Ali’s blog

Mostly quant stuff with occasional digressions

The impact of the City on London and the British economy generally

Posted by alifinmath on February 21, 2008

A readable article in the London Review of Books:

But it isn’t possible to deny that in most of London, City money has a negative impact on the quality of life. It’s partly that the men, in particular, can be so insanely boring. That may reflect the way banking has changed, become more intense, more time-consuming and more overtly greedy. David Kynaston, author of a magisterial four-volume history of the City, completed in 2001, observes at the start of the fourth volume that ‘the modern City is in many ways a cruel, heartless place, and its occupants work such cripplingly long hours that inevitably they lack much of the roundedness of earlier generations.’ From a parochial point of view, the City types’ effect on the texture of life is not heartwarming. The bankers don’t use the local schools or hospitals or shops: at least not until the shops catch up with them, and then when the shops do catch up with them they are selling things at such high prices that no one else can afford them. During the week, the men are functionally invisible: they leave the house around 6.30 and are back at about eight.

In London, as a rule, non-City people don’t love City people, and there isn’t much non-economic interaction between them. The bonuses are a big part of that. The City is, collectively, astonishingly wealthy. It earns 19 per cent of Britain’s GDP. People don’t mind that in itself but they do mind City bonuses. Last year, these amounted to a truly boggling £19 billion, all of it paid at the end of the year. In London, the effect of that money has become almost entirely toxic. I’m not talking here about middle-class envy – the resentment increasingly expressed among the ‘middle-class poor’ about how unfair it is that these bankers get paid so much for contributing so little. That resentment seems to me to be largely hypocritical, a middle-class resentment of one of the few forms of inequality that doesn’t benefit them. But City money is strangling London life. The presence of so many people who don’t have to care what things cost raises the price of everything, and in the area of housing, in particular, is causing London’s demographics to look like the radiation map of a thermonuclear blast. In this analogy only the City types can survive close to the heart of the explosion. At this time of year, when the bonus stories come out, you can understand why. A bar announces that it is offering the most expensive cocktail in the world: £35,000. That buys you a shot of cognac, a half bottle of champagne, a diamond ring and the attentions of two security guards to protect you for the rest of the evening. A deli, at the special request of a customer, creates a £50,000 Christmas hamper. Word gets out, and another customer immediately orders two more. The expense of London is forcing people further and further out of the city, and making life harder and harder for the ones who remain.

So the story of Northern Rock was a fuck-up. The trouble is that it may turn out to be a harbinger of meltdown too. As Clive Briault of the Financial Services Authority pointed out on 4 December, we in the UK have had 67 consecutive quarters of economic growth. Inflation is low and so is unemployment. (Actually, the unemployment figures are almost laughably rigged – but that’s another subject. Suffice it to say that pretty much everybody who wants work can find it.) Everything that goes up must come down, and it was inevitable and indeed necessary for things to cool off a bit. The danger is that they might do much more than that. Our economic good times have been funded to a large extent by personal debt, which has in turn been funded by rising house prices. This has made people feel very confident about their finances, and often led them to treat their homes, via remortgaging, as giant cash machines. But the fright caused by the sub-prime disaster – a disaster playing out in slow motion, with more bad news certain to come – is going to cause a tightening up of credit. Banks are going to become increasingly cautious about lending money. They’ll lend it to fewer people and charge more money for the privilege. People think that mortgages are priced at a rate linked to the Bank of England’s interest rates, but that’s not directly the case: they are priced according to the rate at which banks can borrow money from each other. That rate is under pressure from the sub-prime fiasco. UK personal debt comes to a cool £1,400,000,000,000, and all of it is about to be costlier to pay off. Next year, 1.4 million fixed-rate mortgages are due to come onto the new floating rates, which will be much more expensive. It’s the same thing that triggered the wave of repossessions across the US. Add to that the fact that the British market now has £108 billion worth of buy-to-let mortgages, which are particularly exposed to a dip in house prices combined with a rise in interest rates, and you would be forgiven for thinking that some sort of crash is imminent. The central banks obviously think the risk is very real, because on 12 December, the US, EU, UK, Canadian and Swiss central banks announced that they were joining together to provide £50 billion worth of liquidity to the financial markets. Because banks are reluctant to lend to each other, the central banks will make the funds available instead. This might help, or it might be a sign of anxiety so big that it accidentally makes things worse – but it was worth a shot.

(This is only an excerpt). This finance capitalism is difficult to decipher even for insiders. I don’t think anyone understands the evolving dynamics of what’s taking place, which has ben created by the unregulated and profligate use of new financial instruments. In many senses, the British economy is even more vulnerable to a breakdown in the global financial system than the USA. Worst comes to worst, the Americans can still fend for themselves. The Brits can’t.

Maybe a century from now, economic historians will be writing the definitive account of how toxic and opaque our current brand of vulture finance capitalism really is.

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One Response to “The impact of the City on London and the British economy generally”

  1. […] Read the rest of this great post here […]

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