Shrink Britannia

The week of the pre- Budget report is as good a time as any to review the state of the UK’s morale. Judging from comment on two big news topics, bankers’ bonuses and the Iraq inquiry, it could be better. Despite globalisation and climate change, history still influences actions as much as ever. The City is not exactly the most popular set of institutions just now. But when the second diminutive Frenchman in two centuries casts aspersions on a prime source of British wealth, there’s a rush to defend it. Even so, the City may be one of two legacies of the past too big for the modern nation to cope with, the other being the trailing glories of Empire, with Britain, according to one historian of Empire, acting as “Boy Wonder to America’s Batman.” But how to downsize without throwing the baby out with the bathwater? From Will Hutton. John Redwood’s saying: “

Britain is now a large bank with a medium-sized government attached to it,” is sadly apposite. The national debate should be how to shrink it. Worse, as banks necessarily reduce their size and the riskiness of their lending, they are in no position to finance economic recovery.”

And from Bagehot in the Economist

The empire is the Indian elephant in the living room, the tiger under the dinner table. Britain is still living in its own shadow.

  • aquifer

    The Swedes just seemed to stop their imperial thing and not miss it.

  • Erm: something adrift with one of those hotlinks. The Will Hutton piece is available on Comment is free. As it stands, the link seems to direct to a New York Times repost from Reuters.

    That niggle apart, a thought struck me about the Hutton thesis: if the UK banking sector is so grossly out of scale for a small first-world nation, what about Switzerland? Scroll down the Hutton thing, and we find a comparison of sovereign risk versus Bank assets as a proportion of GDP. Hutton says the chart is taken from a BoE source. What I do not get is the value of the comments appended: for example, this particular one on “Banking sector and sovereign risk” seems to show that the UK has proportionately half the exposure as Swizerland, but the cost of insuring against a national collapse is about half as much again. Then Hutton [?] comments:

    This graph is important because of the line of fit, showing that the greater the size of a country’s banking assets the higher the risk premium on its debt. This is market recognition of the “doom loop” effect. The greater bank assets , the more governments are at risk for potential damaging or even overwhelming bank bail outs – which the market recognises by asking for an interest rate premium to hold that country’s debt.

    Yet, the UK is well below that “line of fit”: Greece and the RoI are predictably way, way above it, with Iceland in some stratosphere off the graph.

    Perhaps some kindly soul can help this aged loon understand how all that fits with the swelling act of the imperial theme. Is it merely a re-buffing of Dean Acheson’s classic comment at West Point, 5 Dec 1962? Or are we still looking for a way of breaking up the big banks, so that no one is “too big to fail”?

  • IJP

    Very much enjoyed the Bagehot article, have never seen the issue of the modern UK so coherently expressed.

  • Brian Walker

    Malcolm. The fit is not in the detail but in political attitudes. The banks are too big for the UK economy to back up. “Punching above our weight” is also more than we can bear. Interesting to me, as it might suggest that managing decline which Thatcher thought she’d seen off, may be in for a comeback.

  • Drumlins Rock

    Quit your moaning you old codgers.

    The British Empire isn’t dead, its evolved into osmetihng completely different but its influence still streches round the world.
    Lets start with the obivious ones Canada, Australia and New Zealand, they are still culturally closer in virtually every way than any or out mainland european partners, lets got to singapore, a tiny nation but still with massive influence at the centre of SE Asia, even though the Anglo-Celts are a tiny part of the society there the influence is still strong and the basis of the economy, the same for hong kong, etc.
    In South Africa and much of the continent the legal and economic structure are based of the UKs, and finally we have India, overshadowed by its neighbour China, but with a population thats catching up and an economy that is vast and complex but steadily growing.
    IM NOT SAYING GO BACK TO THE GOOD OLD DAYS!
    What i’m saying is we should be working closer with these countries as equals because the ties are still strong and strenghtened by many family ties from emigration both ways, through that we could be an important cog in a economic system that rivals china and the USA, not the hub but a part, is that possible?

  • Dave

    What Redwood was objecting to was state ownership of banks – something that Hutton promoted. Hutton is too dim to grasp that the public’s silly fears of public ownership” were well founded – as Redwood fully understood:

    “Understand that the UK Parliament now has to supervise a large bank with a medium sized government attached. If they nationalise LLoyds as well as RBS the banks balance sheets will be more than twice the national income and more than five times the annual tax revenue. That’s taking a crazy risk.”

    Dimness aside, his main role as a europhile is to promote UK integration into the EU while insidiously presenting this abdication of the UK’s national interest as being a promotion of it, so most of the tripe that he proffers is simply to finesse that transfer of UK sovereignty to the EU and he cares not one iota about how destructive the consequences are to the UK. Dan Hannan has his number:

    “The Hutton/Rudd arguments for joining the euro are terrifyingly similar to the arguments for joining the ERM. Then, as now, Europhiles claimed that membership would boost business. In fact, more than 100,000 firms went bankrupt during our 23 months inside the system. Then, as now, they promised that membership would create jobs. In fact, unemployment doubled to just under three million. Then, as now, they claimed that it would bring lower interest rates. But interest rates were in double figures for most of our time in the ERM – despite inflation at barely three per cent – and 1.75 million homes were overtaken by negative equity. Then, as now, they assured us that participation would bring stability. In the event, our trade-weighted exchange rate was less stable during membership than before or since.

