As Rachel Reeves made clear in her Mansion House speech last night, she wants to relax banking regulations. Big bonuses will be coming back, paid much sooner than has been permitted of late. The aim is to increase risk-taking in financial services. She is issuing new remit letters to the Bank of England and others, emphasising that this is her expectation, although copies do not appear to be available as yet. Her belief is that this will boost the economy. She is wrong.
Aristotle noted a very long time ago that money cannot be made from money. His reasoning was clear. Value is created from the production of goods and services that meet needs. Bankers cannot do that. No one can eat money.
The counterargument to that suggestion is that banking and financial services facilitate the aggregation of capital, which can release productive capacity. I disagree with that claim in the modern fiat-currency economy. Banks are the primary source of capital for many companies where growth is most likely. But they do not aggregate depositor money to make loans. Instead, they make loans out of funds they create under a licence from a government-run central bank. Bankers, as most people understand them to be, do not, therefore, fulfil the task of lending depositor funds. Rachel Reeves has fallen for a fallacy that her former employers at the Bank of England have admitted is not true.
Investment bankers might fulfill this task of aggregating capital, to some degree, but bankers, as most people know them, don't.
So what do banks do? Fundamentally, they do three things.
First, they charge massively for the use of loaned funds created costlessly by them. The return to them on their government-created right to create such funds is phenomenal and wholly inappropriately charged for by the government as the facilitator of this oligopolistic exploitation of millions in the UK and beyond.
Second, they use the capital provided by depositors to speculate. This is not a creative process. It is, in effect, gambling. The net contribution to society is negative. The costs incurred necessarily prevent it from being a zero-sum game, after all. The returns are biased toward those with the most capital. The upward redistribution of resources within society exacerbates the similar inequalities created by the core banking function.
Third, they supposedly advise others with financial capital that might be aggregated, such as pension funds. In this role, they, and others in the financial services sector, face three major problems.
Firstly, they are not competent to advise on the productive use of capital because bankers and financial services specialists have never been engaged in such activities.
Secondly, bankers only understand financial capital, which is fundamentally different to productive capital, and since accounting post-2005 has only concentrated on reporting returns to financial capital, the ability to differentiate the two has been almost entirely lost, at least within the City.
Third, since bankers only take a microeconomic and financial view of the world, and accounting still fails to recognise the cost of the externalities created by capital when used by companies, the advice provided by bankers is inevitably counter-productive to the necessary goal of achieving climate stability upon which human life depends.
Despite all this, Rachel Reeves went out of her way in her speech to describe the financial services sector as ‘the crown jewel in our economy'. This is total nonsense because there is literally nothing that the financial service sector can do to add value to the economy without there being opportunities for them to fund within the remainder of the economy. In other words, the financial service sector that Rachel Reeves describes can only have a parasitical role, extracting value from the real productive value of the economy created entirely outside the walls of the City of London. Reeves appears unaware of this.
I stress, when saying this, that I am not passing judgement on the routine supply of basic banking services, or accounting services, or of routine insurance. The value of all of these I recognise, but it was also glaringly obvious that this was not the focus of what Rachel Reeves was describing when referring to financial services in her speech. It was the growth capacity of the supposed speculative capital aggregation activity to which she was making reference, and there is no evidence this adds value, or that changes to it can produce beneficial outcomes.
Let me take local authority pension funds as an example. Rachel Reeves wishes to aggregate the 86 existing local such funds and create eight mega funds from them. She claims that this will improve their contribution to the UK economy. What she ignores is that the criteria for the success of these funds is whether they are able, or not, to meet the likely financial requirements of their members when they are in retirement. Nothing else matters and at present, these funds have between them an aggregate surplus of approximately £100 billion. In other words, they are more than succeeding at delivering for the people to whom they have obligation. Unless she can demonstrate that aggregating these funds to create a pool of opportunity for higher risk, and so potentially lower return investment, can deliver better outcomes for the members in question (who have never got a mention in her discussion of this issue) then her proposal is recklessly irresponsible.
