I have found it extraordinary to read some of the commentary on the liberalisation of the City in the 1980s, written by people who now have access to state papers under the 30 years rule. They wish to see in our debates and discussions theĀ causes of the banking crash which happened 23 years later from quite unrelated causes. Such is the power of Labour’s spin.
The banking and broking system moved smoothly from the cartelised and small City of the early 1980s to the global market of the later 1990s without accident. When the Conservatives left office in 1997 we had a decade of success with the larger City under our belts. The commercial banks were bigger and did more, but they still had sensibly controlled balance sheets thanks to the continuity of banking regulation under the Bank of England. There wereĀ no more scandals then than in the years prior to Big Bang.
Gordon Brown decided to tear up our regulatory settlement, take most of the bank regulation responsibilities away from the Bank of England, and give them to a new Statutory body, the FSA. It was that fateful decision, not our decision to liberalise the City, which caused the banking crash. Mr Brown’s new regulator allowed a massive expansion of bank balance sheets and credit, well beyond anything we would have allowed, and then in 2007-8 they decided to bring the system crashing down by forcing change too rapidly onĀ a bloated banking industry with higher interest rates and demands for more capital.
Big Bang transformed the City for the better, as I hoped at the time. It broke up the cosy cartel of the old stockbrokers and jobbers, introduced competition into commissions which made share buying and selling so much cheaper, allowed in many foreign banks and brokers with extra capital, new business and job opportunities, and allowed UK institutions to raise serious amountsĀ of new money to operate on a world scale.
It built one of the dominant financial service and banking sectors of the world. The City expanded from the narrow Square Mile around the Bank of England, to encompass Aldgate, Liverpool Street, the Finsbury area , parts of Mayfair , St Paul’s and parts of docklands. Today we earn Ā£60 billion from our financial and business service exports, and have aĀ group of companies and service industries that the world envies. Without Big Bang none of that would haveĀ happened, and the UK would be a lot poorer. Instead of blaming Big Bang for financial scandals, people should remember there were scandals before Big Bang, and remember above all that it was Mr Brown’s regulators who Ā helped bring on the crash they were meant to prevent.
January 3, 2015
The problem with the Big Bang was that through financialization,mainly securitization of junk by using the new derivatives voodoo, banks could expand their balance sheets up to 60 times equity. Securitization was turning water into wine, junk debt miracilously became triple A mint debt. And then when the the inevitable happened at 60 times gearing, one more person than the 1.6% equity base showed up to cash in their chips, the system froze. To compound the issue, the govt and central bank stepped in and bailed out the feckless institutions. That started with the Asian crisis in 1998. Then these bloated, insolvent monopolies became to big to fail, or even to big to bail.
That is Thatcher’s legacy. A free market would have euthanized these banks 20 years ago. Now we are backed into a corner.
January 3, 2015
Gary
A completely ignorant post. Securatization etc happened long before Big Bang. There was a cartel before BB and a free market post. I know you hate banks but really at least make an attempt to be factual
January 3, 2015
Not to that extent. They where running a shadow banking system next to the real one along with PPI rip offs, rate fixing, insider trading, money laundering, and ripping off business in any number of ways the charge sheet grows ever longer after a massive taxpayer funded bailout with no comebacks for bankers, only a deluded apologist who if he saw a union official claim for a taxi and walk tell us banking is legitimate and Unions are corrupt.
The average person has equal chances? What are you like?
January 4, 2015
Bazman
Your ranting post has absolutely zero to do with what I wrote
January 4, 2015
Was it factual?
January 5, 2015
Bazman
No what you wrote wasn’t factual about big bang. ALL the things you wrote happened AFTER Gordon Brown changed things. Insider trading which prior to big bang was illegal but rarely prosecuted changed in the 1980’s at the time of Big Bang and a number of high profile bankers where prosecuted, fined and jailed, The best known being the Arbitrageur (named unchecked individual ed) , find $100 million, jailed for 2 years & banned from ever working in finance again. A substantial number of other bankers were also prosecuted, fined and jail. The New York then District Attorney Rudi Gulliano made his name clamping down on rogue bankers. He later became Mayor of New York.
In the last 5 years dozens of bankers and traders have been jailed, fined and banned for their illegal activities. Breaking the law and illegal activity should always be prosecuted.
January 3, 2015
“libertarian”, what part of bank bailout by govt is free market ? In a free market businesses that are caught overexposed go out of business. They cease to exist. The Big Bang socialized risk and privatised profits. The Mexican peso crisis in the 80’s was the first bailout, the Asian crisis the second, dotcom the third, 2008 the fourth , since the big bang.
I suggest you change your moniker, it is currently a misrepresentation.
January 3, 2015
Certainly the bank bailout was very foolish and unnecessary, and not a free market policy. But how has this to do with Big Bang? How did Big Bang socialize risk, I don’t see the connection? What do the Asian crisis, the Mexican peso crisis or indeed the dot com bubble to do with Big Bang in London???
January 4, 2015
Richard1
You are absolutely correct. Gary has a big issue with bankers. Which is fair enough its just that his arguments which he uses to beat them don’t stack up. The reason is that the solution he wants to replace the current system doesn’t actually work any better.
January 4, 2015
Richard
The Big Bang was a transatlantic deregulation of finance by Thatcher and Reagan. There was a common aim.
By proceeding with serial anti-free market bailouts, in contradiction to deregulation, they effectively transferred the risk of finance onto the taxpayer but continued to pay themselves ever larger bonuses. Socialize the risk, privatize the profits.
Reply Taxpayer bail outs was no part of our 80s agenda for reform.
January 4, 2015
Gary
You’re deluded. The Bank bailouts happened in 2008. The market was freed from price rigged commissions and monopoly practice in 1986. What bailout of dotcoms with taxpayers money? Give me some evidence that this happened. Until Gordon Brown changed things the Bank of England was the lender of last resort and had been for 100’s of years. You make it up as you go along.
January 4, 2015
Gary
I suggest you get someone sensible to read my post to you.
I told you an inconvenient fact that rubbished your foolish and incorrect claim.
As to bank bailouts which was NOT a part of my post I absolutely agree 100% No bank should have been bailed out using taxpayers money.
