Why Boris is wrong to attack the City
UNTIL now, I thought that Boris Johnson understood how the City works. Now, however, I’m not so sure: yesterday, he said he understood why so many people view Goldman Sachs “as a giant vampire squid wrapped around the face of humanity”. The reason? Because, says Boris, “instead of planning to hand out gigantic bonuses to their masters and mistresses of the universe, they should be lending that money to liquidity-starved British businesses.”
What? Since when do investment banks lend money to firms (and presumably, he means small firms, as those are the ones that tend to be most credit-crunched)? That is the job of commercial banks such as Barclays, not of firms such as Goldman. I have a lot of time for Boris, but such a basic error does not bode well for the rest of his argument, which soon falls apart.
He also appears to have bought all the claptrap about the cause of the bubble and subsequent bust, which he attributes solely to commercial banks. What about cheap credit from central banks, undoubtedly the biggest cause of the bubble? And the savings glut in China and Japan, which pushed down global rates even further? What about Alan Greenspan, who told bankers they would always be bailed out, making them take excessive risks? And global regulation which encouraged banks to hold too little capital? And the US government, which officially encouraged sub-prime lending?
Of course, banks must shoulder their fair share of the blame and in future they must be allowed to go bust – bailouts are economically and morally wrong. But almost everyone was guilty, from the global economic establishment to greedy consumers and buy-to-let investors. The real reason for Boris’s anger is that he simply cannot understand why banks are handing out bonuses again at a time when most other people are suffering.
Given that until yesterday he was the last politician actually to stand up for the City, he probably feels deeply betrayed. In a way, I can understand his despair: bonuses are inflaming public opinion and making a devastating crackdown against the City even more likely. As a public relations exercise, they are a complete disaster. I too get quite a lot of stick for defending the City; but the difference is that I prefer being right to being popular.
Working in finance is not about being loved: if you want to do that, you go and work for charity. It is about making money. The City is only a problem for the rest of society when it starts making losses, which is what happened in 2007. As long as profits are not based on unsustainable bubbles, then it is in the public interest for financial firms to be profitable.
National insurance and income tax means bonuses are already taxed at about 50 per cent. The Mayor says bankers should understand their duty to the wider community, and expresses dismay at the fact that they are snapping up expensive homes again. But this is manna from heaven for Gordon Brown, who is picking up stamp duty at 4 per cent. The budget deficit will not be as bad as some had feared this year, thanks to higher than expected payouts in the City.
Boris’ rant suggests that he has been nobbled by Tory central office. The City made many terrible mistakes but it is slowly reforming itself, introducing long-term pay and cutting leverage. It is a shame that Boris has decided to go with the populist flow.