I very strongly suspect that she is being that irresponsible. What she has forgotten, as have all within the financial services sector, is that they only exist to service the end consumer, who is the individual saver. They do not exist to service the collective interest of the City. Nor do they exist to provide funds for speculative purposes that might promote bankers' bonuses. Their sole purpose is, in the case of pension funds, to supply a secure income to a person in their old age. It should be added that when seeking to do so, they should also seek to ensure that the opportunity for such old age should exist, which means that they must be inherently engaged in tackling climate change, which never got a mention in anything that Rachel Reeves had to say last night, so obsessed with her growth mantra is she, which is so contrary to the likelihood of achieving that goal of sustainability.
Did Reeves have anything useful to say about the economy as a consequence yesterday? No, is the answer to that. She added no value at all. But, she did threaten the well-being of a group of pensioners who are currently very well served by their local authority trustees.
She also significantly increased the chance that there will be future significant financial instability in the City of London by encouraging the taking of short-term speculative positions that are highly risky but which do fuel the payment of bonuses wholly inappropriately to people who have no downside consequences from undertaking this activity, of which asymmetry she appears to have no understanding.
So, was this a good night for the economy? No, it most definitely was not. Rachel Reeves is really a very big threat to the well-being of this country.
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A good blog. Even the dogs in the street know the dangers of freeing up the financial sector, we have been there before. Rachel Reeves is not fit for purpose and should resign before she plunges the economy into complete disaster.
It wasnt only Aristotle but many early faiths, including at one time Christianity that prohibited Usury.
Its time to bring back the idea that making money out of money isnt a respectable activity and should not be encouraged at both a legal and social level.
Basically they are no different to bookies except they are posh and bailed out by the Government when they back the wrong horse.
Much to agree with
I’ve started to read Michael Hudson’s ‘The Collapse of Antiquity’ (2023) – our future is actually in our past it seems.
Last night’s speech perpetuates what some of us more critical observer’s have been noticing since Thatcher’s boot boys came in – Chancellor’s of the Exchequer whose natural environment and constituency is private banking and not social policy. Labour has now latched onto this much to our own loss.
Oh dear! Reeves is proving even more dangerous than we feared. I knew she was going to be a neolib, but I didn’t realise how bad she’d be even on her own misguided terms.
Is she surrounded by equally dumb people, or is she just ignoring good advice she is being given?
The whole team is dire
Dire or captured? Or both, because they are arrogant and economically ignorant and too stupid to realise that they are glove puppets for vested interests.
I wonder what their ‘price’ is???
UK is now corrupted to the core.
Never put a banker in charge of the economy.
Dare I say it again, but “Yes, Minister!” has a wonderful befuddled character called Desmond Glazebrook (played by Richard Vernon), who appears in several episodes. He is of course, a banker.
The programmes were made originally as satirical comedy drama. They are of course now more helpfully viewed as documentary, and far more realistic than current news programmes.
https://duckduckgo.com/?q=%22Desmond+Glazebrook%22&t=fpas&ia=web
“Second, they use the capital provided by depositors to speculate. This is not a creative process. It is, in effect, gambling.”
Many/(most/) banks have “prop-desks” these are desks which trade in commodities/futures, which can include wheat, pork bellies, orange juice etc. They also trade electricity, the flow of electricity through an HVDC link such as BritNed (Uk to Netherlands) is wholly controlled by prop-desks – I know because I have been in the control room and seen the scrolling screen showing trades. Electricity volumes traded in the UK are around 4 to 6 times that of electricity delivered. The claim is that this delivers liquidity to the market, it does no such thing, it only introduces speculative spikes. So I you wondered why elec is so expebsive, well one reason (there are others) is banksters and prop-desks – UK serfs keeping them in the style to which they have grown accustomed – & Reeves wants to give em even more money. Bless.
Much to agree with
Thank you and well said, Mike.
My employer trades and facilitates the trading of electricity.
There is a nexus of the City, Bank of England and Treasury with shared mindsets and education, who look after their mutual interests, which are not the same as those of the wider economy and society. The financialisation of so much of business, with outsourcing and privatisation is a product of that mindset. It goes a long way to explain the low investment and poor productivity. I suspected that Reeves was a product of that world and her behaviour since tends to confirm it. She will put their interests first.