You have not the remote idea what the big bang did. Your seem to have missed out all the other boom and bust cycles, and financial problems that occurred BEFORE big bang and also BEFORE we left the gold standard. Do get a grip Gary
January 3, 2015
Gary ignore this comment. A couple of months ago I posted a some stuff about a friend of mine whose son who was looking for a job and received a similar sort of reply. Unfortunately for Libbie, who was describing himself at the time as a “expert on employment”, the faults in his argument were highlighted by two other commenters. Obviously he has read something in “The Readers Digest” over Christmas about central banking.
January 4, 2015
Dear Derek
No one highlighted a fault in my argument about jobs. People who don’t know or understand the market disagreed. Thats your right to disagree. It doesn’t alter facts though. Has your friends son landed one of the 500,000 new jobs yet?
On the banking point err central banking wasn’t the issue at all, it was about Big Bang and I made the easily checkable and factually correct point that securitisation and derivatives existed BEFORE big bang. Google it, learn something
January 3, 2015
Big Bang was absolutely essential to ensure the survival of the City of London. There was nothing inevitable about London being a great financial centre. The Eurobond market started off in Paris afterall. Had the old City cartels managed to fight off Big Bang (and some tried) London would be a completely different, and much poorer, place than it now is. Big Bang was a massive achievement by the Thatcher Government.
It is no surprise that Labour try to blame the banking crisis and Great Recession which took place 22-23 years later on Big Bang, as they cast around for anyone to blame but their own incompetent regulation, loose monetary policy, runaway government spending and foolish and unnecessary bank bailouts. Partly its Labour’s normal lies and spin. Partly also its that many leftist politicians and commentators have never worked a week outside the public sector and don’t have a clue about the actual workings of capital markets.
Labour must not be allowed to escape blame for the banking crash, the foolish bailout and the Great Recession which happened after 10 years of Gordon Brown’s catastrophic chancellorship of the exchequer.
January 3, 2015
Are bankers to be allowed to escape blame? You would have never believed anyone who contradicted their religious financial beliefs would you? The Tories backed them to the hilt. To the hilt and still do as they are in the main not so secretly funded by them.
January 3, 2015
Big Bang was the abolition of the system of fixed commissions and of the restrictive practice of brokers and jobbers having split functions, together with the admission of foreign and other competition to the stock exchange. These changes were inevitable and wholly sensible. There is no logical connection between the Big Bang reforms and the explosion of banks balance sheets (which only took place as pointed out above under Brown’s regulatory system), nor in the growth of securitization (in the case of subprime mortgages something that was itself driven by government regulation and pressure in the US).
January 3, 2015
“It was that fateful decision, not our decision to liberalise the City, which caused the banking crash.” With this opinion, it still stands that decisions by a UK government contributed to the banking crash. It is good to acknowledge that.
January 3, 2015
EU Socialist drivel once more.
January 3, 2015
@Hope: what is socialist about this?
January 4, 2015
There’s nothing socialist about it, of course. I do find it tiresome when those on the right refer to anything they don’t like as ‘socialist’ and those on the left substitute the word ‘fascist’.
Most economies, including the USA’s, are a mixture of socialist and capitalist. We can all have our own opinions on where the balance should lie. It’s only natural that we all have our differences. That’s a good thing and nothing for anyone to get upset over.
What should upset us though, is the use of an ideology of one sort or another to justify wrongdoing. In the Communist era, in Eastern Europe it was a lack of democracy and suppression of human rights. Sadly, the same is true of the EU, albeit not to the same extent. The exercise of democracy is frowned up when it produces results not quite to the liking of the EU hierarchy. Human rights aren’t respected by the tolerance of mass unemployment -especially among the young of the Eurozone.
The Greeks are being threatened with dire consequences if they dare to use their democratic process to try to correct mistakes made by previous Greek governments. The first big mistake was to go into the Euro. The second big mistake was to sign up for an Austerity program. The Greeks are now trying to “unsign up”. Good luck to them.
The Germans and some of the commentators on this blog may not like the EU or Greek politics. But there’s nothing particularly socialist nor fascist on the part of the Greeks for wanting to renegotiate a better deal, and there’s nothing particularly socialist nor fascist, about the EU powers-that-be not wanting to offer them one.
January 4, 2015
@petermartin2001: I agree with some of what you write. That Syriza is not to be feared that much, it is just a democratic expression at elections, and what I see of it, it is a party that likes to cooperate with the Dutch SP, the Irish SinnFein and the German Die Linke, none of them close to my affiliation but that’s democracy.
What I disagree with is your assertion of lack of EU democracy and human rights:
Article 15 of the charter of fundamental rights (better than the Human Rights Act 1998 you in Britain have to contend with) states āthe freedom to seek employmentā but not any guarantee. You cannot, even as a Brit, just āinventā human rights, you must be able to provide proper references, so please do so if you have them.
The so-called threats to Greece are not worse than the threats to the Scots if they were to vote for independence, that is all part of political games. Obviously the EU will make a deal with Syriza if/when it wins the elections. The EU is felt more distant than the national systems, but EU democracy can well stand a comparison with British democracy on most aspects.
January 4, 2015
The question on EU democracy, or lack of it, is easy to answer. Ask anyone in America and they will know their President is Barrack Obama who was last elected in 2012. But will anyone in Europe know their President is Jean-Claude Juncker? Who elected him?
Who elected the 28 European Commissioners? What powers do they have? Where did these powers come from?
Who’s in charge of Greece? The Troika or the democratically elected Greek government? What role should Angela Merkel, and the other German politicians, play who have plenty to say about Greek internal affairs?
Is the expansion of the EU a democratic process? What can we do if we don’t like it? How can we stop it? Is our only option to leave?
No-one can tell us this is democracy and keep a straight face surely!
The issue of unemployment is more problematic. No government can guarantee everyone the job they’d like, but what is the point of only guaranteeing “freedom to seek employment”? I’ve always had a freedom to seek to be a member of the England Cricket team. Sadly I didn’t quite make it! But I did find other forms of employment more suited to my talents. I did have what the Aussies call a “fair go”, unlike the present younger generation in the Eurozone.
We can debate what we mean by human rights, and where they come from, but I’d class mass unemployment such as we see in the Eurozone, which no-one has voted for, as nothing less than a crime against humanity. Those economists and politicians who claim nothing can be done, and that we need these high levels to prevent inflation should hang their heads in shame, immediately resign and hand their jobs over to those who claim that something can indeed be done.
PS The British left should hang their heads in shame too. They criticised Mrs Thatcher when unemployment in the UK became too high, as was their democratic right, but they have little or nothing at all to say about what’s happening in the EZ right now.
