Will the City of London Survive Subprime?

♠ Posted by Emmanuel in , at 4/07/2008 12:55:00 AM
Not to put too fine point on it, but nobody should be surprised that the United Kingdom is being buffeted by the subprime scourge emanating from the States and the resulting fallout in yonder lands. Although Americans are famous for their free-spending ways, Britons are in the same league in terms of sheer profligacy, if not worse. Last year, personal debt exceeded GDP in the UK. Mo' mortgages, mo' stuff, mo' debt--how very American. Now that credit standards are becoming tighter in the UK and around the world, will there be much of an effect on the financial services industry? First, let's take the sanguine view espoused by Michael Snyder, the chairman of policy and resources for the City of London corporation. Unsurprisingly, this chap is optimistic on the City of London's future prospects. You can almost hear the Gloria Gaynor playing in the background...

The financial roller coaster of recent months has allowed many to lose perspective and forget that, while times are undoubtedly tough – and may for some get tougher, the medium and long-term prospects for the UK-based financial services industry are still good.

Bank and other shares have been bouncing around like escaped Easter rabbits so it is worth reminding ourselves that the health of a financial centre depends on underlying factors rather than short-term market events, however adrenalin-inducing.

In spite of the worldwide credit crunch and the anxieties it brings, London’s foundations as a global financial hub remain strong and the City will remain an important provider of jobs and revenue for the UK.

This does not mean that rose-coloured spectacles are now the latest spring fashion in the Square Mile. Indeed, a very high price is being paid by UK-based financial services to learn the lessons of the past few months. For example, the supervision of Northern Rock – and the response to its difficulties – has damaged our global reputation, at least for a while. But as other jurisdictions with much thicker rulebooks have also been found wanting, London is probably no longer seen as an egregious offender and the Financial Services Authority seems determined to upgrade its specialist monitoring and assessment resources.

The shortage of confidence in the credit markets is serious for the wider economy and good news is needed from, for example, the US mortgage market, if those with money are going to start feeling more confident about lending to those who want to borrow.

In the financial industry jobs are being cut and teams laid off as firms react to the market conditions and race to show themselves agile enough to find a route through to profits. Politicians around the world are rightly asking tough questions of highly paid chief executives, centred around the link between results and rewards.

Yet anyone watching shares in perfectly good businesses crash overnight or witnessing outright panic surge across trading floors might go further and conclude that the current arrangement of relatively open, globally integrated financial markets is, not to put too fine a point on it, the worst system possible. Like democracy, the current financial system appears dire – but in practice it is still rather less dire than all the other systems so far thought of. The current pain is a necessary part.

Markets have got us into a global crisis at a speed few imagined. As the distrust caused by shaky US mortgages unwinds there will be a need for serious adjustments to supervision, systems and guidelines – but only after careful thought and, we hope, proper consultation with the industry.

At the heart of the necessary transfer of capital and risk will remain the global centres such as London and New York. The heady predictions of 150,000 new jobs in UK-based financial services over the next 10 years may need some downward revision – and some jobs will go in the short term. But in the end the only people able to operate the levers of the global financial machine are those already working in the specialised business cluster whose heart is the Square Mile but whose centres also include London’s Canary Wharf and West End, Edinburgh and Leeds.

The 6,000 firms that employ, for example, 340,000 well paid knowledge workers in the City of London business zone alone between Fleet Street and the Tower of London need these “walking assets” during the current turmoil precisely because they are the expert financial engineers in what is now the UK’s major industry – finance.

The ability to develop new products and operate them 24/7 across the world – in English – from a business cluster that has become Europe’s financial capital and is located in a time zone between Hong Kong and New York is needed more than ever. Only centres such as London have the world-spanning skills needed to work through the changes and adjustments necessary.

New technology and techniques have brought benefits in enabling risks and assets to be rapidly redeployed around the world. We are learning, painfully, some of the downsides of this globalised marketplace but there is no turning back to the era of isolated development. The City of London is at the heart of this new world. The lessons of the turmoil are being carefully absorbed by people in the powerful cluster of financial and business skills that will remain based here and continue to provide a key element in London and the UK’s modern economy.

It's so very Thatcherite. You've got TINA going on (There Is No Alternative to neoliberalism) and all that. For a contrasting view, the man who broke the Bank of England, George Soros, offers this rejoinder to the attaboy above. In other words, he too is seeing the end of the Thatcherite / Reaganite brand of neoliberalism:

The City of London faces a severe recession and the UK economy is set to follow the US into a sharp downturn, according to a gloomy prognosis from the billionaire financier George Soros.

Faced with over-valued houses, mountains of personal debt and a rise in unemployment, the UK is especially vulnerable to the effects of the credit crisis sweeping through financial markets, Mr Soros said, and he warned not to expect a rebound at any point in the near future.

Indeed, the crisis is so serious that it will up-end 25 years of free-market thinking and bring to an end an era of cheaper and easier borrowing, he predicted. "It is not going to be like the 1930s – we are not going to allow financial institutions to fail – but this is a historic event like the Great Depression was."

In the UK, as in the US and the rest of the developed world, "ever looser lending standards and more aggressive supply of mortgages" have contributed to a house price bubble but, said Mr Soros, "I think we have come to the end of the road".

"To say that it won't affect the real economy is untenable, because it affected it on the upside, so it will affect it on the downside. Recession in the US is inevitable. There will be implications for the globalised economy and the UK happens to be as vulnerable as the US, but in different ways. The finance industry is much more important to the UK because London is a financial centre and the industry is going through a painful process of deleveraging. The housing market in the UK has at least not seen the building boom that we have seen in the US and the supply of new homes has not gone up, but on the other hand, the indebtedness of UK households is actually even greater relative to income than in the US..."

Echoing the themes of The New Paradigm, Mr Soros said: "Regulators have abandoned their duty by letting markets regulate themselves. It's because a market fundamentalist ideology has come to dominate the behaviour of market participants and market regulators over the past 25 years ... and the idea that markets are best left to their own devices became policy."