Starting in the 90s, the banks stripped out all knowledge of real business and the wider economy as they got rid of all the expertise from their branches and regional offices. All in the name of cost reduction and believing that they could just use IT to make lending decisions. I saw it happen first hand. Now they no longer have the resources and skills to make good lending decisions. They are focused overwhelmingly on property and speculation as their accounts show. We need a new banking system – those old Captain Mainwarings had a useful role to play.
I’d like to see an estimate of what the banks’ behaviour has cost the economy over time. Not just the cost of bailing them out but the costs to the rest of the economy from their failure to support it and of their role in facilitating money laundering and tax avoidance. We only ever hear about their tax contribution.
I have no idea if anyone has ever done that
I remember some thirty years ago, the first time our bank manager came to see the company I ran at the time, not to see how our business was going (as they had occasionally done in the past) but to try to sell us ‘additional services’ such as insurance. We got quite cross, and told him that if they ever tried that again, we would move our account. He looked a little shocked, but apparently a note was put on our account and we were never ‘upsold’ again.
It’s the modern trend to focus on growth by extracting extra revenue, rather than providing good core services at a comfortable profit. We are all the poorer as a result. There should be nothing wrong with being a stable and profitable business.
That is what banking became this century. I can recall when it wasn’t.
I can recall the first visit we had from our bank manager , travelling down from Shropshire to West Wales to see if our request for funding was viable. I remember making a chicken and mushroom pie etc for him and of course a glass of white wine. He walked around the farm and admired the stock and approved the plans. Now, after over 40 years, last month I finally payed off the mortgage. I don’t even know who my current manager is!
Me neither
They stopped telling me a while ago
Thank you and well said, Robin.
I have also observed in the past 30 years.
With regard to tax, that figure includes the tax paid by employees and even the likes of cleaners, catering staff and receptionists, the latter likely to be employed by third party contractors. The figures are designed to boost what little tax the employers / firms pay.
PWC came up with this nonsensical methodology years ago.
I suspect that you watched the same developments as I did. A fundamental change from pre-Big Bang and the shift to the dominance of investment banking – or as I always think of it, speculation banking.
I also tend to lump the accountants, lawyers and property firms in with banking as they are intertwined and share similar self-interested values and ethics. Regulation has no chance when ethics are fundamentally rotten. You just end up with people gaming the system which is what happens in the City. And the rule of power – my lawyers are bigger than the regulator’s and yours.
“I’d like to see an estimate of what the banks’ behaviour has cost the economy over time. Not just the cost of bailing them out but the costs to the rest of the economy from their failure to support it and of their role in facilitating money laundering and tax avoidance.”
Based on the analysis provided, the banking sector’s net contribution to the UK economy is likely negative, though this conclusion would benefit from further in-depth research and validation.
To determine whether the UK banking system’s net contribution to the economy is positive or negative, we can compare its economic benefits (contribution to GDP) with the costs of mismanagement, misconduct, and other negative externalities.
Step 1: Contribution to GDP
Banking as part of financial services:
The financial services sector contributed £173.6 billion to GDP in 2021 (8.3% of total GDP).
Banking likely accounts for a significant portion of this (estimated at ~60–70%, or £100–120 billion annually).
Total contribution over a decade:
Assuming banking contributes £100 billion annually, its total GDP contribution over 10 years would be approximately £1 trillion.
Step 2: Costs of Banking Mismanagement
From earlier estimates, the costs of banking mismanagement include:
Bailouts (2008–2020):
£33 billion net cost (direct fiscal impact).
Lost economic growth:
£200–400 billion (credit constraints, reduced business investment, and opportunity costs).
Facilitating money laundering:
Estimated annual cost of £56–£140 billion, leading to a total of £560–£1,400 billion over a decade.
Tax avoidance facilitation:
Contribution to £50–£100 billion in lost tax revenues over 10 years.
Consumer confidence loss and spending constraints:
£50–£100 billion over a decade.
Regulatory compliance and fines:
Fines: £70 billion (direct costs).
Compliance costs passed on to the economy: £100 billion over 10 years.
