I went to listen to Vince Cable talk to a City audience brought together by the Liberal think-tank CentreForum. The message he delivered was a fascinating mixture of love and threat: the City is not all to blame for the crisis, it is in many places a dynamic and important part of the British economy ... but ... the bits of the City that did fail have done huge damage to the UK economy. So Cable wants banks to start lending to small businesses again (... though he made noises accepting that deficient demand might be why there's not much lending going on...). He looks forward to the September report on how to deal with "too big to fail" and hints that breaking up the banks might be a part of getting more competition into the sector (though he reminds the City that Brussels is its friend in looking to preserve the big, European-style integrated bank). And he warns that the City should be sensitive to awarding itself whacking great bonuses while pay is frozen or cut elsewhere – understand the political constraints the coalition is operating under, he says.
This is all fine as far as it goes. Cable is not in charge of short term macro-economic policy, so there's no point pressing him on the austerity debate. However, the big problem for long term growth and the health of the UK economy is that the City sucks in so much talent and capital that we suffer a real "Dutch disease". The original "Dutch disease" came from the discovery of a really valuable and huge gas field off the Dutch coast at Groningen. Dutch industry withered because investment and talent could earn so much more in the gas industry than elsewhere that costs to the rest of Dutch industry rose, it became uncompetitive and withered.
The trouble with the kind of disease we get from the City - maybe we should call it an FTI, a Financially Transmitted Infection - is that for a large part it does not arise from the exploitation of a real and valuable resource. The point was powerfully made early in the crisis by Martin Wolf (requires an email sign-up): "Perhaps the most striking characteristic of the banking sector is its profitability. Between 1997 and 2006, for example, the median nominal return on equity of UK banks was 20 per cent. While high by international standards, this seems not to be exceptional ... [while]... long-run real returns on equity in the US have been a little below 7 per cent. Another study estimated the global real return on equity in the 20th century at close to 6 per cent."
The problem is that the extraordinarily high return on capital employed in banks is not like the profits made from the Groningen gas field -- the measure of something really useful happening -- but rather the measure of a social subsidy being applied to banking. Because taxpayers guarantee banks against collapse, a huge cost is borne not by shareholders but by society. Take the biggest cost item out of most businesses, and you'll also see them reporting not only great profitability but also attracting too many people and other valuable resources to work in them. What this means is that if you want to rebalance the economy and get healthy growth out of it, you have to seriously attack this massive subsidy to finance. The measure of the success of coalition policy on financial sector reform will be that return on capital in finance falls to ordinary levels.
I asked Cable whether he agreed that this was a problem, and whether he thought that breaking up the banks was going to be sufficient. His answer - on message for the audience, but I hope not the whole coalition thinking on this - was that the City sometimes reminded him of the oil company compounds he knew while Chief Economist at Shell: the expat workers live priviledged lifestyles protected within high barbed-wire fences, pay off the government in royalties but otherwise had no link to the rest of the country that hosts them. And bonus-time is when this becomes most clear, he warned the City audience. This is when the world of finance "connects with the public psyche".
I can see that bonus-time is a political management problem – but it is far from the heart of the problem. Even if there were no "connection with the public psyche" it would still be the case that the subsidy junkies in the City were deviating productive resources from the rest of the economy and making recovery slower than it ought to be. I hope that Cable had simply decided that there were a small number of warning shots to be fired at his audience this morning, and that he has not given up on the real problem of rebalancing the UK's economy.