Cities of money - Page 3
From Griffith REVIEW Edition 22: MoneySexPower
© Copyright Griffith University & the author.
Written by Stuart Glover
LONDON 2008: 'THE GHERKIN' RISES FROM the city of London like a tycoon's bulging cigar. The 180 metre, forty-storey, purple-green tower – as much a giant Pysanky egg or Faberge phallus as it is a building – announces the rebirth of ‘The City' or the ‘Square Mile' as the centre of international finance. Designed by Norman Foster (Lord Foster to you), it replaces the much-mourned Baltic Exchange building bombed by the IRA in 1992. In some sense, it also replaces the BT Tower as the symbol of the city. But while in 1965 the then Post Office Tower captured the technocratic fantasies of swinging London – you can see it in Dr Who, Bedazzled and later The Goodies' ‘Kitten Kong' – The Gherkin suggests our immaculate green future. It is naturally heated and cooled and uses light wells to illuminate itself. Coming after half a century of efforts to reproduce every financial district worldwide from the one template, The Gherkin is compelling. We do not have the right words for it; instead, we resort to metaphor: a busting boiler, a tethered zeppelin, a glass sea sponge, the pinecone, the Pyrex dildo, the crystal phallus and so on. Nevertheless, its strangeness allows us suddenly to see London and its financial world anew.
Somehow or other, in the twentieth century Britain was gutted by two world wars and lost an empire, but has emerged again in the twenty-first century as the centre of global finance. New York still has the larger stock exchange, but London leads in banking (with more than 550 banks) in headquarters from the Top 500 companies (twenty-eight, compared with twenty-four in New York and twenty in Paris) and in overall volume on the global financial exchanges (31 per cent compared with 19 per cent in New York). Partly, this is historical. In the late nineteenth century, London was the very powerful hub of the global economy. It was the biggest port, it serviced the largest domestic economy, and it had the largest empire. The world, including Australia, came to London to borrow money, secure debt and trade goods. In the succeeding 100 years, the British domestic economy has shrunk in importance and the spokes extending globally from London have become more important – but still require the hub that London provides all the same. In this role, London has some other slight advantages over its competitors. A recent survey of finance professionals in New York, London, Frankfurt and Paris by the Y/Zen consultancy group had London leading on a cumulative index of fifteen measures, and particularly in relation to the availability of skilled personnel, regulatory environment, access to international markets, access to customers, fair and just business environment, and culture and language. The only major measures where London trailed New York were corporate and personal tax regimes and access to business infrastructure.
By 2000, the wholesale financial services sector provided 350,000 jobs in London, up from 175,000 in 1970. Economist Paul Woolley argues that finance has become the dominant industry sector in the United Kingdom, accounting for between 30 and 40 per cent of the aggregate corporate profits. In a real sense, London's fortunes are hostage to the fortunes of high finance. Historian Niall Ferguson sees these outcomes as evolutionary, following Jean Bapiste de Lamarck's idea that organisms (in this case, financial institutions) morph to the needs of their environment – taking up whatever advantage circumstances offer. It may seem as though London could only have risen again by dint of government planning or through some kind of global financial consensus. In reality, the rise of London is as accidental as was its decline after World War I. Since 1980, it has benefited from a virtuous circle where finance and commerce are drawn there because finance and commerce are already located there.
When, in 1992, Francis Fukuyama was busy announcing the end of history – the ideological arm wrestle of the previous seventy years having been settled in favour of free-market liberal democracy – many economists believed there could now be a similarly straightforward consensus about how to run a modern liberal economy. The formula that central bankers, big business and econocrats had settled on was as simple and comforting as Fukuyama's. What the new global economy required was free trade, new markets, deregulation and a light hand on the tiller of monetary policy, while fiscal policy was to be avoided at all costs. The role of finance in this was particularly important. As the UK Department of International Development recently concluded, ‘a large body of evidence now exists which shows that the financial sector can make an important contribution to economic growth and poverty reduction ... By increasing the savings rate and the availability of saving for investment, facilitating and encouraging inflows of foreign capital, and optimising the allocation of capital between competing uses, the financial sector development can boost long-run growth through its impact on capital accumulation and the rate of technological progress.'
