by David Priestland
Four years ago, as they looked into the post-Lehman Brothers abyss, our political leaders promised “never again”. Both David Cameron and Vince Cable have called for a new “responsible capitalism”, where banks would invest for the long term. But behind the scenes the Treasury is sabotaging efforts to control one of the most extreme forms of casino capitalism – “high-frequency trading”. And that tells us a great deal about our ruling elite’s real plans for Britain’s economic future.
The past fortnight has seen growing calls for curbs on HFT – the use of complex computer systems that spot market patterns, buy millions of shares and hold them for micro-seconds before selling them on. Last Thursday, a US Senate committee heard harsh criticisms of these technologies, and the head of the Australian stock exchange denounced some practices as “inherently dangerous”. Meanwhile, MEPs have announced plans to impose severe regulation. The Treasury, however, has been fighting to dilute any reform, claiming that HFT makes markets more efficient.
HFT generates huge profits for financiers and stock exchanges, but many blame it for market volatility and crashes. The most recent victim was the American firm, Knight Capital, which almost collapsed last month when a computer malfunction cost it $440m. More serious was the “flash crash” of 2010, when these technologies briefly sent American shares plummeting and threatened market panic.
HFT also reveals a deeper problem with the economy of the last few decades: finance’s extreme short-termism, and the funnelling of resources into trading rather than investment and jobs.
The coalition government claims to be worried about this, and commissioned the respected economist John Kay to investigate. His report, published in July, was scathing about the City’s myopic culture, and accused it of “undermining” support for “innovative, sustainable long-term business performance”. But while the government made polite noises, it has shown few signs of listening.
So why are our leaders so determined to ignore the lessons of 2008? Lobbying from finance is one factor. Some 16 of 31 members of a “high-level stakeholder group” – one of the two panels advising the Treasury on the issue – have links to the HFT industry. But the problem is more deep-rooted. Most of our leaders cannot imagine what the British economy might look like without a free-wheeling financial sector. Lack of vision afflicts left as well as right: within the Labour party, Ed Balls is opposing plans that might upset the City.
Yet this is not to accuse politicians of bad faith. The choices facing Britain are not easy ones. Britain has had an unbalanced economy for decades, and changing direction will take more than a few policy initiatives.
Ever since London challenged Amsterdam as the west’s main trading hub in the 17th century, a “merchant”-style capitalism has dominated the centres of power. This encouraged a particular economic outlook – flexibility and market awareness, but also a preference for short-term profit over long-term domestic investment.
London’s economic elites were masters of global networks, but less interested in developing the home economy – hence the frequent tensions between finance and industry. Merchant dominance also helps explain why Britain – unlike Germany – has never enjoyed the collaboration between finance, technocratic industrialists and scientists and workers that is so essential for stable growth.
This approach seemed plausible when global finance boomed after the 1980s. City profits and easy credit obscured the deep flaws beneath the surface. But with the collapse of that model in 2008, Britain has reached a turning point: it either “resets” its economy or it continues on the old course, and risks social crisis.
Some Labour thinkers are pondering major change – this is what Ed Miliband’s oddly named “predistribution” is all about. But the details remain vague.
The Conservatives, on the other hand, seem doggedly determined to tread the merchant path – even if they rarely say so openly. For the Treasury hopes that just as the City remade itself in the 1950s and 1960s as a lightly regulated haven for American “eurodollars”, so London’s financiers can find a new role: as bankers to Beijing.
The Guardian