January 3, 2015
Gordon Brown personally oversaw the conditions that lead to the UK banking crash, by not regulating the banks, but also by overspending and borrowing in every single year.
January 4, 2015
Overspending by Labour government on welfare did not cause the banking crisis. and Coalition has now borrowed more than Labour did and took a decade less to do it. Between May 1997 and April 2010 Labour borrowed Ā£429.975 billion. Since May 2010, this Government has now borrowed Ā£430.072 billion. So do tell us lojo how this fits into your deluded world view and since when did you became a fan of any regulation banking or otherwise with its red tape and wealth creating strangulation of business.
The market ie bankers know what is best for banking. Get out of the way!
January 4, 2015
Bazman
The EU and UK law forbid under monopolies ruling that banks such as RBS could acquire other large financial institutions. Gordon Browns govt fought to have that overturned to allow RBS to acquire ABNAmro. RBS where allowed to complete the takeover and it was the failure of that institution that crashed RBS. So much four regulation eh Bazman
January 4, 2015
Huh! What!? I don’t understand! What regulation? There was none and none was needed?!
January 5, 2015
Bazman
Don’t be silly, there has always been bank regulations & its always been needed. What happened was Gordon Brown changed the regulations and set up a body with no knowledge or experience to police it, thats why it went wrong.
January 5, 2015
Bazman – the failure of the Labour government to regulate the banks caused the banking crisis. Have you forgotten already the mad years between 2000 and 2007 when house prices in some parts of the country more than tripled? Have you forgotten people borrowing like there was no tomorrow – re-mortgaging every year to pay off their credit cards. The so called economic growth was all fuelled by growth in consumer debt. Total consumer debt in 1997 stood at Ā£650 billion. By 2007 it was Ā£1.43 trillion. Consumers borrowed and spent Ā£78 billion a year. And Labour spent the tax all this borrowing and spending produced – as fast as they could. They doubled the number of middle managers in the NHS. They doubled the money spend on housing benefit. And there is no going back from this stupidity. You can’t suddenly slash housing benefit – or get rid of a hundred thousand people middle managers in the NHS earning 3 times what a nurse gets.
You talk about the coalition increasing the debt. What on earth should they have done in 2010 when they inherited the situation where the Labour government was borrowing Ā£150 billion a year just to pay the bills. The entire wage bill of the public sector is about Ā£150 billion. Should they have shut the entire public sector down?
What would you have done that would not have involved a massive increase in debt?
January 3, 2015
Indeed I agree fully, but it is all under considerable threat from the agenda of the EU. Also from the current (largely misguided/over the top regulation) of banking, bank lending and mortgages. Further damaged by daft employment laws and totally absurd laws such as the Coalition’s gender neutral annuities and pensions.
Even just opening a bank account now can be a major operation. Then you deposit money and watch is decline in value interest rates below inflation and are taxed on it too.
January 3, 2015
A good proposal from the Conservative to cap pay government pay offs at Ā£95,000. They should have done this four years ago though still rather high. It should also apply to the BBC, local authorities, quangos too. So many fail then “resign” only to be give a huge pay off for this failure. If they are any good they can get another job anyway.
True that outside the state sector the total remuneration pay is likely to be 1/3 less. That too needs to be addressed.
January 3, 2015
MPs get from 50% to 100% of a years salary (Ā£67,060) plus Ā£42K for terminating contracts with staff and property perhaps relatives in some cases.
This possibly after only a few months service too (or just one term anyway).
January 3, 2015
How about MPs pay, expenses and pensions. The same for MEPs and EU commissioners. Gravy train on the taxpayer.
January 3, 2015
And now your boss with his spineless cowering to Brussels will let them destroy the city. Anything rather than stand up for Britain.
January 3, 2015
I remember the banking crises of the 80’s and 90’s and the massive unemployment of the 80’s. I also seem to remember that many of the problems began in America and affected insurance. The troubles started earlier.We cannot keep destroying the public sector because it got us out of the red once.
January 3, 2015
The main banking problem of the early 90s was caused by John Major taking us into the bonkers ERM as chancellor and destroying the economy, businesses and taking away people’s homes, with 17% mortgage rates and the likes. Still no apology from the man for destroying the Tory party for 3+ terms so far. Cameron is still on essentially the same bearing it seems.
January 3, 2015
“such is the power of Labours spin”
And there you have it John, in just a few words.
Labour in the Blair years were so good at manipulating the truth, it kept you out of office for 13 years.
But to be fair, the Major Government needed a good kick up the arse at the time.
Once Labour got in office the Conservatives never got their act together, by being able to disprove the lies and much exaggerated truth elements of Labours spin machine.
Sorry to say that the Labour spin machine kept them in power for longer than it should have, but that was in part due to the fact that the Conservatives were useless at PR and still are to a degree.
You argue lies with fact, undeniable fact, with simple explanations, but instead of doing so at the time your leaders all tried to be like Blair, and even agreed with many statements for what they thought would gain them some advantage at the time.
Labour still seem to get more traction in the media than do the Conservatives.
Until you get your message out in very clear and simple terms, without the use of weasel words and phrases, the Conservatives will struggle.
Until you actually deliver what you promise, then few will believe anything you say.
Labour should have been absolutely hammered on the economy as soon as your lot had had a good look at the books, the famous note “no money left” should have been used over and over again, indeed this should have been the suicide note that would keep Labour out of power for generations.
January 3, 2015
Well said. But Cameron is emulating Blair. The public this time are far much wiser and already do not believe a word Cameron says.
January 3, 2015
It is the Biased BBC – they see themselves as the natural opposition to the Conservatives, and the entire Ā£6 Billion is spent on EU, warmist and socialist propaganda every year. The very worst use of taxpayers money.
January 3, 2015
There are are social factors which the tories always seem to ignore and the socialists perhaps even more.The people who we have in this country affect the flow of monies. The people who are trying to take control of our services and see themselves in a superior position , stand on the Brits in a continuing demeaning of everything British.The methods are a drip by drip control of big money and spread of financial abuse. Whilst loftily the banks bosses are looking at amounts of cash and percentages , others are looking at control from the roots.
