Balancing on a Cable

Has the battle to reform finance in the UK already turned into a victory lap for the City? The indications from Liberal Democrat Secretary of State Vince Cable are ominous
Tony Curzon Price
Tony Curzon Price
3 June 2010

When Vince Cable was interviewed on the BBC's Today this morning, he sounded depressingly like business ministers of the last 20 years. When asked how he would help to deliver on the program of "rebalancing the economy", he started fine by identifying the correct problem: based as it was on the imaginary work of the City, the growth of the last 10 years was largely illusory; so Britain needs an economy founded on different activities. Fine. So how do we go about it? "Spending £50m more on apprenticeships (of which there were only 250,000 in the country, can you believe it?)", says Cable. Anything else? "Restructuring the Regional Development Agencies into business partnerships." Any more of this exciting program? "We're going to cut regulation of business." And? "We're going to cut the department, more than the Treasury will be cut itself..." The civil servants at Business Investment and Skills will be smiling at each other as they sip their lattes this morning: we've captured our man.

What should he have answered? That Britain has suffered from the "Dutch disease" of the City, and rebalancing the economy will flow from sorting out financial regulation. Shareholder and employee returns in finance have been much higher than in any other sector because society provided the safety-net capital that banks need to operate. This had the same effect on the economy as the discovery of huge gas fields had on the Dutch economy in the 1970s and 1980s: talent and investment flowed to the hydrocarbon sector and other parts of the economy could not attract good people or capital. The rest of the Dutch economy withered. Hence "Dutch disease". (The City-centred economy was much worse than the Groeniggen field find in Holland, though. At least there really was natural gas off the Dutch coast. It turns out that most of the so-called value created by the City was in fact illusory - the hoodwinking work of "locusts", in Martin Wolf's parable, and as described here by Mike Rustin.)

Once you take the hidden subsidies out of finance, the economy will rebalance. Vince Cable, who sounded so good on the economic crisis before he became Secretary of State, knows this. He didn't say it. The danger is that he knows that financial reform, now under Osborne, will end up being a "victory lap for the City" (as Simon Johnson has characterised the Obama/Dodd Wall Street reforms).

The consequences of handing the economy back to the City are horrific, and the Liberal Democrats will not be forgiven for allowing that to happen. "Coalition" has to mean Vince Cable adopting a fighting attitude towards Osborne on this. There is much talk about "new politics", "consensus" what "the country needs". Well, there is a consensus on the new approach the country needs, and this is that the City has to come second. Adding 50,000 apprenticeships won't achieve this.



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