How Britain can avoid another financial crisis

The Spanish-American philosopher George Santayana was known for his scathing quotes. One of the most memorable is that “those who cannot remember the past are doomed to repeat it”. Santayana referred to our extraordinary human ability to make the same mistakes over and over again.

When former British Chancellor of the Exchequer Kwasi Kwarteng’s short-lived career fell apart after his disastrous household on September 23, it came as a surprise that someone so intelligent, driven and open to ideas (according to those who know him) would have a so great success had errors of judgment.

As Damien McElroy of The National pointed out in these pages at the time, Mr. Kwarteng’s doctoral thesis during his studies at Cambridge University was on 17th century English economic history. The theme was the Recoinage Crisis of 1695, which crashed markets just a year after the Bank of England was formed. But there was something even more current and very current in economic policy circles that surprised me.

Why didn’t Mr. Kwarteng reflect on Bill Clinton’s big about-face after his election as President of the United States in November 1992? Candidate Clinton had a big economic promise, a tax cut for the middle class. But during the transition period, the two months that Mr. Clinton prepared for his inauguration in January 1993, he hosted Federal Reserve Chairman Alan Greenspan in his home state of Arkansas.

Former U.S. First Lady Hillary Clinton offers cookies to the Arkansas press corps during an interview with then-U.S. President Bill Clinton in the Roosevelt Room of the White House in Washington December 22, 1993. `

Mr Greenspan convinced Mr Clinton that a tax cut would be disastrous. That would unsettle the bond market. Interest rates would rise, making middle-class mortgages more expensive. A strain on the deficit would instead stabilize the US economy. Mr. Clinton was angry but reasonable. He reversed his core economic policies and paved the way for America’s economic boom years of the 1990s.

One of Mr. Clinton’s key advisers, James Carville, famously said: “I used to think that if there was reincarnation, I wanted to come back as a president or a pope or a .400 baseball bat. But now I want to come back to the bond market. You can intimidate anyone.”

This was one of the great about-faces in politics and business, but for some reason Mr. Kwarteng’s tax cuts a generation later were more or less what fiscal conservative Alan Greenspan had warned Mr. Clinton about. And now Mr Kwarteng’s successor as British Chancellor of the Exchequer, Jeremy Hunt, seems to be struggling with the lessons of recent history.

British Prime Minister Rishi Sunak chats with British Chancellor of the Exchequer Jeremy Hunt (left) as they meet business owners at a Downing Street Christmas market in London. EPA

Mr Hunt wants to tear up regulations affecting UK financial markets. Many of these regulations were introduced after the 2007-2008 financial crisis to prevent economic history from repeating itself with another financial crisis.

The UK financial services sector is hugely important, employing a million people in various functions, 3.3 per cent of all UK jobs, with a further million in support services. Financial services workers are also early adopters of new technologies, and according to analysis by TheCityUK, “output per hour in the industry was £83.30 in 2020 compared to £39 for the whole (UK) economy”.

Brexit has undoubtedly weakened Britain, impoverished us as a nation and hit financial services

As early as 1986, British Prime Minister Margaret Thatcher initiated a highly significant liberation of London’s financial markets known as the “Big Bang”. Chancellor Hunt seems intent on repeating this piece of successful economic and political history. But critics – and there are many – believe the scale of the proposed deregulation risks repeating past mistakes.

Sir John Vickers, the economist who led the inquiry into the banking sector in the wake of the 2007-2008 crisis, suggested Mr Hunt was on an “extremely dangerous and wrong path” and risked “undermining the bedrock of our regulation of banks in the UK”. to destroy.

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Mr Vickers believes relaxing the rules will not be a big bang but a big mistake. However, Prime Minister Rishi Sunak believes the UK banking sector will be revived. Treasury Secretary Andrew Griffith vigorously defended the possible rule changes in media appearances. However, he refused to dig into a key issue that has clearly weakened the UK financial sector: Brexit.

According to the accounting firm EY, at least 7,000 British city finance jobs have migrated to the European Union after Brexit. Dublin is a preferred location. Back in 2018, Business Insider reported that “US banking giants Goldman Sachs, JP Morgan, Morgan Stanley and Citigroup have shifted €250 billion in assets to Frankfurt due to Brexit.” Goldman Sachs CEO Lloyd Blankfein tweeted how much he is enjoying Frankfurt because “I’m going to be spending a lot more time there.”

Mr Griffith and Mr Hunt may be right about relaxing the rules, but still the failure to address the damage of Brexit suggests the biggest lesson of the past has yet to be learned. It can even be repeated.

To make the UK more prosperous, a top tip is to avoid economic self-harm. Brexit has undoubtedly weakened Britain, impoverished us as a nation and hit financial services. To add to George Santayana’s observation, if we don’t face the mistakes of the past, we can’t correct them.

Published: December 14, 2022 at 9:00 am