Misallocated capital opportunity costs:
Estimated at £100–£200 billion over 10 years.
Step 3: Net Impact Calculation
Category 10-Year Contribution (£ billions) 10-Year Cost (£ billions)
Banking sector GDP contribution ~1,000
Total costs (all categories) ~1,063–2,373
Net Contribution Estimate
Best-case scenario: Banking contributes £1 trillion to GDP but incurs costs of £1.063 trillion → Net loss of ~£63 billion over 10 years.
Worst-case scenario: Banking costs the economy up to £2.373 trillion → Net loss of ~£1.373 trillion over 10 years.
Conclusion
Based on these estimates, the UK banking system’s net contribution to the economy is likely negative when accounting for mismanagement, misconduct, and externalities. While it generates significant GDP, the broader costs imposed on the economy often outweigh these benefits, especially during and after crises.
The findings highlight the importance of reforming the sector to maximize its potential as a positive economic driver while minimizing systemic risks and negative externalities.
I think you overestimate the banks’ contribution to GDP. There is much more than banking in that 8% or so.
It is remarkable how quickly things change, in the wake of Trump’s victory. Regulation has been “overdone”. Release the genius of the cowboys and charlatans. Forget the wanton greed of the financial sector and their utter irresponsibility; take them off the leash so they can create a boom out of nothing; and bust the whole financial system in the blink of an eye; in the digital age, faster; before anybody can act.
Rachel Reeves is Grenfellising the banking sector.
I was not sure about that description, but then decided it was fair
Thank you, both. I think John’s description is appropriate.
This is germane to what I would term the wider, modern Lockean turn (I referred to the impact of Locke on another thread). Sky News today has a report on a group that calls itself ‘The Sovereign Project’. It believes taxation without consent is a reversion to feudal serfdom. This marks a growing attack on the State’s right to tax. This is essentially an appeal to the extension of Locke’s ideas on rights, ownership and property (it is further than Locke envisaged, but is almost entirely founded on Locke’s essential theories* -which have had unintended and egregious consequences that Locke did not contemplate or understand).
* The Sovereign Project may or may not understand their debt to Locke; but that is why it has traction in our intellectual tradition, conscious or not.
I presume this is in the States?
I think it is fair. The difference is that there were some building regulations, but they weren’t applied as designed, and the Government deliberately deprived the resources to apply the regulations properly. Reeves appears to intend just to release the financial sector from the restraints designed to prevent a crash (because, from direct experience you can’t trust the sector not to threaten catastrophe).
I think we should call out deregulation for what it is, across the board: Grenfellising. Either you wish to protect the public, or hand over the public well-being to cowboys. There is no room for half-measures. The cowboys ask for an inch, and take a mile. They are ruthless, and we need to call a spade, a spade.
Agreed
In the States? According to Sky News, only if that now includes a wood-panelled room in a hotel in Leicestershire, where a small meeting of the 20,000 (claimed) membership group was held ……..
The insanity has moved…..
Let’s stop kidding ourselves. She’s just a puppet. Another of Starmer’s useful idiot cabinet members.
Do you know how deep the UK has sunk (from the perspective of an Irishman whose father moved there when I was a kid, so my schooling was in England and Germany).
I recall Maggie Thatcher having a few dissenting voices in her cabinets because she chose them based on their suitability for the job.
The UK has sunk that far, that I’m thinking a semi-positive thought about her tenure as PM
The horror, the horror.
Thank you, John.
Starmer fears Streeting and his backers, Blair and Mandelson. His main ally in cabinet is Reeves, who he would also like to succeed as leader. She’s interested, apparently.
The problem for Streeting is that he has a constituency that has little lovge for him. Not a basis for leadership.
Thank you, Richard.
Richard and readers may be interested in my observations from New New Labour’s latest prawn cocktail offensive in the City:
https://www.nakedcapitalism.com/2024/05/tony-blair-and-his-associates-are-waiting-in-the-wings-to-seize-back-power-in-the-uk.html.
Please scroll down the post and BTL.
Thanks
I read it
Worth doing so
I also noted the Rawnsley article
Thank you, Richard.
