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The UK – Life After the Bankers

August 20, 2011

The lemmings of the financial markets were at it again this week. As a result, as one of the UK newspapers points out, the UK taxpayer is sitting on a financial loss of £40 billion ($64 billion) from the nation’s investment – a.k.a. government bailout – in two of the largest UK banks. Shares in Lloyds TSB and RBS currently stand at 20p and 28p respectively. This is less than one twentieth of the value of those shares pre-2008.

Many financial pundits in the UK are now predicting that the financial services sector will never recover its pre-eminent position in the British economy, or at least not in the foreseeable future. They see this as a bad thing, because we do not have income streams ready to replace what economists coyly refer to as “invisible earnings”.

I see this as a good thing. Our economy depends upon institutions that have spent the past twenty five years leeching money from countries, businesses and individuals. They have made it easy for nations to load themselves with unsustainable debt. They have created an environment in which the treasuries of many companies are their most important profit generators, as opposed to the core businesses themselves.

By reckless lending they have contributed directly or indirectly to the impoverishment of millions of pensioners worldwide, whose funds have dramatically declined as a result of the banks’ adventures in the sub-prime housing market. Through their lack of attention both to the details and to the fundamentals of their businesses, The Mirror Group, Enron and WorldCom crashed and burned on their watch. And now they are up to their necks in dodgy Southern European debt, while still paying their senior executives handsome bonuses for their outstanding success.

Long ago the banks abandoned any pretence at having a purpose beyond the enrichment of shareholders and an elite group of senior employees. Since 2008, shareholders have suffered a massive loss of fortune. Run of the mill bank employees – those whose jobs survived the orgy of outsourcing that took place over the past twenty years – have seen their jobs disappear or their working conditions substantially worsen as their employers seek to squeeze more work out of those that remain. And for banks such as HSBC, strategic planning means cutting back functions and regions that do not deliver the necessary levels of profit at the cost of 35,000 jobs worldwide. Some strategy. Some planning.

Yet while employees, shareholders and customers are reeling over the effects of collective stupidity and greed on the part of the banks, their senior employees are still finding one way or another to enrich themselves, using the perverted rationale that relative failure equals success.

This much can be garnered from even a superficial analysis of the events of the past three years. Yet the malaise goes way back. A friend who has worked in occupational medicine for thirty-odd years tells the story of an investment banker at a conference in Paris who foolishly remarked that money isn’t everything. When he returned to London there was a message waiting for him. He was instructed to report to the occupational health department, which was under orders to assess the man’s sanity, and to report back to HR with an opinion as to whether he would ever be able to work in banking again.

The story sounds like a variant of a famous anecdote about Bill Shankly, the celebrated manager of Liverpool Football Club, who was asked by a reporter “surely football isn’t a matter of life or death.” “You’re wrong, laddie”, Shankly replied, “it’s far more important than that.” Except that my friend swears that his story is true.

That this self-referential industry, managed by greedy and clever fools, should continue be at the heart of the world’s sixth largest economy seems to me to be the UK’s most pressing national issue – far exceeding the problem of how to fix the social problems at the heart of the recent riots.

Yes, of course we need banks. But banks that recognise that their customers’ savings are not assets to be thrown on the table of a global casino. Banks that do not achieve massive cost savings through mergers and then squander them – as RBS did – on disastrous acquisitions. Banks that do not urge their customers to carry out extensive due diligence before making acquisitions, yet – as Lloyds TSB did  – comprehensively fail to do so when agreeing to merge with the basket case that HBOS had become.

We need banks that fulfil the needs of the societies in which they operate rather than function as multinational opportunists taking a piece of every action from which they can make a turn. Banks that provide a safe haven for savers and don’t exploit the inertia of customers by rewarding new savers above existing one. Banks that lend fairly and sensibly, unlike the major bank that a few years ago lent a restaurant £6 million for refurbishment – more than the value of the premises. Banks that don’t send their customers on magical journeys through call centres and regional hubs in search of answers to simple questions.

So what’s to be done? It would seem to me that the UK should be following a twin strategy.

First, it should reduce its reliance on financial services as a deliberate policy rather than by a slow process of deterioration beyond its control. The government has a rare opportunity to make changes now. As the majority owner of two of the country’s largest banking groups, it has the power to create a ring-fenced retail banking industry and a regulatory structure designed to ensure that savers are protected without recourse to government bail-outs, that the everyday business of lending is less prone to upheavals in the global markets. If profitability takes second place to stability, so be it.

Banks that wish to continue to play in the global casino should be allowed to do so, provided that investors and shareholders are made fully aware of the risks involved in doing so. If the divorce between retail and casino banking diminishes the UK financial industry, so be it.

The second strategic track is to take a cold hard look at what we are as a country today, and where we can go from here. What are the industries that we should be encouraging? What are we good at as a nation? And what are the sacred cows that are holding us back?

Let’s start with the things we still do well, and, if we play our cards right, that could make up lost income from a decline in financial services revenue.

Educating people: despite misguided policies by successive governments, we still have some world-class universities and – believe it or not – some world-class schools. Instead of deterring foreign students from studying in the UK by imposing increasingly draconian visa regulations, we should be redoubling our efforts to sell our education system abroad. If we award 50% of places at our universities to foreign students, the fees earned by those institutions can enable them to invest in their facilities, staff and research capabilities. If we encourage families from abroad to send their children to fee-paying British schools, those children will be more likely to go to British universities.

We should focus on making the United Kingdom the best place in the world to study and carry out research. And if we cannot entice people to study here, we should export our best institutes to countries where their expertise is prized – the Middle East and Asia, for example. More on this in a future post.

Curing people: whatever ails the National Health Service, we still have a large reservoir of medical expertise. Foreigners have long chosen the UK as a location of preference for specialised treatment. The UK trains thousands of foreign doctors. When it comes to medical treatment, excellence usually wins out over cost. A thriving private health industry should not degrade the NHS – it should complement it.

Welcoming people: we have the heritage, we have the culture, we have areas of outstanding natural beauty. Yet most visitors to the UK never venture beyond London. Do we have joined-up strategy that embraces visitors whatever their reason for coming to the UK – educational, health and sports tourism for example?

Creating things: we have actors, musicians, writers, fashion designers and artists. Our mother tongue is the dominant world language. We have a film industry. We have theatres, opera houses, ballet companies. We have a music industry. We should support, encourage and promote our creative industries rather than progressively starve them of funding. They bring visitors to our country and income from abroad. They are part of our national brand.

Inventing things: last but not least, we still invent things. We need to invest in our research capabilities rather than allow them to wither. Our scientists, engineers, software designers and medical researchers continue to win Nobel Prizes and invent world-beating technology. We should encourage our inventors to work abroad, and foreign inventors to work here – we should think in terms of cross-fertilisation rather than brain drain.

As for the sacred cow, it’s time we recognised that defence means defence. We can no longer afford to be the world’s junior policeman. In extremis, we still have our nukes, and should keep them. We should be able to contribute to international military action, but in proportion to our size and diminished influence in the world. We should focus on research and development, on smart technology and on developing our expertise in diplomacy and dispute resolution.

We are, after all, a smallish European country. Punching above our weight economically does not require us also to do so militarily.

By weaning ourselves off our addiction to the financial services sector, recognising our military limitations and by focusing on what we’re really good at today – not yesterday – we have a chance to renew ourselves as a nation, or at least to manage the decline in our fortunes with grace and the minimum of social disruption.

All easier said than done, and no startlingly original thinking in the broad principles. But in future posts I’ll do my best to challenge conventional wisdom on one or two of the themes covered here.

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