current affairs

Saving the banks won’t fix our economy

You could do a lot worse than read the IHT's excellent article from last week “As the pound falls, so does the mood in Britain”. Its authors Julia Werdigier and Nelson D. Schwartz put together many of the factors I believe are critical to understanding the current quagmire. Key facts:

Household debt as a percentage of disposable income in Britain hit 177 percent in 2007, compared to 141 percent in the United States.

As in Iceland, banks, real estate and other financial services boomed in London in recent years, even as other swaths of the economy withered. In recent years, this sector has been responsible for about half of total job growth in Britain even though it accounts for only about 30 percent of the economy, according to Peter Dixon, U.K. economist for Commerzbank in London.

Traditional industries [in Britain] like manufacturing have faded in recent decades, unlike on the Continent where they remain a relative counterweight to the outsized problems in the financial sector.

People spending way beyond their means was always going to come home to roost at some point. And relying on an economic model's dependence on continual 'growth' in a simplistic “more is more” sense is also a recipe for a crash at some point. Growing spending when much of it is debt must halt when finally the banks realise they need to get paid back!

But the UK's banks, so often cheered as a strength, are also a huge vulnerability. They have created disproportionate job growth and make up fully a third of our economy – that's astonishing. Banking is necessary, of course, to support commerce and personal finances. But banks should be the lubricant for the wheels of commerce – they shouldn't be the main event themselves. And herein lies the problem, the banks were creating economic growth based on models which many of their own didn't understand. The actual value produced was, in my view, very low. This was false productivity and economic success.

Banks need to step away from the centre stage, bankers need to be more humble and remember they are there to support innovators, inventors and investors who want to build sustainable long-term businesses that employ people and give back to society through steady returns, decent salaries and by paying their taxes — not dodging them.

Not until we have a diversified, sustainable economy with our eyes firmly set on the long-term can we hope to emerge from these dreadful downturns.