When the Bourbons, the French royal family, were restored to the throne after the fall of Napoleon in 1814, it was said “they had learned nothing and forgotten nothing”. Well, I don’t know what Mark Carney, the new governor of the Bank of England, has or hasn’t forgotten, but he certainly has learned nothing from the financial crisis.
Carney, formerly head of the Canadian central bank, took over from Mervyn King in the summer.
Tory chancellor George Osborne heaped him with praise—and also with money. Carney’s financial package is worth £874,000 a year. And even then his wife tweeted complaining about the difficulty of finding suitable accommodation in London because of an influx of French millionaires fleeing higher taxes.
Carney’s attempt to recalibrate British monetary policy has got off to a difficult start. The financial markets reacted sceptically to his commitment not to raise interest rates as long as unemployment is higher than 7 percent.
But they will have been cheering his most recent speech.
Carney promised to make it easier and cheaper for the banks to borrow money from the Bank of England. More generally, he sprang to the City’s defence, declaring, “If organised properly, a vibrant financial sector brings substantial benefits” to the rest of the economy.
Carney noted that bank assets—the loans they make—are now four times the size of the British economy. At the time of the crash in 2008, many thoroughly respectable commentators argued that allowing the financial sector to become so bloated had created a monster that threatened to destroy the entire economy.
Not so Carney. He wrote, “If UK-owned banks’ share of global financial activity remains the same and financial deepening in foreign economies increases in line with historical norms, by 2050, bank assets could exceed nine times GDP, and that is to say nothing of the potentially rapid growth of foreign banking and shadow banking based in London.”
This provoked a protest from Financial Times columnist Martin Wolf who said, “This would turn the UK into the Iceland of 2007”. A handful of bankers and their political cronies used tiny Iceland as the launch pad of a huge financial bubble that nearly took the whole country with it when it burst in 2007-8.
As it is, this nearly happened to Britain. The Royal Bank of Scotland, rescued by the state in the autumn of 2008, is a lumbering zombie bank, still loaded down with all the bad loans it made during the bubble of the mid-2000s.
It is also currently under investigation, along with five other major international banks, for rigging foreign exchange markets.
In the immediate aftermath of the crash, politicians acknowledged that the banks had got completely out of control. Osborne and his Lib Dem counterpart, business secretary Vince Cable, followed their Labour predecessor Peter Mandelson in pledging to “rebalance” the British economy, shifting resources from finance to manufacturing.
Now Carney has torn this all up—the City is being given its head again. Yet, as the Marxist blogger Michael Roberts has pointed out, Andy Haldane, a senior Bank of England official argues that financial markets don’t create wealth but simply shift the burden of risk around the system.
Haldane warns, “A banking system that does not accurately assess and price risk could even be thought to subtract value from the economy, and if risk-making were a value-adding activity, Russian roulette players would contribute disproportionately to global welfare.”
Carney has nevertheless decided, as Wolf puts it, to “bet on big finance”. This follows Osborne’s attempt to attract Chinese banks to the City. As Aditya Chakrabortty has shown recently in the Guardian, London and the south east—driven by the City—have become more economically dominant since the crash. They account for 48 percent of British growth since 2007, compared to 37 percent in 1997-2006.
So maybe Carney and Osborne have given way to a counsel of despair. Dangerous though the City is, it’s all British capitalism has. So they see no alternative to riding the roller coaster, confident in the knowledge that when it crashes again, it won’t be their class who picks up the bill.