Another observation from the City and even Whitehall events that I attend: One no longer sees diplomats and even foreign media. That has been the case since the circuit restarted after covid.
It’s not really suprising, is it. There is no money to follow now.
It was deregulation of the banking sector that contributed toward the Great Financial Crash in 2007-2008. I don’t recall regulations being tightened afterwards, so more deregulations seems foolish.
As for money making money, if someone gains £1million then there must be someone who looses £1million, with nothing more to show for the transaction; no assets, no services. There is only a net transfer of wealth from losers to winner.
Regulations were tightened, it is fair to say. Capital requirements were increased, some banking activities were supposedly ring fenced to limit risk and bonus payments were capped and deferred. It looks bonuses are back in play now.
Thank you, both.
From the spring of 2008, so before Lehman and in anticipation of what had been bubbling since August 2007 or even earlier, to the autumn of 2012, I worked on bank solvency at the banking trade body.
In addition to increasing capital, for the first time and rectifying an omission / decision made in 1988, liquidity rules were introduced. Leverage limits were also introduced. Some structural measures, ring fencing in the UK and restrictions on trading in the US, were also introduced.
The above were what the regulators could get away with. Banks wore down politicians and regulators over the years and shifted the debate / spotlight as early as 2009 towards government finances.
Banks also exploited the divisions between the hawks (UK, US, Netherlands and Sweden) and doves (Germany, France, Italy and Spain, fearing what soon became the eurozone crisis). The hawks wanted tougher rules and rules in place mid-decade. The doves said governments could step in instead. 2019 was a compromise, but even then implementation dates were stretched.
Richard and readers may not be aware that the final rules arising from the 2008 crisis won’t come into force until 1 January 2026.
Thanks
And by 2026 they will have been relaxed for all the reasons you note on Naked Capitalism
The pensions industry is in dire need of fundamental reform. The purpose of a pension fund is, as you say, to provide a secure income in retirement. However one of the issues I have agreed with you about over the years is the need to direct pension savings for useful purposes rather than to indulge in financial speculation. Money cannot be made from money. Bankers and various financial services specialists are experts in financial speculation and aren’t competent to manage productive capital for productive purposes, but these are the folk who advise pension funds and their trustees. Whilst local government pension fund committees (who act as trustees) are doing their best with the tools and knowledge they have, which is heavily influenced by their professional advisors in the financial services industry, I think to describe local authority employees as being well served by the fund trustees is to give the latter unwarranted credit. They have been brainwashed and few, if any, challenge the conventional wisdom they are fed by their advisors. They seem to be doing well making money from money but it is an illusion. The surpluses these funds now have are, of their very nature, fleeting. It is only three years ago that most DB pension funds, including the local authority funds, were in deficit. In fact, in 2021 the University DB scheme (the USS) was declared to have such a serious deficit that contribution levels would have to be increased to 56% of payroll. That triggered an industrial dispute. Those large deficits were the result of low interest rates and, conversely, those deficits have now turned into surpluses because interest rates are high. It has little to do with investment decisions taken by local authority pension committees. The volatility in the valuation of DB pension fund liabilities is one of the major factors in the demise of defined benefit pensions.
Because of the way pension funds are managed and regulated and what they think “investment” is they are one of the biggest contributors to financialisation of the economy. Don Young’s 2005 book “Having Their Cake” describes how pension funds and their agents destroyed a long established and thriving UK company – Redland plc. In the UK pension funds assets are valued at about 120% of UK GDP. The use of these funds for financial speculation is seriously damaging the economy in the UK and globally. We do need to find a way to reconcile the provision of income security in retirement with directing the funds being saved to productive uses. Unless we do that then pension funds are amassing large financial claims on the economy without contributing to the productive capacity of the economy to meet those claims. That is unsustainable.
Thank you, Richard, with regard to Streeting. One wonders what he will do to further his ambition.
I am told he is already looking for another seat.
Thank you, Richard.
We should not forget that Reeves was an economist AND lobbyist at HBOS after her stint at the Bank of England, a job she never tells us about.
Weirdly……
Thank you, Richard. She ought to be reminded, especially as regulations are rolled back.
