The finance curse

Nicholas Shaxson writes about the UK's 'finance curse':

A growing body of economic research confirms that once a financial sector grows above an optimal size and beyond its useful roles, it begins to harm the country that hosts it. The most obvious source of damage comes in the form of financial crises – including the one we are still recovering from a decade after the fact. But the problem is in fact older, and bigger. Long ago, our oversized financial sector began turning away from supporting the creation of wealth, and towards extracting it from other parts of the economy. To achieve this, it shapes laws, rules, think tanks and even our culture so that they support it. The outcomes include lower economic growth, steeper inequality, distorted markets, spreading crime, deeper corruption, the hollowing-out of alternative economic sectors and more. The finance curse: how the outsized power of the City of London makes Britain poorer, Nicholas Shaxson, ''The Guardian',5 October

It's not just the finance sector that works to influence policy in ways that drain resources away from ordinary people and small businesses: governments the world over are in thrall to big business. They act as though the interests of big corporations coincide with those of the citizens they are paid to represent. Our economies and societies are so complex that they can believe this, or act as though they believe it, with impunity. The Social Policy Bond idea is an attempt to re-orientate policymakers so that they again think in terms of the well-being of citizens, rather than the financial health of private- or public-sector bodies whose operations might, or might not, generate net welfare gains.

Almost all of us want to see a healthy business sector and an effective welfare system for the most disadvantaged. Government, and often, only government, can and should do the basics: infrastructure, education, health up to certain levels. But when things become complicated we should be targetting ends, rather than the supposed means of achieving them. The finance sector, which should be the financial services sector, has become grotesquely enlarged because of this confusion. So:

Lending to businesses outside the financial world – which many people might think the principal activity of a bank – represents about 3pc of the activity of British banks. The City services only itself, John Kay, 'The Telegraph' (London), 9 September 2015

Fine if the bankers want to do other things, but they shouldn't siphon funds from the rest of the economy, nor manipulate the regulatory environment, to do them. A Social Policy Bond regime wouldn't confuse ends with means, and wouldn't subsidise big business at the expense of ordinary citizens and small businesses. As Mr Kay puts it: 'We do not need an army of the overpaid and overbonused buying and selling from each other.' We don't need it and we certainly shouldn't tax people to pay for it.