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Bookmark and Share Dr Stephen Spratt is Director of nef‘s Centre for the Future Economy.

Mervyn King has annoyed Gordon Brown and Alistair Darling again with his call for UK banks to be split into smaller groups focusing on either retail or investment banking, but not both. King does not share the government’s belief that stricter regulation would prevent banks heading straight back to the casino, describing such thinking as a “delusion“.

He is almost certainly right. Banks like being big, and they particularly like being too big too fail. With the backing of the taxpayer, should their gambles go wrong, they can borrow cheaply and make huge bets in the market, safe in the knowledge that they will capture any gains but be protected from losses.

It is not surprising then that the banks also oppose King’s idea. Of course, they say that this is because of the enormous complexity, or “practical difficulties”, that implementing it would involve. Another reason is more likely. Simply, they are able to make a lot of money from leveraging their depositor base to support speculative activities elsewhere.

But this creates strong incentives to focus on the more “exciting”, and highly lucrative, gambling activities at the expense of the “boring” business of providing banking services to individuals, families and small businesses. This is nothing new in the UK, where financial exclusion remains a huge problem and small businesses struggle to access finance at all. The closure of branch after branch, particularly in disadvantaged areas, is just the most brazen example.

It seems very hard for banks to concentrate on providing a good service to these parts of their customer base when the global casino beckons. If some banks want to roll the dice in the markets, fine – they just shouldn’t be allowed to gamble our money to do so, and they certainly should not have these bets underwritten by the taxpayer.

For banks to serve their retail customers well, they should be dedicated to this essential function, and only this. By cutting banks down to size we could bring them closer to the communities they should be serving, and so better able to meet local needs.

At nef we would go further. Will Hutton on this site rightly calls for root and branch reform. Here are a couple of ideas of how that process might start. Most “investment” banks don’t really do any real investing. They are trading banks. But we do need real investment banks that focus on long-term needs, and nowhere is this more obvious than with green energy and transport infrastructure.

As well as separating out retail banking, why not also restructure the investment side? The government, on our behalf, retains its stake in the banking system, and it could use this as the means to form a green investment bank, charged with financing these long-term investments. And why stop there? A national housing bank to underpin a more stable housing market that meets people’s needs is an idea whose time has come.

For a while not so very long ago, people remembered that the purpose of banking was not to feather its own nest, but to provide the vital financial services and long-term investments that underpin our economy and society. King seems capable of seeing through the hard sell of the financial lobby to recall this. It would be good if the chancellor and prime minister could do likewise.

Bookmark and Share Dr Stephen Spratt is Director of nef‘s Centre for the Future Economy.

Bail-outs have now boosted UK national debt to staggering levels but have done little to stop the rot in our financial sector. By refusing to acknowledge the deep structural failings in the banking system, the Government is storing up debts they’ll probably never have to deal with, and no future government will be able to meet without decimating core public services. Banks that really have become too-big-to-fail leave the UK very vulnerable and must now be broken up. Soon to-be-published plans for banking regulation must go much further than tinkering with corporate governance and transparency. We need to separate investment banking from retail banking. We also need local banks that are in touch with their customers and able to respond to the needs of the dynamic small businesses on the frontline of our economy that will lift us out of recession.

Bookmark and Share Dr Stephen Spratt is Director of nef‘s Centre for the Future Economy.

Before our eyes the financial crisis is accelerating into a downward spiral of nightmarish proportions. Today it was confirmed for the first time that the UK is officially in recession, as the effects begin to hit the real economy in earnest. Nobody expects things to get better before they get a lot, lot worse.

‘Decisive action’, we are told, is being taken to deal with the banks. The latest £50 billion guarantee package comes hard on the heels of the untold billions to ‘recapitalize’, or to provide ‘liquidity’, or just to keep the lights on a little longer in the hope that something turns up.

The government resembles a grimly optimistic hot air balloonist, spat out of a storm and crashing to earth while frantically pumping more and more hot air into the balloon, only to see it flow out of huge holes rent in the fabric of his craft. The pilot, lets call him Darling, will certainly delay the crash a little bit, but only at the cost of using up all of his gas. Once the basket hits the ground – in whatever battered shape – it will surely stay there.

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Bookmark and Share Dr Stephen Spratt is Director of nef‘s Centre for the Future Economy.

