The collapse of Greensill, a cog of the little-regulated shadow banking sector, which represents a threat to 5,000 UK steel jobs and tens of thousands of other employees around the world, has caused uncomfortable rumbles across the financial sector.
The risk of a sequel of the 2007-8 financial crash has been driven home in a global economic system that has failed to recover from that disaster and is still being battered by the ecologically-linked health disaster of Covid-19. (And yes, that is the Greensill advised by one David Cameron, former Prime Minister, after Mr Greensill advised his government on supply-chain finance.)
The threat the fragility of the financial sector presents to the security of all is obvious.
But that frightening level of risk shouldn’t be allowed to disguise an even bigger impact of the UK’s oversized financial sector. That is, its grinding down of other elements of society and its capture of opportunity and resources from the real economy in its search for further super-profits for owners and bonuses for bosses.
This is known as the ‘finance curse’. Too much finance – there’s a whole body of literature under that title – makes us poorer. It’s an issue around the world, but in the UK, where the sector’s ideological footsoldier, neoliberalism, has had a particularly strong position, its weight is one of the world’s heaviest.
One of the easiest ways to think about this is in terms of its consumption of human resources. A bright young woman from Newcastle or Manchester finishes a PhD in mathematics. She might go into academic research, advancing human knowledge. She might go into manufacturing, refining or advancing practices and approaches to improve productivity and create new products. Or there’s the lure of the City, of huge salaries and bonuses and glossy excitement. And she may well go on to invent the next fancy financial instrument that brings down a bank or two after it’s made a lot of money for a few people along the way.
She’ll be based in London, of course, where all that money is sucked to – including money from the privatised local services, in care homes, in PFI schools, hospitals and roads, in outsourced contracts for security and social care, up and down the country. For the concentration of money in a small part of the country is another part of the resource curse, a major contributor to the UK’s world-leading levels of regional inequality.
And that money then is not available to be invested in new manufacturing or food production facilities, or in the cultural industries or technology research and development. Rather, it churns around and around in the financial sector, when it isn’t being siphoned off into the nearest handy tax haven.
This is not, you probably won’t be surprised to know, the account we’ve been hearing from the Government during debate in the House of Lords on the Financial Services Bill. The Government was last month repeating a figure that it later confirmed to me comes from PriceWaterhouseCoopers – that the financial sector contributes £76 billion in tax receipts.
But that doesn’t count any of the costs of the type outlined above. You don’t need to contemplate high finance to understand the fallacy of this argument. We’re talking about gross income, not net. It is the same argument made when a supermarket swoops into the edge of town with a proposal for a new greenfield development, promising in large headlines on the front page of the local paper: 120 NEW JOBS.
What’s never calculated is how many jobs – and businesses – will be lost as a result of that development, the closed greengrocers and butchers, clothes shops and pet food stores in the town centre, which get swept aside by the multinational giant. Or the cost of the air pollution from the cars driving to that supermarket, the time spent by locals in the resulting road congestion, the loss of biodiversity and green recreational space, or the poor quality of the minimum wage, zero-hours contracts provided.
Research indicates that the UK’s financial sector passed the point of optimal finance some time in the 1980s – meeting the needs of the real economy – and all the growth since then has only done harm. The only study to have attempted to quantify the damage, from the Sheffield Political Economy Research Institute (SPERI,) estimated in 2019 that ‘excess finance’ cost us a cumulative £4.5 trillion from 1995-2015 – that’s a measure of the damage done.
As I contemplated the Financial Services Bill, and what amendments might have been put to it, I might have used a Goldilocks approach, calling for the Government to work out what is a “just-right” size of financial sector for the UK, and to develop policies to deliver it. But there’s another impact of the financial sector – its lobbying power, and not just with the Conservative Party that forms our current Government.
So, I decided to take a softer approach. That’s why I’ll be presenting today Amendment 123, which simply calls for in a year’s time, then every five years thereafter, for a report to the relevant Lords and Commons committees on the costs and benefits of the financial sector, including its impacts on poverty and inequality, the impact of capital allocation on the real economy, the net real impacts of mergers and acquisitions, and the impact of money being moved offshore.
It’s a cost-benefit analysis, something many members from the Tory benches opposite often leap up to demand for modest proposals to improve social benefits, workers’ conditions or environmental controls. I hope they’ll be joining me in demanding similar information on the financial sector. And although the amendment was tabled before Greensill, I also got into the planned statutory report the risks of the shadow banking sector, for the huge, immediate threat of catastrophe also needs urgent attention.