January 3, 2015
It might be uncharitable to blame Gordon Brown but it is not as he was told in clear terms of the likely (and actual, as it turned out) consequences of his folly, thanks to Peter Lilley who records (@ http://www.peterlilley.co.uk/questions/1806/oral-question-money-creation-and-society ): –
” …..I was shadow Chancellor when the Bill that became the Bank of England Act 1998 was introduced. He pointed out that I then warned the House that: –
“With the removal of banking control to the Financial Services Authorityā¦it is difficult to see howā¦the Bank remains, as it surely must, responsible for ensuring the liquidity of the banking system and preventing systemic collapse.”
And so it turned out. I added:
“setting up the FSA may cause regulators to take their eye off the ball, while spivs and crooks have a field day.”-[Official Report, 11 November 1997; Vol. 300, c. 731-32.]
So that turned out, too. I could foresee that, because the problem was not deregulation, but the regulatory confusion and the proliferation of regulation introduced by the former Chancellor, which resulted from a failure to focus on the banking systemās inherent instability, and to provide for its stability.”
January 3, 2015
“Gordon Brown decided to tear up our regulatory settlement, take most of the bank regulation responsibilities away from the Bank of England, and give them to a new Statutory body, the FSA. It was that fateful decision, not our decision to liberalise the City, which caused the banking crash.”
And as the Bank of England no longer had responsibility for the prudential supervision of commercial banks it was wrong for the mass media to keep telling the public that the Governor Mervyn King was to blame, while saying nothing about the person who had been put in charge of the FSA and who did have that responsibility.
And the name of that person was … ? I wonder if any of your readers can say, off the top of their head without resorting to an internet search.
And what is that person doing now?
(In employment in the city – link offered without the details ed)
January 4, 2015
Well, as nobody has volunteered it, the name of the person first put in charge of the FSA was Sir Callum McCarthy, and he is now a director of the Castle Trust, the website of which may be found simply by putting “Fixed Rate Bonds” into google when it now comes up as the very top reference, and which says:
http://www.castletrust.co.uk/about-us/
“Our directors include:
Sir Callum McCarthy, former chairman of the FSA and non-executive director of HM Treasury
The Rt. Hon. John Gummer (Lord Deben), former Secretary of state for the Environment”.
January 3, 2015
Nor should we forget that it was brown who destroyed the final salary pension scheme system after some 70 years of successful operation. Another wilful, disgraceful act of political vandalism.
January 4, 2015
Economic vandalism too – essentially legalised theft from the prudent – continued and augmented by Osborne and the coalition.
January 3, 2015
Oh yes I forgot to mention who was left in control of a certain bank until the tabloid journalists got a hold of him rather than the regulators.
January 3, 2015
Keep the debate simple and you win.
The cause of the 2007 disaster was that Labour held interest rates too low for too long. That in itself caussed the boom and the crash was then inevitable, with or without Browns loose control of the banking sector.
January 3, 2015
I was told some years ago by a retired former Senior Director of one of the big banks that Brown partly populated the FSA with banking ‘discards’ and Civil Servants ‘encouraged’ to apply for a transfer by their departments.
True or not it, it has credence given the fateful consequence of Brown’s foolishness!
January 3, 2015
The “City” is an outstanding contributor to our wealth and economy and – as you say – an example to the world . During the changes that happened in the late 70’s and early 80’s the “cross the counter ” bankers were very keen to add the “merchanting” sector to their activities . This did take place without the supervision, understanding and skills in place to control and direct the enterprising element . It resulted in many errors and mistakes with many 0000’s on the end leading to the scandals that brought shame and difficulties to the entire sector .
I still believe today it is a mistake to have the 2 branches of banking mixed together ; one of the results is the disappearance of the “Manager” who understood and played an important role in his immediate cross -the- counter banking area . The merchanting sector was always supplied with very bright young individuals who quickly made the sort of contribution that fostered the investment manufacturers and others needed ; this is still the case today .
It was no surprise to me that Sir John Vickers , in his report on Banking , recommended the “ring fencing” of the 2 sectors . He understood like many of we onlookers that it was wrong to mix the activities together . I wonder whether his advice has been properly taken on board and implemented .
January 3, 2015
I agree that big bang broke up the city clique cartels and brought in a great deal of foreign investment.
However, the bank cartel was ā and is ā still left intact.
As such, we are surely still in a position where we will forever be piling on regulations as banks (understandably) exploit loopholes. They will also still be ātoo big to failā, effectively making them state-owned as it is surely implicit that the state will rescue them if they get into trouble.
I think we have a decision to make regarding banks and I see the following 2 options:
1) We deregulate and lower the cost of entry (e.g. reduce the capital requirement) and allow thousands of banks to spring up in true competition
2) We eliminate commercial banks and have one bank for each nation (Banks of England, Bank of Scotland etc)
This half-way house between commercial and state-owned is surely the worst of all worlds. It is a recipe for unhealthy collusion between banks and the state and a very inefficient, self-serving banking sector.
January 3, 2015
While one can only agree with the proposition that Labour alone possesses the intellectual dishonesty to blame Big Bang in London for the problems of Lehmann Bros in New York 23 years later, there is room for an alternate view of recent economic history.
Letās start with Dr JRās statement, āBig Bang transformed the City for the better, as I hoped at the time. It broke up the cosy cartel of the old stockbrokers and jobbers,ā.
The old, pre-Big Bang, City had evolved so as to delineate between businesses that accepted risk as principals, and businesses that did not knowingly accept risk, being agents or brokers. The jobbers accepted market risk and above the brokers and jobbers in the City hierarchy, but members of the ācosy cartelā nonetheless, sat the Accepting Houses, who were commonly described as merchant banks. The merchant banks fully accepted risk and shared with the trading banks the business of financing the government by buying discount and interest bearing debt, as well being active in taking equity risks. The structure of the old City could therefore be described as being a Glass-Steagall model without the black letter law.
The nature of the merchant banksā business meant that their balance sheets had grown over some 200 years to become much larger than those of the brokers and the jobbers who were required to remain as partnerships by the rules of the stock exchange. There were a relatively large number of brokers and jobbers, so that the London market in debt and equity securities had an inherent spread of risk in all regards. After the Baring collapse of 1890 the merchant banks had abandoned the partnership model and had incorporated.
Even without the benefit of hindsight, astute readers can guess how the relaxation of the rules controlling the old City (Big Bang) would inevitably pan out. The starting gun saw a rush to merge as the relatively small number of merchant banks became high level predators of the brokers and jobbers, whose partners cashed in on up to 200 years of goodwill and suddenly found themselves very rich men (women were not considered to be partnership material). The practical effect was a higher concentration of principal risk in a small number of financial institutions. This concentration of risk was not matched by any expansion of managerial understanding, which resulted in the second collapse of Barings and the collapse of SG Warburg some years later in 1994.
