Gambling with our future

One of the best definitions of stupidity is that it is the art of making the same mistake twice and expecting different outcomes. It is also a pretty good indication that someone is following silly far-right political theories instead of acting in accordance with the evidence.

So, it was fascinating to discover that the Conservatives intend to deregulate the financial services industries in order to kick start the economy. Because the last time this was tried it caused the biggest bust in living memory.

The 2008 free market collapse

I say memory but I am beginning to think that an ability to recall the most basic facts about recent economic history is a lost skill. So it is worth recalling what happened during the 2008 financial crash. The sequence of events went like this:

1. The Conservatives deregulated financial trading in one big bank in 1996.
2. That caused a huge growth in high-risk financial trading that brought in massive profits for the City of London.
3. The incoming Labour government cheered on the boom and told us they had put an end to the cycle of boom and bust.
4. Traders in the city made enormous bonuses by selling highly complex financial products that were supposed to be completely safe but also highly profitable.
5. When those who had bought the products needed to sell them, the value collapsed and that caused others to sell and the price to drop further.
6. Major financial institutions went bankrupt when they discovered the wonder new products they had spent so much of other people’s money buying were no longer worth much. Lehman brothers collapsed. People queued outside Northern Rock to try to get lost savings back.
7. The government and state-owned central banks had to step in to save great chunks of the private sector.
8. As a consequence, the public purse took on massive debts.
9. Ten years of austerity was imposed on public service users and public sector workers – teachers, nurses, council staff etc – who had done nothing to create the problem.
10. The traders who sold the dodgy products kept their bonuses.

If that is too far into the past for this government to be able to recall, then there is another more recent sequence of events that is also of relevance.

This year’s free market collapse

Financial markets have never quite recovered from the shock of 2008, so when Liz Truss came to office it didn’t take much to trigger another potential collapse. Her reign lasted only days and the sequence looked like this:

1. The new PM decided to implement far-right political theories and cut tax hoping that growth would pay for it.
2. The City of London looked at the figures and realised the sums didn’t add up.
3. There was a run on British government loans that forced up interest rates.
4. The Bank of England called in obligations that British pension companies owed but never expected to have to pay quite so soon.
5. The pension companies were forced to the edge of bankruptcy. Repeat – Liz Truss and Kwasi Kwarteng nearly destroyed your pension.
6. The Bank of England had to print free money in the middle of an inflation crisis to bail out the pension funds.
7. The consequent rise in interest rates will be punishing home buyers by hundreds of pounds every month for years to come.
8. Yet another incompetent prime minister was forced to resign.

Opinion

What you vote for is more important than what you vote against

by Andy Brown

8 December 2022 - Updated on 14 December 2022

The next free market collapse?

Or perhaps try another financial sequence:

1. In 1634 the Dutch are daft enough to pay ludicrous prices for tulip bulbs. The early traders make a lot of money. The late arrivals lose everything.
2. In the 21st century, the crypto-currency bitcoin is invented and people start buying electronic records that are even less tangible.
3. Early investors make a lot of money out of bitcoin so later investors assume they will also be onto a winner and buy.
4. The price of the worthless non-existent coins goes up even further.
5. The market begins to settle down. Then to decline a little. Then to decline some more.
6. In November 2022 the second biggest bitcoin exchange in the world goes bankrupt wiping out $30bn.
7. Bitcoin goes down even further.
8. People start to ask questions about exactly what they own and whether it is really worth anything, with consequences for the real economy that are yet to be played out.

In such an environment why would anyone think that the problem is that the financial markets have been too heavily regulated and what we need is an even larger dose of the anarchy of unguided markets?

UK now in a race to the bottom

There is only one explanation. Thanks to Brexit the City of London is losing business. Paris has overtaken it as the main financial centre. Britain no longer has easy access to European financial markets. So the alternative is to set it up as the gateway for hot money that is lightly regulated. There is a lot of profit to be made from laundering money from dodgy sources. For a while.

We were all told many times with great solemnity that after Brexit there was absolutely no intention to launch a race to the bottom on standards. Now they have decided to do exactly that.

We are all therefore entitled to ask two crucial questions. The first is this. Was this the real motivation behind Brexit from the start? Since it could never work for the real economy, was it driven by the dreams of dodgy financial speculators who could afford to fund hefty campaign contributions?

The second is simpler. What could possibly go wrong?