This is the economics that I learnt at university, wherein the invisible hand best allocates resources – in this case, capital. With the decline in teaching economic history and political economy as companion disciplines to quantitative economics, this is the economics that business schools now propagate unthinkingly.
This unthinking acceptance of the economic and social utility of finance manifests itself both culturally and within the markets themselves. The new success of the city has spawned a British literary hero in the form of Geraint Anderson, author of the bestseller City Boy: Beer and Loathing in the Square Mile (Headline, 2008). New York gave us Tom Wolfe's Sherman McCoy (Bonfire of the Vanities, Picador, 1989), a man (almost) brought low by his financial vanity and Bret Easton Ellis's Patrick Bateman (American Psycho, Picador, 1991), whose murders seem to be connected to his job as a banker. As a former banker, Geraint Anderson provides a more convincing account of the day-to-day of the dealing room and of the coke snorted and the cash blown after hours. While not clearly fiction or non-fiction, Anderson transplants his protagonist, Steve Jones – something of an echo of the lad-lit hero (or maybe just the lad mag hero) of the 1990s – into the city. Part account, part fantasy, and with all social critique suspended for the sake of the jokes, it is despicably funny, but eventually just despicable.
More problematic is the financial markets' unthinking acceptance of their own functionality. Demand and supply set the prices for securities, commodities and money. This allows investors in economic enterprises – in London, Dubai or Shanghai – to access funds at the cheapest, most efficient price. What could be more beautiful? Yet the mantra ignores the regular failures of markets and their costs to their users. As the work of the Paul Woolley Centre for the Study of Capital Market Dysfunction at the London School of Economics underlines, security prices constantly and sometimes catastrophically fluctuate in little relation with the value of the underlying asset. The dot.com bubble is the best recent example, in which the stock prices bore little relationship to the profitability and balance sheet of the traded company. Such fluctuations in price are good for trade. People make money as stocks go up, and the brave (some say the unethical) can also make money by selling short as stocks go down. In some sense, then, trade is just noise; it does not affect or enhance the underlying value of the asset. Heaving trading means profits for brokers as they take their 1 or 2 per cent cut from each transaction. However, heavy trade does not grow the economy. A rising market can leverage the creation of new capital, but a falling one can shrink it – reputedly, world capital has shrunk by $500 billion in the current mortgage-led credit crunch.
Perhaps more problematic still is the way that the finance sector takes its cut out of the real economy. As Paul Woolley states: ‘None of us knows how much of our spending goes on financial services. We know how much our mortgage costs but we do not know how much revenue or profit revert to the bank from the mortgage payments. We are not likely to know the management and dealing fees that are embedded in our pension fund ... We do not know what banking costs are as a proportion of the input costs for all other goods and services we consume. Maybe we should and then we would realise the full extent to which the finance sector surreptitiously feeds off of the real economy.'
This is capitalism, but I am not sure Adam Smith would wholly approve. We need global finance, but its Darwinian (almost viral) opportunism – and the profound informational asymmetries between the financial sector and the mum and dad investors – mean there is nothing like the well-informed market Adam Smith imagines in The Wealth of Nations. The UK government, newly alert to the importance of the financial sector to London and the importance of London economy to the nation (see the London's Place in the UK Economy report), is only going to do what it can to further grow the City of Money. Yet good policy and good regulation might consider the costs of always giving the finance sector its head – of always letting bond traders, currency traders, bankers, ratings agencies, hedge fund managers, and refinanciers move money in search of short-run profits without consideration for transaction costs or for underlying economic growth.
SYDNEY 2008: THE NEW TOWERS OF THE Sydney financial district are the product of four forces: deregulation and its flows of global capital; the real estate boom early this decade; our forced saving through superannuation; and the privatisation of infrastructure. How the mining boom will yet affect the finance system is not clear. Nor is it clear what will be the next force – positive or negative – to shudder through the system. Back at Macquarie Bank, the chosen are trying to ride the wash of the US sub-prime disaster. Unlike the many dissatisfied denizens of the corporate world – the pinstriped prison as Lisa Pryor calls it in her book of that name (Pan Macmillan, 2008) – they seem to be on top of things. They seem to be doing well; whether they are always doing good is a more complicated question. ♦