If one looks around the City today, virtually none of the businesses which dominated in 1985 are still in existence with the exception of NM Rothschild. Everything our host says about Gordon Brown and the FSA is of course absolutely true, but there can be no disputing that the City is now the preserve of international mega-banks. Those making money are salaried employees rather than British proprietors. It must be progress, although there are no longer any ships in the docklands either. Moving money around seems to be more profitable than making and moving goods.
January 3, 2015
Bluedog
Whilst a lot of what you say is true there are 2 things I would point out.
In investment banking most of the top 10 players from 1985 are STILL in the top 10
ie
Goldman Sachs
Morgan Stanley
Credit Suisse
Barclays
JP Morgan
UBS
Citi
Deutsche Bank
NM Rothschild
The second point and one that is rarely touched on is that the other issue back in 87 was the change of the stock exchange from open outcry to electronic trading. That has had the most profound effect both good and bad.
In my opinion the problem at BB was not Merchant or Investment banks buying up jobbers and brokers it was the big retail and commercial banks. They where the ones who didn’t understand the “city” and ultimately ended up with organisations such as RBS which were a giant mess of clashing legacy systems, cultures and management structures.
As has been show the smaller more niche operations are the ones who are most successful now.
January 3, 2015
Libertarian, the list of top investment banks that you offer contains one original British name, NM Rothschild, which validates my point. As a consequence of this change of ownership the City is no longer under British management, possibly a latent risk factor in retaining this very lucrative field of enterprise in the UK.
All the rest of the names are foreign, except Barclays, and the current pre-eminent bank, GS, was a relatively insignificant player in 1985, when Saloman Bros was the US top dog. Barclays became an investment bank only recently after the tumultuous formation of Barclays Capital. One could argue that Barclays was lucky to get through 2008 without being nationalised like RBS and Lloyds/HBOS.
I completely agree with your point about the impact of technology on the old City model. The development of electronic trading was always going to change everything, and the carefully drawn distinction between principal businesses and agency businesses would have been hard to maintain even if the BoE had tried to ensure its continuance. Unfortunately a Labour Chancellor such as Gordon Brown, who saw things through the prism of bitterness and envy, is always guaranteed to make the wrong call.
You mention RBS, and as the inheritor of County by way of NatWest, that entity certainly justifies your point about the misunderstanding of the ‘City’. Of course, RBS was also closely linked to the ambitions of the SNP, and there seems little doubt that it was intended to become a financial powerhouse based in Scotland, but with the bulk of its profits coming from rUK and its international business. After the collapse of RBS and its nationalisation by Westminster, and now with the collapse of the oil price, SNP strategists must be wondering how they can take a trick.
January 4, 2015
Had the oil price collapse happened a few months earlier the separatists would have struggled to get beyond 30%. The fact that the SNP was such a cheerleader for the hapless Fred Goodwins RBS expansion didn’t come out in the campaign nearly strongly enough. Probably Alistair Darling didn’t want focus on Labour’s own role.
One point to add to the exchange above: it is inconceivable that any of the old City brokers jobbers or merchant banks could have played any significant role in global capital markets as now structured. NMRothschild is a great success but they have carved out a niche advisory role, and (sensibly) doesn’t have a big underwriting or distribution capacity.
January 4, 2015
Bluedog
No, that list ( in a slightly different order ) was the SAME as the top 10 in 1987. British banks have never dominated the market because they didn’t exist before Big Bang !!! They were jobbers, brokers or niche Merchant Banks such as Rothschilds, Morgan Grenfell, Schroders, Barings etc. Goldman Sachs was a bigger player than Solomon Bros in 1985 too. Although I concede they did view each other as rivals. Soloman made the same mistake that lots of other institutions did i.e. buying too many incompatible business such as phibro etc. Of course Solomon Smith Barney was later acquired by Citigroup. GS on the other hand acquired a tiny commodities trading house J. Aaron and that was all.
I agree with the rest of your post 100%
January 4, 2015
Yes, you are absolutely right.
Our host, as an ex banker, applauds Big Bang but you correctly identify that prior to that, there was an effective Glass-Steagall seperation.
Conflict of interest was a concept dumped in favour of “commerce’, which rapidly degenerated into spivvery.
Regettably, the Tory party has become the enemy of professionalism in its pursuit of the “free market”, which is usually an oligopoly.
Prior to Big Bang there was no ban on bering both a commercial bank and an investment bank – vide Nt West/County
January 4, 2015
No ban, but effective seperation.
Hence the comment about professionalism.
January 4, 2015
Mickc
What existed in UK prior to Big Bang was not like Glass-Steagall at all. That act ( of which there were 4 parts) prevented US commercial banks from owning securities firms. In the UK securities firms like the US ones didn’t exist as we had a set of different activities in stock brokers, stock jobbers, merchant banks etc
January 3, 2015
‘Gordon Brown decided to tear up our regulatory settlement, take most of the bank regulation responsibilities away from the Bank of England, and give them to a new Statutory body, the FSA. It was that fateful decision, not our decision to liberalise the City, which caused the banking crash. ‘
Yes, indeed. Difficult to find anything good to say about Brown and his dabblings in the City.
January 3, 2015
One of the major failures of Messrs Cameron and Osborne has been their inability or reluctance to nail the responsibility for the financial crisis firmly where it belongs: as you so rightly say, in the hands of Gordon Brown and his Labour Government. Rather they like their coalition partners and Labour have preferred to pursue the populist alternative of banker bashing; perhaps they are frightened of being seen to admit that politicians might ever be the cause of anything bad. It certainly true that there was plenty wrong in the banking world (if there was any room for doubt, the rate fixing scandal has put paid to it), but Mr Brown’s regulatory reforms and general policy provided the background in which corruption could flourish.
You are equally right that big bang was a watershed and an essential one at that. It was not this alone that caused the renaissance in the city; it also got a great whiff of oxygen from the Thatcher Government’s tax reforms and rate reductions that suddenly made it worth working hard rather than spending time inventing new ways of avoiding tax.
January 5, 2015
“One of the major failures of Messrs Cameron and Osborne has been their inability or reluctance to nail the responsibility for the financial crisis firmly where it belongs … Gordon Brown and his Labour Government.”
