Martin Vander Weyer
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His outburst last week, coming from the chairman of the Financial Services Authority, really was strong stuff — perhaps much stronger than he realised in his haut-fonctionnaire way. Here, compressed from a round-table discussion in Prospect, are the key phrases: ‘There are clearly bits of the financial system which have grown beyond a socially reasonable size. Some [financial innovation] is socially useless activity. The FSA has to be very, very wary of seeing the competitiveness of London as a major aim. If increased capital requirements are insufficient [to eliminate excessive trading activity, profits and bonuses] I’m happy to consider taxes on financial transactions — Tobin taxes.’
Before cross-questioning this manifesto, let us remember that Turner is no ideologue at heart. A cross-bencher in the Lords, he lost interest in party politics in the 1980s after he shifted from the Tories to the SDP. Nor has he ever belonged to a tribe — least of all the City tribe, despite stints with Chase Manhattan and Merrill Lynch. Those years engendered little empathy with today’s City practitioners: at the FSA, he has the air of a colonial governor who regards the natives as incorrigibly wicked.
As a McKinsey-trained consultant, he looks at his subject matter from above and outside. The application of such an objective intellect produces lucid analysis — but leads to solutions that can too easily fail to comprehend the human factor or anticipate the political response. Lately this has turned into a tendency to say the unthinkable — making him, perhaps unintentionally, a useful outrider for politicians who don’t dare to do so themselves. In July, for example, he declared that his own 2005 pensions report should have been more radical and should have recommended raising the state pension age to 70. This swipe at the City fits the new Turner pattern.
Many of us might agree that the UK economy has become too dependent on financial services — but most of us would argue that the solution to that imbalance is not to tax the bankers until they leave, but to encourage a resurgence of our shrunken manufacturing sector, down from 19 per cent of GDP to 13 per cent in the past ten years. And for that we need (apart from a devalued pound and a bonfire of red tape) a funfair of vigorous financial activity, from venture capital and private equity and expansive high-street lenders to stock markets that offer growing companies ready access to public capital.
As for his point about social usefulness, it leads nowhere but to a quasi-Marxist cul-de-sac of state economic planning. Doctors, teachers, policemen and poets apart, which of us can claim to be truly useful? Yet who could deny the fiscal usefulness of a financial sector that generates one pound in every seven of UK tax? Trying to measure the social utility of financial techniques, and regulate them accordingly, seems to me to be socially useless in itself. What matters is the point at which these activities turn, through excess profit-seeking, from being neutral or positive to being very dangerous indeed. A vivid example is the grain futures market: benign in normal times, when it offers farmers certainty as to the price they will get for their next harvest; but deeply destructive when, as in the spring of 2008, hedge funds and investment banks drove the price to such a spike that it led to food riots in poorer countries.
So Turner’s stab at what a socially useful financial sector might look like is unlikely to gain traction in public debate — but his argument about excessive profits and bonuses driving an uncontrollable spiral of risk strikes a deep chord. As stronger banks return to business as usual there are indications of a rapid return to the mega-bonus culture: Barclays was recently reported to be poaching a team of five ‘star’ commodity traders from J.P. Morgan for £30 million between them.
Numbers like that are offensive to anyone feeling the pinch of a recession made worse by the banking crisis; doubly offensive to those who believe that even the strongest banks owe their survival to the fact that taxpayers’ money rescued the tottering ones, thus preventing systemic collapse. What’s worse, the trend suggests to City critics that some bankers remain blind to the dangers of excess — and are set on doing it all again, undeterred by tighter capital rules which they will doubtless find ways to circumvent.
So why not adopt Turner’s suggestion of a ‘Tobin tax’, taking a slice of profit out of every transaction to reduce the temptations? Well, ever since the Nobel laureate James Tobin came up with this idea (for foreign exchange dealings) way back when Turner and I were sixth-formers, no one has actually implemented it — because even if major nations did so in unison, there would always be havens where business could be booked tax-free, and there would always be clever (and highly paid) bankers dedicated to avoiding the tax at home.
As Mayor Johnson and the British Bankers Association were both quick to point out, we really don’t want a shrunken City, strangled by new taxes and regulations to the point at which it no longer has the vitality to finance a wider recovery or keep London’s economy afloat. On the other hand, Turner is right that the priority must be to avoid another grotesque boom and bust a few years hence. Ask intelligent, seasoned practitioners how to reconcile these positions and they will tell you the solution has less to do with rules and more to do with the human factor Turner tends to ignore: with man-management, career development and personal ownership.
A healthy new City would, they say, look quite like the City of 25 years ago. How much more stable it might be, for example, if most bankers made long careers within a single firm, rather than being poached from one to another every three years; that would quell both the bonus spiral and the drive for short-term profit maximisation. It would help too if partnerships and boutiques were encouraged to proliferate, so that practitioners were more often the owners of the business they engage in, and established firms faced smart competition from nimble smaller ones.
And how much more effective will be the oversight of bankers’ behaviour when Gordon Brown’s ‘tripartite’ muddle is forgotten, clear authority is restored to the Bank of England — and the FSA is scrapped, as George Osborne intends. That will leave Turner, upright public servant though he undoubtedly is, temporarily out of a job. But the Conservatives can surely find another one to suit his talents: a colonial governorship, perhaps?
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