50 economists and experts have pointed out a number of key flaws in chancellor Rachel Reeves move for further deregulation and grow the financial sector. Recently, Reeves said to City bankers that regulation following the financial crash has “gone too far”. She called the financial sector the “crown jewel” of the economy.
Deregulation push will lead to ‘inflating assets’
In a letter that Positive Money organised, academics and experts warned that:
Lending to the real economy has consistently made up around just 10% of bank lending in recent decades. The vast majority – around 80% – of bank lending goes towards inflating the price of pre-existing property and other assets.
So support for actual business growth from the financial sector is comparatively very low. Rather, it’s in part a set up to milk profits from assets people already own. This includes essentials like housing, showing further that the bubble is a scam to leech money from peoples’ need for shelter.
Another note in the letter chimes with this. It states that growth in the finance industry actually corresponds to harm in the real economy. The experts point to studies from the IMF and BIS that show that financial sector growth has a negative impact when private sector credit is above 100% of GDP. From 2000 to 2023, it has averaged 160% of GDP, which shows how private debt ridden the economy is.
The experts also said that too much focus on the financial sector poaches highly skilled and educated workers away from the real economy, such as from research and development. They argue that financial sector growth encourages excessive risk taking, leading to perpetual crisises.
Reeves encouraged more financial risk taking in a remit to the Financial Conduct Authority in November. The Labour government has already relaxed ring fencing rules that separate bankers’ retail and investment banking operation to protect money from peoples’ deposits. That includes an increase in the threshold where banks fall under the regime from £25bn in primary deposits to £35bn.
“Trap of complacency”
Jesse Griffiths, the chief executive of UK charity Finance Innovation Lab and a signatory to the letter against further deregulation, has said:
Promoting the growth of the financial sector as an end in itself would be a mistake. There is ample evidence to show that this leads to a focus on the needs of international capital rather than domestic businesses. We must heed the lessons of the global financial crisis, which showed how dangerous a focus on financial deregulation can be for the economy
In an October speech, the governor of the bank of England, Andrew Bailey, warned policymakers must not fall into a “trap of complacency” and ignore the “timeless nature of the threat” of a financial crisis.
The letter from the 50 experts further notes the financial sector poorly serves diversity in the economy. Small and medium size enterprises (SMEs) received between just 2% and 5% of lending from banks, despite making up 60% of private sector jobs. And the financing shortfall for SMEs has been estimated at £20bn per year.
Signatories to the letter included the Nobel laureate Keynesian economist and academic Joseph Stiglitz and the economist and author John Kay.
Featured image via Sky News – YouTube
