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Rachel Reeves’s support for the City of London, described as the “crown jewel in our economy,” has sparked concerns among economists. Recent warnings indicate that any attempts to ease regulations on the financial sector may jeopardize the government’s broader economic growth objectives, aligning with a growing fear that significant lessons from the 2008 global financial crisis are being overlooked.
These apprehensions arose following the chancellor’s November Mansion House address, during which Ms. Reeves posited that the regulatory frameworks established post-crisis may have become excessive. This assertion raises alarm, as these regulations were explicitly designed to mitigate financial sector excesses, manage systemic risks, and safeguard taxpayers from needing to cover financial failures. Dismantling such protections in pursuit of growth could undermine the stability they provide.
Ms. Reeves argues that expanding the financial sector will create broader economic prosperity. However, historical evidence provides little justification for this belief. The financial sector contributes approximately 9% to the UK’s GDP, and while Ms. Reeves emphasized its position as the second-largest exporter of financial services within the G7, this contribution has not significantly alleviated the UK’s issues with stagnant productivity or chronic underinvestment. The financial sector’s growth has often come at the expense of more traditional industries by attracting resources and talent away from them.
Currently, around one million individuals are employed in the financial services sector. In contrast, there are approximately 25 million working-age adults in the UK categorized as manual laborers, as well as another 10 million in low-wage white-collar jobs. For those in lower and middle-income brackets, wages and opportunities for advancement remain stagnant. Fostering growth in labor-intensive industries that have historically been overlooked might be a more effective approach.
Rather than pursuing further deregulation, the UK’s financial sector should refocus its efforts on facilitating productive investment. Once an essential instrument for economic advancement, the sector now appears increasingly distanced from its foundational purpose. The think tank Positive Money highlighted a stark shift in the financial landscape, revealing that in 1960, UK banks held assets worth 32% of GDP, a figure that skyrocketed to 563% by 2022. This trend supports international studies indicating that “excessive finance can hinder economic growth.”
The financialization of the UK economy has been linked to rising inequality and economic instability. For instance, an asset bubble in the housing market has resulted in average-priced homes becoming unattainable for the majority, leaving only the wealthiest 10% with access. The risk to the wider economy is heightened when speculative actors engage in reckless behavior in pursuit of greater returns. Prominent figures within the industry have expressed concerns. Sir John Kay, in his 2015 book Other People’s Money, scrutinized a culture where profit often supersedes ethical considerations and prudent decision-making. Additionally, Nikhil Rathi, the chief executive of the Financial Conduct Authority, warned MPs that reducing regulatory oversight could enable more harmful players to infiltrate the sector.
Earlier this year, Andrew Bailey, the governor of the Bank of England, evoked Greek mythology to underscore the necessity of caution regarding financial excesses. He proposed that the Trojan princess Cassandra, known for her accurate yet disregarded predictions, would have made an effective central banker due to her insight. His comments echoed economist Hyman Minsky’s assertion that the memory of financial crises tends to fade, often giving way to misconceptions of stability in a “new era.” While the events of the 2008 crisis may seem remote, complacency remains a formidable risk. Should the chancellor choose to overlook these historical lessons, the UK may well find itself repeating past errors.
Source
www.theguardian.com