eyebrows. This month, economists felt compelled to voice their concerns, cautioning that loosening regulations in the financial sector could jeopardize the government’s broader economic strategy. They emphasized the importance of remembering the hard lessons learned during the 2008 global financial crisis.
Their reaction was in response to Ms. Reeves’s statements during a speech at Mansion House in November, where she hinted that regulations put in place after the crisis might be too stringent. It’s a worrying assertion because those measures were designed to rein in excesses, mitigate systemic risks, and ensure that the Treasury wouldn’t have to rescue failing institutions. Undoing such protections for the sake of economic growth undermines the stability they provide.
Ms. Reeves argues that expanding the financial sector will boost and diversify economic prosperity. However, history doesn’t offer much backing for this claim. Although the financial sector contributes 9% to the GDP and is the second-largest exporter of financial services in the G7, it hasn’t effectively tackled the UK’s stagnant productivity or chronic underinvestment issues. Instead, its growth has often drained resources and talent from the “real economy.”
The financial services sector employs about a million people, while a staggering 25 million UK adults are manual workers, and another 10 million are in low-paid white-collar jobs. For those in the lower and middle tiers, pay and social mobility remain static. A shift towards promoting labor-intensive industries, which have long been overlooked, seems more beneficial.
Britain’s financial sector could benefit from refocusing on fostering productive investments rather than more deregulation. Once a catalyst for economic development, the sector is drifting away from its core mission. Positive Money, a think tank, noted that UK banks’ assets were 32% of GDP in 1960; by 2022, they mushroomed to 563%. It underscored international studies revealing that excessive finance could actually stifle growth.
The financialization of the UK economy has fueled inequality and instability. For instance, the housing market has created a bubble where average homes are affordable only to the wealthiest 10%. The overall economy becomes vulnerable when speculators abandon caution for higher risks. Alarms are ringing from within the industry. In his 2015 book, “Other People’s Money,” Sir John Kay questioned a culture prioritizing personal gain over ethics and caution. Meanwhile, Nikhil Rathi, head of the Financial Conduct Authority, warned MPs in December that loosening the watchdog’s powers could allow more wrongdoers to slip through.
A few months prior, Bank of England governor Andrew Bailey drew from Greek mythology to highlight the need for vigilance against financial overreach. He suggested that Cassandra, the Trojan princess known for her true yet ignored prophecies, might have been an exceptional central banker. Her cautions resonate with economist Hyman Minsky’s belief that people forget past crises and fall for visions of a “new era.” Although the 2008 financial crisis may seem like a distant memory, the real peril lies in becoming complacent. If the chancellor ignores history’s lessons, Britain might find itself repeating past errors.
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