Save the City

There’s an interesting economist out this week with a front page saying: “Save the City”, which seems to be getting everyone a little bit worked up.

Why?

Because it’s in defence of the City.

The story talks about the history of the City, and how its future may be jeopardised by the regulatory and taxation changes taking place today.

The actual main story this relates to – three pages about “Death by a thousand cuts” – is actually a very good factual piece about the City’s role in the UK economy.

Here’s a short summary of the key information in this article by Gary Neill:

First, Britain let banks get out of hand, creating a bubble of exposure that could have ruined the country if the government had not acted the way it did.

“At the height of the financial crisis Britain feared not only the collapse of banks that were too big to fail, but the terrifying risk of having to bail out banks that might have been too big to save.”

This is why the costs of the new regulations proposed in the Vickers report “is likely to be significant: perhaps £3.5 billion to £8 billion ($5.4 billion to $12.5 billion) a year, or even higher”.

But it won’t cripple the City whose “growth over the past six decades has come from international banks choosing to do business in London rather than from the growth of British-owned banks. TheCityUK, a lobby group, reckons that 251 foreign banks have branches or subsidiaries in London and that over half of all British banking assets are owned by foreign banks.”

It is why we talk about London to banking as being like the Wimbledon to tennis – we provide the courts but not the players – and is reflected in the UK’s popularity for trading in OTC Derivatives and FX.

But then other rules are worrying, such as the EU’s proposed financial transaction tax which will raise money for Europe – some believe as much as €55 billion a year, with up to 70% collected in Britain – but would seriously impact London as a viable trading centre. 

“The European Commission’s own impact assessment reckons that it could force 90% of some sorts of trading activity simply to move from the EU, with the loss of hundreds of thousands of jobs.”

Combined with other proposed changes to regulations, all designed to “threaten a market that Britain dominates, to the benefit of centres such as Paris or Frankfurt.”

Add onto all of this that, “on a rough calculation for The Economist by KPMG, getting out of London would be advantageous for high earners.”

Similarly, “the share of Britain’s GDP accounted for by insurance and finance, including retail services like arranging mortgages, has already dropped to just under 8% from above 9% in 2007. The number of people employed by the industry in Britain fell by 7% in the three years to the third quarter of 2011. More jobs losses are likely …

“London has hung on to its top ranking in the closely watched Global Financial Centres Index published twice a year by Z/Yen, a consultancy. But the gap between London and New York, in first and second place, and Hong Kong and Singapore in third and fourth has narrowed in recent surveys …”

At this point, the article makes a strong case for why London succeeds as a financial centre when others fail:

• “Incumbency is a powerful barrier in industries, such as finance, where there are strong network effects.
• Trading attracts liquidity and thus more trading.
• A steady supply of skilled financiers adds to the virtuous circle.
• The use of English around the world gives London an edge over other European centres.
• London goes to work in the middle of the global trading day: the City day starts just as Asia’s financial markets are closing and its financiers are still at their desks when the New York market opens. That makes it an ideal spot for global asset managers.  One-third of the £4.8 trillion of funds managed in Britain is on behalf of foreigners, according to TheCityUK.
• London is also an ideal place to strike deals between parties from different countries, because of its highly respected body of commercial law and experienced judges.
• London’s lead in foreign exchange, as well as in interest-rate derivatives, grew out of its reinvention in the 1960s and 1970s as an offshore centre for dollar deposit-taking and lending, after sterling’s decline as a reserve currency.”

But it also talks about threats to this strength, such as many of the City’s bigwigs are from the 1980s, and a new breed of financier is coming out of Asia.

I liked this piece, and think it builds on my history of the City of London series which is soon to be released as a new book.

The article is balanced, informative, factual and has some great content.

Then there are the two supporting articles that go with it, which are not.

They are contentious, ill-informed, biased and potentially xenophobic.

These pieces really are not good, with some saying it’s an appalling piece of journalism, such as Ian Fraser.

Ian is an outspoken journalist about the crisis caused by the British banks, and is often damning in his views about the banking system.

With this piece, he’s surpassed himself.

“This intellectually lazy piece of journalism is a disgrace. More than any Economist article I’ve recently read (some of which have been excellent by the way), it has made me give serious thought to cancelling my subscription to The Economist.”

Why so harsh a criticism?

Well, here’s the article Ian picked on: “Save the City”.

He claims “it doesn’t even start to acknowledge the multifarious failures of the financial sector, or the damage it has wrought on the UK economy in recent years. The article fails to mention the massive risks posed by “crony capitalism” and “regulatory capture”, including wilful blindness to fraud, and even includes the words –

Finance—the funnelling of savings to their best use—is a vital industry. Britain is very good at it, leading the world in various financial markets, including foreign exchange and over-the-counter derivatives.

Who wrote this garbage I wonder?”

I don’t think it was quite so bad myself.

Instead, I took offence at the other article supporting the City.

This one is from Schumpeter – named after a famous Austrian-American economist from the last century – and is entitled: “the dangers of demonology ”.

Here's a brief excerpt of what I found misleading:

“Throughout history, moneylenders have been persecuted. Ethnic minorities—most obviously the Jews in Europe and America but also the Chinese in Asia—have clustered in the financial sector first because they were barred from more respectable pursuits and later because success begets success. At times, anti-banking prejudice has acquired a strong tinge of ethnic hatred.

“In medieval Europe Jews were persecuted not only because they were not Christians but also because killing them was a quick way to expunge debts. Karl Marx, who came from a Jewish family, regarded Jews as the embodiments of capitalism who could only be rescued from their ancestral curse through revolution.

“The forgers of the ‘Protocols of the Learned Elders of Zion’ wanted people to believe that Jewish financiers were engaged in a fiendish global conspiracy. Louis McFadden, the chairman of the United States House Committee on Banking and Currency in the 1930s, claimed that ‘the Gentiles have the slips of paper while the Jews have the lawful money’”, and “a survey in the Boston Review in 2009 found that 25% of non-Jewish Americans blamed Jews for the financial crisis, with a higher percentage among Democrats than Republicans.”

In other words, the Economist is running an article that implies the banking crisis could lead to anti-semitism on a grand scale once more: “demonising bankers will not solve these problems—and may well, if unchecked, bring a lot of ancient ugliness back to life.”

I personally think that is incredibly inflammatory and biased.

When combined with the Save the City, these two articles undermine the Economist’s credibility and heritage.

It’s a shame, as the death by a thousand cuts piece has some real substance.

Ah well.

So much for the heady days of journalism with integrity, I’m off to watch Hacks again.