The new Governor of the Bank of England, Mark Carney, is beginning to look like an inspired choice. At the very least, he has already marked himself as being a very different central banker compared to his predecessor. Mervyn (now Lord) King, often sounded as if he would rather be somewhere else, preferably a university seminar room.
Mr Carney made an extraordinary speech last week, at an event held to mark the 125th anniversary of The Financial Times. He reminded us that history often rhymes: the early editions of the FT were filled with stories about China's growth prospects; the precarious nature of Spanish government finances; and worries about the health of Irish banks.
Mr Carney directly addressed those who, as he said, would now like to see the UK’s financial sector shrink further, if not shut down altogether. Just as in Ireland and elsewhere, the loathing and distaste for bankers felt by many in the UK in the wake of the financial meltdown is showing few signs of dissipating. Rather than join in this banker-bashing, Governor Carney argued that the time has come to move on. He didn’t quite say “hug a banker” but he came mighty close.
Financial services accounts for a tenth of the UK economy and over a million jobs - two thirds of which are outside London. Mr Carney argued that a properly regulated financial system could be allowed to grow further, not only remaining a significant employer but, perhaps, becoming an even bigger part of the economy.
“Properly regulated” is the key part of his thesis of course. For this to happen, the new rules have to be agreed on a global level for international banking to begin growing again. Right now, as banks shrink back to operate mostly within home country borders and world trade growth is negligible, globalisation is on the retreat. Mr Carney thinks this is temporary and is making some bold moves to ensure that the UK is a big beneficiary of renewed financial growth, whenever it comes.
With or without growth, banks are essential, despite what some of their more fanciful detractors would have us believe. Various colourful metaphors can be used to illustrate the importance of finance. In the current febrile climate, most people would probably understand if we compared banks to sewers.
We cannot do without proper plumbing: a clean and efficient system that allows liquidity to flow without impediment is essential to our well being. We all know what happens when pipes leak or drains get blocked. It is often very unpleasant. So it is with banking: the basic function of a bank is to ensure that financial liquidity flows through the economic system without leaks or blockages. When these occur, it is very damaging to our economic health - in extremis, potentially fatal. Right now, the system is very blocked.
Mr Carney came up with some innovative and radical suggestions to improve liquidity in the UK. He made the simple point that with the repatriation of banking regulatory powers to the Bank of England, he has a much better, much more detailed knowledge of the health of the system. Hence, he feels more comfortable increasing the amount of support he is willing to give stronger institutions, as well as easing the price of that support.
He also drew our attention to the current proposals, led by the Chancellor of the Exchequer George Osborne, for Chinese banks to establish a base of operations in London. If this comes to pass, the growing internationalisation of the renminbi will bring a big boost to London.
We need to think about all of this and try to figure out if there are any lessons for our own attitudes towards finance. I think there are at least two, related, elements that we need to reflect on. First, there is the IFSC: how can we position this source of jobs, economic activity and tax revenues to benefit from renewed growth in UK financial services? Second, we need to think about how we react to proposals like this. If we find ourselves exploding with indignation at the idea of encouraging banks to grow, we need a rethink.
We need to move on. Anger is not a strategy. Mark Carney is right; banks are not going away any time soon, they are essential parts of our economy and, once fixed, can become important sources of growth. Go on, hug a banker.
