In a troubling development, UK Chancellor Rachel Reeves has expressed enthusiasm for deregulating the City of London, calling it the “crown jewel” of the British economy. Her suggestion that post-financial crisis rules have “gone too far” and should be relaxed to promote growth has economists sounding the alarm. They fear that rolling back hard-won stability measures could pave the way for another catastrophic meltdown.
Forgetting the Painful Lessons of 2008
The stringent regulations put in place after the 2008 crash aimed to rein in the financial sector’s worst excesses and ensure that taxpayers would never again have to bail out reckless institutions deemed “too big to fail.” Eroding these protections now, in the name of unleashing the City’s animal spirits, suggests a dangerous amnesia about the root causes of that crisis.
History offers little evidence that an unchecked financial industry drives broad-based economic prosperity.
The Myth of Finance-Led Growth
Chancellor Reeves argues that liberating the City will increase and spread economic wealth. But the sector’s meteoric rise in recent decades has come largely at the expense of the “real economy,” siphoning investment and talent away from the industries that employ the vast majority of British workers in favor of financial engineering.
- The financial sector accounts for 9% of UK GDP
- Only about 1 million Britons work in financial services
- 25 million working-age adults are classed as manual workers
- 10 million work in low-paid white collar jobs
Promoting labor-intensive industries would do far more to boost productivity and living standards than further swelling the City’s coffers. Indeed, research consistently finds that “too much finance” harms growth once the sector expands beyond an optimal size.
Stoking Instability and Inequality
Britain’s lopsided “financialization” has also amplified economic fragility. When short-term profit seeking trumps prudence, speculative bubbles and crashes become all but inevitable. Astronomical asset prices, especially in housing, have put ownership out of reach for all but the wealthiest while lining the pockets of wealthy investors.
Only the richest 10% can now afford an average-priced English home.
If the Chancellor undermines regulators’ authority to curb financial excess, experts like the Financial Conduct Authority chief warn, it will become easier for bad actors to run amok and jeopardize the stability of the entire system. The costs will be borne not by the City’s high-flyers, but by ordinary families and taxpayers.
Heeding the Warnings of Cassandra
As Bank of England governor Andrew Bailey has cautioned, allowing a resurgence of complacency and hubris so soon after 2008 recalls the ill-fated Cassandra of Greek myth, gifted with prophetic foresight but cursed to be ignored until it was too late. If Britain’s leaders refuse to learn from the mistakes of the recent past, they risk leading the nation into a dangerous future.
Robust, well-regulated capital markets have a vital role to play in channeling investment productively and efficiently. But a City of London unshackled from the rules designed to keep its worst impulses in check threatens far more harm than help. The UK’s economic potential rests not with financial alchemists, but with the hardworking majority. For their sake, the Chancellor must reconsider this reckless path.