There’s no shortage of appetite. Conservative MP and supporters have been very clearly and loudly blaming the financial crisis on Labour for the past four years. The idea that they are reluctant to do this is simply not supported by the evidence.
Conversely, that the argument hasn’t found the traction you’d like it to, might reflect an inability to make it properly. More likely, however, is that it reflects the good sense of the electorate, who find the argument that an international banking crisis was caused by the British government’s spending on welfare more than a little simplistic.
Moreover, Conservative voices face an additional problem in this respect, in that when they talk about Brown’s regulatory failures, very few actually believe that a Conservative government would have been harder on the City, that they wouldn’t have encouraged even more light-touch regulation, which after all is what many Conservatives were calling for at the time.
Given all this, it’s no surprise that this narrative fails to inspire anyone other than the faithful, who already blame Labour for everything anyway!
January 3, 2015
Couldn’t agree more.
I barely understand what goes on in the city and I live a rather long way away, but I still understand that they make a big contribution to my standard of living.
The city brings in a vast amount of money that the government gets to tax and spend on public services which we could not afford otherwise. It also generates useful employment. Every once in a while they screw up and that costs money, but nothing like as much as they bring in.
It was all running satisfactorily before the FSA which managed the rather impressive trick of replacing occasional minor banking crises with one huge one. I’m not entirely clear on how they managed this, but my understanding is that banks we’re allowed (indeed encouraged) to lend too much money they themselves had borrowed to people who had little or no chance of paying it back.
January 3, 2015
That is not true all the money they have lost in the crashes could have built up a strong manufacturing base with real jobs, energy investments and much more. The mass unemployment and in particular youth unemployment could have been tackled instead of providing a few jobs and vast wealth for an elite. Previous government policy including Labour is to blame for this. The cards stacked against the working person and the poor in short with this elite blaming them for their own problems.
January 3, 2015
The money lost in the crashes is dwarfed by that brought in by the financial services industry.
Government can’t just create a strong manufacturing base. See British Leyland. It could try to assist, but when governments interfere in free markets they almost always make things worse. Not sure what “energy investments mean”; if it’s energy that doesn’t involve digging up things that burn and then burning them, then it’s bogus and it would be cheaper to try to keep warm by burning money.
Who are the poor? Do you mean those working on minimum wage. Thanks to income top-ups funding in no small part by taxes on the city, they’re hardly poor by any objective standard. What stops them training for an above minimum wage job? I know and have known personally many who have done just that and gone on to better things. Similarly many who refuse to do so and never get anywhere.
The most successful people in the city are (or were before Gordon Brown skewed the market by buying banks which the market wanted to kill) payed according to the amount of money their work generates. It’s not like there is some caste system selecting those who work there. What is the real difference between those who struggle on minimum wage and the successful investment bankers? They didn’t inherit their wealth after all. Could it be that they made the effort to train for that high paying job and put in the hours to do it well?
January 4, 2015
The finance sector is very important, but it could be argued that many are poor due to the size of the banking sector the sheer size of the banking sector, at five times national output, is menacing. Providing an educated workforce, properly maintained roads, efficient railways and properly functioning water and energy systems is how any government helps the economy and denying there is any poverty because the city provides some extra crumbs for the scroungers who do not work there is for the birds pretty much like you assertion that only fossil fuels are the way forward in energy production. Tell that to China and the rest of the world desperate for alternative cleaner sustainable fuels its interesting to see how in some countries the oil companies are complaining that solar is unfair competition. as it becomes cheaper than coal. Usual do nothing change nothing Tory nonsense.
January 4, 2015
Solar is not cheaper than coal. That’s absolute nonsense.
China may be interested in alternative fuels, but that hasn’t stopped them building coal fired power stations at a rate unprecedented in human history.
I’m frankly fed up with people whinging about the poor and then pricing them out of food, housing and energy with environmental nonsense. If you want the poor to be better off, stop getting in the way of economic growth and let us do the basics like heat homes, get around, and grow food in the cheapest way available.
I say shame on the environmental movement for leaving people cold and hungry in the name of half baked and often discredited pseudo-science. Especially when nuclear would essentially resolve the supposed problem in only a few years and they refuse to contemplate it. I say this as a professional scientist with a PhD in a relevant field, but without relevant financial interests, who has studied these issues extensively.
Solar! I’ve never heard anything so ridiculous. Like we don’t need electricity at night, or when it’s cloudy. Under optimal conditions there’s only 1kW/m2 of sunlight available to collect and such optimal conditions are rather scarce.
If you object to fossil fuels, you can use nuclear. More expensive than fossil, but way cheaper than “alternative” and at least it works.
January 5, 2015
Bazman
Try joining us in the 21st century.
There are 44,555 financial services companies in the UK they employed last year 2.19 million people
UK Financial Services paid Ā£65.6 Billion in tax into UK Exchequer
The Professional Services sector contributed Ā£174 billion to UK economy
Professional Services exports Ā£103 billion
You think thats crumbs. So come on Bazman what can replace this and provide that level of earnings and tax income?
Cut your facetious and sarky comments & give us a straight answer
January 7, 2015
Solar in Australia is competing with fossil fuels.
http://www.theguardian.com/commentisfree/2014/jul/07/solar-has-won-even-if-coal-were-free-to-burn-power-stations-couldnt-compete
As for solar at night this is possible by using a solar-thermal power plant and other method are available. Just because you are ignorant of something does not mean it cannot exist.
Nuclear is not cheaper. It is the most expensive and dangerous method of boiling water ever conceived by man and cannot ever be viable without subsidy. Never.
China is choking on its own pollution coal will have to end somehow at least in its dirty present form.
Britains wind power cannot cope as you say, but as it stands we are still waiting seven years for EDF the French nationally owned company, yes it is, to build nuclear power stations even when promised twice the rate for the energy. No sign of the Chinese and no shale wells despite all the talk of how cheap and available this will be and massive amounts being given to keep old power stations open burning old wood instead of coal to pretend they are green.
Lets just nationalise all the energy production and stop your silly free market nonsense and dogma .
January 3, 2015
Glad you mention that – Liebour did more than anyone to destroy manufacturing in the UK – they also tried to destroy farming, wanting to base their entire economy on Banking. Since they totally messed it up you don’t hear too much about it now, totally aided and abetted by the BBC.
