Analysis: End of the swaggering City — and of New Labour economics

Nice analysis in the Guardian…

There are four big conclusions.

The first is that the long period of economic expansion that started in September 1992 with the pound’s forced departure from the European exchange rate mechanism is now over. The IMF warned yesterday that Britain’s economy will shrink next year for the first time in 18 years, with a risk that the forecast 0.1% decline in GDP will be over-optimistic. The way things look, that’s a reasonable call.

The second thing to disappear yesterday was the notion that the British economy could survive on finance alone. For the past 20 years, policy-makers in the UK have convinced themselves that the might of the City could compensate for the country’s inability to make anything. The notion that the ever-widening trade deficit was merely a temporary phase while Britain adjusted to a weightless, virtual, financially-driven future has now been exposed for the grotesque fantasy it always was.

Thirdly, the bankruptcy of the City also represents the bankruptcy of New Labour economics, which has been based to an unhealthy degree on a desire to ape the go-getting, deal-making culture of the United States.

Labour governments of the past have always had industrial strategies, which have normally been based on the idea that manufacturing matters. Since 1997, ministers have convinced themselves that Britain had a comparative advantage in financial services and that therefore industrial policy should be based on giving the City what the City wants. The light-touch regulation of financial services was but one expression of the almost total obeisance to big capital.

The manufacturing industry, by contrast, was allowed to wither on the vine, even though the idea that developed western nations can no longer compete industrially with the emerging nations of East Asia is countered by the remarkably good performance of high-cost countries such as Germany and Sweden.

Britain would be a cleaner and more prosperous country if a fraction of the effort spent on making London safe for speculators had been reallocated to harnessing the nation’s raw scientific talent into a thriving environmental technology industry.

Finally, the dominance of the City is over, at least for the time being. What we have seen over the past 14 months is the humbling of the City: what the Greeks would have called nemesis following hubris.

Far from using their freedom from regulation to take wise decisions that would benefit all, banks plunged into investments about which they knew little or nothing. Far from allocating capital in an efficient manner, the credit crunch that has resulted from the orgy of irresponsible lending has led to a dearth of funds for the small businesses that sorely need it.

What we have seen in the first week of October 2008 is a broken-backed industry that promised to be at the cutting edge of the free market, but in reality cannot survive without the largesse of the state.

When it came to it, all the bastions of deregulation – the City, the CBI, the Conservative party – crumbled because they could see the writing on the wall. Without funding from the taxpayer, virtually no bank would be safe from the global financial virus.