    Is there any circumstance in which these zealots would not advocate euro membership? If the pound bounces back in 2010 on the basis of a recovery, will they still be whistling the same old tune? How many times do they need to be proved wrong before we stop listening?”

    The UK’s relationship with other states is a function of the UK’s foreign office that will be transferred to the EU’s new foreign affairs section in due course, so there is a lot of tidying-up to be done here (and with institutions such as the Commonwealth) since the UK will no longer determine its relationship with other states as it becomes an internal region of another state. You cannot have an empire within an empire, so the old UK will have to be streamlined to fit its new role as an EU colony region.

    In reality, City hedge funds had nothing to do with the State’s exposure to systemic risk so transferring regulatory sovereignty over them to the EU is just surrender to an EU power grab – nor will giving the EU greater control over banking regulation reduce systemic risk exposure since the EU supports state guarantees for banks. It supports such guarantees because it is the larger EU states who loaned the money to fund the expansionist monetary policies of the ECB, so those larger states will use their control of the EU to ensure that the smaller states fully guarantee all financial debts to the larger states. This makes systemic risk an embedded evil that will eventually kill of entrepreneurial activity in the smaller states, making them dependent on outward mobility of labour for employment.

  • Brian Walker @ 11:30 PM:

    The fit is not in the detail but in political attitudes.

    So, as I suspected, it’s all attitudinal, subjective and synthetic: not the usual stance of cool objectivity and analysis adopted by the dismal scientists.

    Which brings me neatly to Dave @ 12:56 AM. I fully appreciate that Hannan is the master card in any game of Tory Top Trumps. Now, can someone enlighten the rest of us on Hannan’s all-purpose qualification that makes him the universal High Lama? In his various biogs, he certainly seems reticent about his — doubtless gob-smacking — academic distinctions. But then, in the outer fringes of Tory unreality, any question can be side-stepped by a europhobic gloss. As with Dave @ 12:56 AM.

    Alternatively one can take a more rational approach. You don’t have to be a Marxian (but it helps): Douglas Adams put it all succinctly:

    This planet has – or rather had – a problem, which was this: most of the people living on it were unhappy for pretty much of the time. Many solutions were suggested for this problem, but most of these were largely concerned with the movements of small green pieces of paper, which is odd because on the whole it wasn’t the small green pieces of paper that were unhappy.

    As long as we fail to evolve out of capitalism, we’re lumbered with passing around those small green pieces of paper, albeit increasingly in some figurative and electronic virtuality.

    Therefore we have bankers the way a hedgehog has fleas: there’s nothing wrong with either species, provided they stay in their proper place. Inevitably they don’t, so we buy flea-powder or have a banking crisis. It so happens that we have experienced the worst infestation in eighty years.

    Now, I quite like hedgehogs and I wouldn’t want them exterminated merely to minimize the risk of encountering the odd flea. Similarly, I quite enjoy my (not unprivileged) lifestyle, particularly when I contrast it with that of my agricultural labourer and pit-man forebears. Therefore I accept that a quantum of bankers is tolerable. I don’t see the cull of bankers as necessary to the continuance of western society, any more than I come out in a rash encountering foreigners, especially those from the European continent.

    In short, the original thesis was unconvincing; and the previous comments haven’t made it any more so.

  • Greenflag

    Shrink Brittania ??

    Methinks they have not only been selling the family silver but also the family’s krugerrands over the past half century . BTW there’s an excellent article on the ‘Dollars’ decline in the weekend edition of the WSJ and a good read in Newsweek by Niall Ferguson on the inevitable end of American ’empire’.

    The UK on this list below incase anybody misses it is 17th . In 1900 the UK would I believe have been 1st on this list . With Gold now at approx 1200 dollars an ounce who has gained the least in holdings dollar values over the past year or two the UK or China or Venezuela ??

    Drumlin Rock ,

    The Aussies have a Prime Minister who speaks excellent Mandarin -catch yourself on . The UK needs to be in the Euro Zone a decade ago !

    Gold Holdings by country in tonnes .

    Rank Country/Org
    1 USA 8,133.5
    2 Germany3,408.3
    3 IMF 3,005.3 –
    4 Italy 2,451.8
    5 France 2,445.1
    6 China 1,054.0
    7 Switzerland 1,040.1
    8 Japan 765.2
    9 Netherlands 612.5
    10 Russia 568.4
    11 India 557.7
    12 European Central Bank 501.4
    13 Taiwan 423.6
    14 Spain 416.8
    15 Portugal 382.5
    16 Venezuela 363.9
    17 United Kingdom 310.3
    18 Lebanon 286.8

  • Greenflag

    BW ,

    ‘Britain is still living in its own shadow.’

    Excellent article by Bagehot thanks for the link. As the economic winter sets in shadows are disappearing and will provide ever less comfort in the future.