January 5, 2015
Loathe as I am to give any comfort to the Labour party lojolondon they didn’t destroy manufacturing. For the simple reason manufacturing in the UK hasn’t been destroyed by anyone. The UK is the 6th largest manufacturing nation in the world. Its not that we earn less from manufacturing its that services now earn more. Its called evolution. The world changes, most manufacturing now is a heavy user of services in things like software, IP, and design. Manufacturing in the 21st century is no longer labour intensive.
January 3, 2015
Yes
But in that time an awful lot of big British manufacturing and trading brands were sold off by the City and working class jobs lost. The welfare and dependency class grew and – in some cases – is now three generations old.
I do not recall any warnings from the Tories during Gordon Brown’s deregulation of the City and the Daily Mail even dubbed him ‘Prudence’ Brown. It wasn’t a Tory but Vince Cable who was crowned the great seer of the crash.
Reply I wrote an Economic policy report calling for higher levels of cash and capital. The party regularly warned of excessive build up of debt
January 4, 2015
Thanks for your efforts on this, John.
The 2007 Crash seemingly came out of the blue (well – I’d long predicted it in a campaign of emails and postings) so the Tory party’s campaign for prudence must have been very weak.
There has been relatively little blame towards Labour since and now the Tories are going to find it hard not to be found responsible for a large part of the national debt.
January 3, 2015
The cancelling by credit card companies of the cards of their best payers, that is, pe0ple who paid their bills punctually and in full every month and then donating any credit on those cards to charities on the basis “agree to the donation as you’ll not get the credit which is yours ” said much of Mr Brown’s economy. It was a field day, a feast day, for financial vultures preying on increasingly large numbers of injured people. Their business plan was to increase their indebtedness and actually use the laws of the UK such as “attachment to earnings” which the courts used callously and unthinkingly and possibly still do to press the luckless into even further debt, making legitimate employment impossible, burdening the tax-payer with paying benefits to former small business people where even their benefits were expected by our laws to be used for debt repayment..a pound here, a pound there, with a percentage take by more vultures from the debt management companies.
Not much has changed “on the ground “. Many of these companies by hook and by crook have somehow survived or renamed themselves. They nearly always abided by the law and handed out copious amounts of detailed Terms and Conditions which few have the time to read or the specific education to understand. Naturally The Law thought of this and insisted under Mr Brown the companies “Explain” to the customer. In practice 45 seconds is the usual time taken to induce deep sleep in a customer listening to such dry explanations.It was a farce which Mr Brown most likely did not understand at all for he did not seem to have an ear for ” bigoted people “
January 3, 2015
‘and then in 2007-8 they decided to bring the system crashing down by forcing change too rapidly on a bloated banking industry with higher interest rates and demands for more capital….’
Unless I’m mistaken that sounds like it was a deliberate policy to force a recession/depression. The reason being that you say that they ‘decided’ to bring the system crashing down….. I woukldn’t disagree with that. Of course, it wouldn’t be the first time in history that this had happened.
zorro
January 3, 2015
Whilst you are correct to point out Labour’s many errors – just don’t forget to mention that the real crash started in the USA with sub-prime mortgages.
Reply Our crash was equally real and did not result from US mortgage excess, but from UK authorised excess via mega bank mergers.
January 3, 2015
LOL, Atlas, I claim my fiver, you are clearly Gordon Brown in disguise! š
zorro
January 3, 2015
Indeed the crash was certainly equally real in the UK. The accounting rules and creative (essentially dishonest even if legal) accounting and auditing played a very important role in the crash too. Yet auditors nearly always seem to escape almost scot free in the UK.
We have over the years had countless problems with Rolls Royce, Equitable Life, countless banks and insurance companies, RBS/ABNamro and now Tesco PLC. Might we not get some better accounting rules and real some deterrents in place?
Reply The stated figures were quite scary and enabled people like me to warn there could be a crash and the say the banks needed more capital. I do not accept that most audits were wrong.
January 3, 2015
When Gordon Brown deregulated the city of London, US banks could not compete with their stricter regulations. Clinton was lobbied and repealed the Glass-Steagal Act, removing regulatory controls on US banks, and setting up the environment for the US Prime Mortgage crash. So you can see that no-one was more responsible for the US sub prime + UK + Global credit crunch than “Crash Gordon”.
January 5, 2015
lojolondon
Gordon Brown didn’t deregulate the city.
The Glass-Steagall act was repealed in 1999 because following the takeover of Investment Bank Soloman Smith Barney by commercial bank Citibank in 1998 it was realised that Glass-Steagall no longer covered the new banking/trading environment in the US and was no longer enforceable or viable.
The US sub prime problem was caused by 1977 US Community Reinvestment Act which mandated that banks/savings & loans/thrifts should lend to low & moderate income people for home purchases. In order to spread the risk US institution made far greater use of securitisation of sub prime mortgages.
January 3, 2015
Over -blaming the bankers for the crash of 2008 is a lazy option which doesn’t get to the heart of the problem. They aren’t a likable bunch, that’s for sure, but we need to look beyond their personal failings and beyond any technical failings there may have been with the ‘big-bang’ and its regulation, or lack of afterwards.
The problem that all governments have, both from the left and right, and on both sides of the Atlantic is to ensure that their economies are working to close to full potential, creating profits, but at the same time without creating too much inflation. Economic thinking, since the 80’s has led to a movement away from Keynesian demand management ie essentially using government spending and taxation policies to directly control the economy, in favour of a more monetarist approach which focuses heavily, some might say solely , on the control of the economy by the adjustment of interest rates.
So, the theory goes, if the economy needs to be stimulated, interest rates are lowered to encourage people to spend more. From the perspective of a right -of- centre government, keen to keep the government deficit low, this has an obvious attraction. It certainly must have appeared so to Mr Lawson in the late 80’s. He set up a credit boom which made the government’s figures look very good indeed. But as we all know booms are followed by busts. Increased lending merely brings forward levels of demand from some future time to the present time. It’s good for the present but bad for the future. The Lawson credit boom turned to bust in the early 90’s. The Brown and Clinton booms turned to bust in the early 00’s. And we know what happened in 2008!
Each time the busts exposed the weakest link in the system. That was the first to break. It may have been some financial deregulation problem in the city, over-lending to uncreditworthy customers in the housing market, over-speculation in the city, lack of adequate capitalisation of banks etc. Whilst it is certainly worth addressing these individual failings it shouldn’t be assumed they were the overall cause of the problem. If that link hadn’t broken it would have been another one that did.