The predictable crisis in the global system is the most important sign yet that a new economics is emerging. The tragedy is that the crisis-ridden financial system has long since failed to do the basic job required – to underpin the productive economy, and the fundamental operating systems upon which we all depend. These have been variously neglected, taken for granted or cannibalised by finance. They include the core economy of family, neighbourhood, community, and society, and the natural economy of the biosphere, our oceans, forests, and fields.

Worse, even when the financial system has been working at full throttle, it corrodes the real economy by its sheer profitability and faulty measuring and dominates the policy priorities of politicians.

If nothing else, the crisis provides an opportunity to rebuild a financial infrastructure which does the job, which means investing – not just bailing out failed banks – but in loan facilities for an interdependent network of productive local economies that genuinely underpin life and works within the tolerance levels of the natural environment. This is now possible because the state owns a large slice of the financial system.
The priority of politicians is to restore the normal functioning of the banking and financial system. A rapid return to ‘business as usual’ is the plan, which will hopefully be accompanied by an ‘upside’ for taxpayers as governments are able to sell their equity stakes at a profit when normal market conditions return.

This is all very comforting of course, but is it actually such a good idea? After all, it was ‘business as usual’ that got us into this mess in the first place. We now have a unique opportunity to pause and consider what the financial sector is actually for and to put in place institutional and regulatory structures that enable it to perform these functions well.

new economics regards finance as a means to an end: to support inclusive, equitable and sustainable economic activity that creates real value – economic, social and environmental. It is difficult to argue that much of what the financial sector has been focusing on relates positively to these factors, or that a return to ‘normality’ would change this.

If our current system does not support these outcomes, the question arises as to what would. The following six principles are the starting point for rebuilding the financial system so that it supports, rather than corrodes, the real economy.

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Bookmark and Share Dr Stephen Spratt is Director of nef‘s Centre for the Future Economy.

It was not so long ago that Gordon Brown claimed to have abolished ‘boom and bust’. As we enter what everyone now thinks will be a deep and prolonged recession this claim is looking – being as generous as possible – a little over optimistic.

The government is keen to stress that the current crisis was not ‘made in the UK’, and it is certainly true that this is now a global crisis that no country can insulate itself from completely.

Having said that, we have long heard claims that the UK is in a better position to weather economic and financial storms because of our stable economy and sound system of financial regulation and macroeconomic policy…

If this is true it is a bit odd that only a few weeks ago the OECD argued that the UK was, in actual fact, the worst placed among the major developed economies. Rather than being in a better position than everyone else, it seems that we are in actual fact in the worst.

Why might this be?

If everyone on earth consumed as we do in the UK, we would need the resources of more than three planets like earth to sustain us

If everyone on earth consumed as we do in the UK, we would need the resources of more than three planets like earth to sustain us

The most obvious reason is that the crashing financial sector is much more important to the UK economy than to most others – even the US. At least until very recently, the financial sector accounted for 10 per cent of UK GDP, and a quarter of all income tax, and had been growing in importance since the 1980s at the same time as the importance of manufacturing has steadily fallen.

This has not just happened of course – successive governments have championed the growth of the financial sector, much to the irritation of manufacturers who have long complained that economic policy has been skewed towards the needs of the financial rather than the real economy. This seemed fine during the ‘long boom’, but looks very unwise now.

The second factor is consumption. As with the financial sector, the UK has the highest level of consumption (around 90 per cent of GDP) of any other G7 economy. Again, this has been growing steadily since the 1980s at the same time as investment has become less important.

The final piece of the jigsaw is debt. UK household debt is the highest of the G7 economies at 109 per cent of GDP and has also been growing fast in recent decades.

This does not sound like a stable, well-balanced economy equipped to withstand turbulent times, but one that has become increasingly dominated by the financial sector, and which is fuelled by unsustainable consumption based on ever higher levels of debt.

When commentators talk gravely about the dire impacts of falling consumer spending they do so with good reason. The UK economy has become less stable, less diverse and more dependent on consumption and debt – which has obviously been of great benefit to the financial services sector – than any other major economy.

As we look to rebuild from the ashes of the current crisis it is vital that we do so in a way that invests for the long-term to build a diversified, sustainable economy, where finance is the servant and not the master.


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nef employees blog in their personal capacity. The opinions expressed here do not necessarily reflect those of the new economics foundation.