Richard, you say that
‘Aristotle noted a very long time ago that money cannot be made from money. His reasoning was clear. Value is created from the production of goods and services that meet needs. Bankers cannot do that. No one can eat money.’
But this is mistaken
Under capitalism, money is the only thing that can be made from money. Value is not ‘produced’ – only goods/services are produced. Nor are they produced to meet ‘needs’ – but effective demand. Goods/services only have value if they acquire one in the process of exchange – whereby those with effective demand confer a monetary value upon them. Goods/services that do not sell are judged socially worthless under capitalism.
Nor is there a difference between ‘financial capital’ and ‘productive capital’. As long as capital employs activities/entities that produce goods/services, which sell at a profit – it counts as ‘productive’
This is simply the way capital functions and why it also malfunctions
There is no ‘real’ (productive) economy that produces the value upon which the (unproductive) financial sector is parasitic. Value is not a product of productive activities/entities but the (monetary) means by which they are judged productive under capitalism.
Richard, you mistake your (alternative) judgments of productiveness for those enacted by capitalism on the basis of profit. As it happens, profit is a poor judge of productiveness – not least, in terms of the goods/services required to reproduce capitalism; let alone the wider-society in which it is embedded. That is why the financial sector is so destabilizing and its judgments of productiveness require curbing by the state.
But let’s not pretend there is something abnormal about financial capital compared to any other kind. All capital is ‘abnormal’ insofar as it imposes its profit-based judgments of social worth on us and capitalism would quickly collapse if the state did not massively intervene to protect us from its irrational and inhumane ways of judging social worth: not least, our worth as human beings.
I am sorry, but I really do not buy that analysis and I know very few academics I respect who would.
yes, I’m aware of that – so thanks for publishing my post.
But I think I’m on to something that will radically change how we think about value in monetary terms and money in normative terms. Which capitalism currently obscures by judging the social productiveness of activities/entities, the social usefulness of goods/services and the social effectiveness of needs in a self-regulating fashion; via the medium of money
I very much doubt it
Sorry
You are making category errors – the distinctions are real
I wish you would stop making accountancy so interesting. It penetrates to the most primitive exchanges of goods/services. There are fascinating examples of sealed tax returns in the ancient middle-east, with little animals and symbols in an unbroken clay container, but these are quite sophisticated. However, I`m asking, is the whole concept of value, an artifact to be traded? And is economics merely a description of a casino? Money, I`d suppose, is a handy ready-reckoner of your personal or corporate power/influence, of no value in itself. Also, may I ask if the shell currencies of the Pacific and Americas are examples of MMT, as they are of nil value, but serve as currency, presumably with the permission of their societies?
Thank youu for you patience, Paul Mc.
I think you need to read an MMT primer
I have not got time to write one for you
Sorry
David Byrne suggests that:
The future of Local Authority Pension Funds is unclear.
Current discussion suggests that the proposed Mega Funds could assist in providing capital for economic growth. But who came up with the idea?
I suggest that the plundering US banking fraternity and the vulture-like private equity industry are massaging Rachel’s ego and whispering sweet nothings in both of her ears.
Let us closely monitor developments and look out for JP Morgan, Citi Bank, Goldman Sachs, and Carlyle Capital, Blackrock, Blackstone, Bain Capital and other predatory players. They will surely be attracted to the UK Pensions Feeding Grounds.
The red flags need to be hoisted.
I recall, 50 years ago, ( how did I ever get so old that I can say that?) working for a large County Council and,as a NALGO member, attending a very large meeting where it was proposed that the Pension Funds should be partially used to invest in local industries,to generate funds and,also to support the local economy (and,hence , the level of rate income). The idea was defeated by a relatively large majority. The bulk of the attendees had in effect, no interest in supporting the local economy. They only wanted the funds invested in the apparently, high return industries wherever in the world. The local ratepayers for whom we worked, could go hang. This disconnect between the real ,struggling, economy, and the imagined magical ability of ” expert investors” still haunts our minds. So much so, that it seems that it determines the economic strategy of successive national governments ie forget productivity of real things. The financial investors will create our wealth !!!
That’s a depressing tale