It looks like we’ve come to the end of the line with monetarism. Interests rates are so low they can’t be lowered any further. The level of private sector debt is now so high that governments everywhere are scared to raise them to more realistic levels, in case the economy crashes yet again. But, if it does, (when it does?) , what’s going to happen then? Interest rates cannot go any lower. How then are governments going to keep their economies moving?
Reply The Lawson credit boom was the direct result of our joining the ERM – the pound wanted to go up so the Bank created and sold pounds across the exchanges which came back as high powered money in the banking system. They did this for a bit, then the pound wanted to go down owing to inflation the ERM had released, and the process was reversed, leading to a recession. That is why I strongly opposed the ERM at the time. The economy was on EU autopilot.
January 4, 2015
According to Wikipedia Britain joined the ERM in 1990. ie Just after the Lawson boom. The Lawson/Thatcher government also produced a surplus, instead of the usual deficit, in 1990 so cannot be accused of fiscal profligacy according to conventional economic thinking.
So I suppose you could argue that the ERM caused the problems in the early 90’s and I’d agree that didn’t help at all and made the recession worse than it need have been. The best thing would have been to let the Ā£ do what it had to do. Any intervention by government should have been merely a smoothing operation to prevent sudden jumps and thereby create an orderly market.
But I would argue that it was that government surplus (in a net importing country) which was fundamentally to blame. If the government is taking money out of the economy, at the same time as money is leaving the economy to pay for imports, then the private sector is having to foot the bill, which it does by over-borrowing. When the borrowing stops, or slows, something has to give and that’s when we have a recession.
Reply The UK was following the DM before it formally joined the ERM, and that began the credit explosion.
January 4, 2015
PS I should acknowledge that Nigel Lawson resigned as Chancellor in Oct 1989. So any surplus that occurred afterwards would have been under John Major’s watch.
January 3, 2015
The financail crash would happen anyway, that”s the system they have built, most new money go where it does not pay tax
January 3, 2015
In prognosticating about the good sense of the British public in mitigating the possible temptations towards get-rich-quick as a consequence of the bonfire of the customary practices of the old City, I wonder whether JR anticipated the extent to which the old City would be bought out, lock stock and barrel by Wall Street bankers (including some ed) whose lack of personal probity and desire for enrichment had lead to many financial scandals in the USA, and the need for Glass-Steagall to prevent systemic failure, bearing in mind that the Big Bang, as bluedog alludes, abolished a de facto Glass-Steagall that had previously existed in the City?
At the time of the Big Bang there was a lot of deliberately misleading assurances offered by the bankers about ‘bamboo curtains’; subsequently we hear about bankers selling derivatives and stocks for another internal department to short etc.
The old City was contrained by the inefficent, largely manual back office systems and the size of the floor of the old Stock Exchange. One has to wonder how things would have developed, simply be the replacement of the trading floor and clerks with computerisation, whose sophistication was growing rapidly at the time, removing any justifiable constraints on the numbers of organisations that could engage in broking or jobbing or for fixed commissions.
What ultimately caused the crash in 2007-8 was that a proper balance between risk and reward did not exist, as individuals within institutions took huge bets, knowing that it was others’ capital that was at risk, not their own should there be a significant market adjustment. Now it is proposed that banks that are failing should be able to fund a rights issue from their own depositors’ accounts. The present day bankers are like the old dragon slain by Thatcher, the totally irresponsible and legally uncontrained unions. It needs another Thatcher to bring these people within the law and make them incur financial penalties for their crass behaviour: they should pay, not taxpayers or depositors.
Reply Yes, I was well aware that many of the old stockbroking and jobbing firms would sell out, and said so at the time. The crash of 2008 was the result of excessive gearing followed by excessive Central banking constraint, quite unconnected to Big Bang and a set of mistakes made by the US and the Euro area as well as by the UK, but especially virulent in the UK given the decisions made here about regulatory systems and the permission of mega mergers of banks (which I opposed). I also opposed taxpayer bail out by buying shares at too high a price.
January 3, 2015
Fabulous BBC 4 has shown for the second time what happened to the globe after a very big bang; the moon crashing into the earth, now known to be the driving force of all that happens seasonally on earth( not without the help of humans) and the beginnings of life itself in the form of ribonucleic acid This fascinating programme discussed the strong possibility of using solar power to produce all the globes energy. Harnessed by solar panels on the moon and then microwaved to earth, the energy produced would eliminate the need for fossil fuels . Ian Fleming imagined this!
Where are we in this?
January 4, 2015
Solar from the moon is clearly even more vastly expensive and daft than Davey’s heavily subsidised PV on earth. Perhaps 1000-10,000 times more with current technology? It sounds bonkers to me and what about the dangers of the microwave beam to the Earth should it move? Maintenance sounds rather expensive too. Nuclear Fusion on Earth sound a doddle in comparison.
It was a typical BBC science program part real science, part wishful dreaming and part religion (the moon is looking over us, defending us from impacts but sometimes driving us mad!). All presented by someone who reminded me rather of dear old private school enthusiast Diane Abbott.
January 4, 2015
There may not be a choice if we want to survive. We need to think ahead and start planning and working on the possibilities.Without an imagined scenario there would never be a real one . We must remain positive.
The accusation that it makes some have a drastic personality change was immediately discounted.
January 3, 2015
The City and Big Bang? Oh no! Here comes gravity!
January 5, 2015
There is no doubt in my mind that the liberalization of the City was the greatest single reform of the last thirty years. It transformed London and turned it back into a global powerhouse it had been in the nineteenth century after a rather parochial period post WW2.
The Labour Party loved the tax receipts from the sector and used these to massively expand the state. I think there is a great deal of amnesia about how close Labour and the City were. Their regulatory reforms were a disaster. The creation of the FSA, shearing off the supervisory powers, was reputedly mainly because Gordon Brown thought Eddie George was a Tory sympathizer. The BofE was thus in charge of the market while having no daily insight. The much vaunted independence of the Bank of England on monetary policy was offset by the fact that the government packed it with Kensyian economists. The rest is history…
Without the reforms of Big Bang we would have had much less growth and a smaller economy. The crash was nothing to do with the 1980s reforms. The left seems to have forgotten how bad the 1970s were and some seem to want to return us there!