Scottish Independence: What should we really be afraid of? Economy II

In the previous post we looked at what happened during the financial crash and how the UK has faired since the crash.  Unfortunately, it seems that despite recovering to its pre-2008 peak, the economy is in a similarly risky position to the one it was in just before the crash as has grown in the wrong way, being driven by the housing market and record personal debt.  So I plan to look at the UKs response by asking how did we get back in this position?

As mentioned before, the blame for the 2007 financial crash was placed on global unscrupulous banking practises and a lack of regulation and scrutiny at almost every level.  So how has the UK tackled these problems in the financial sector? Well, after bailing out the banks to the tune of £1.2 trillion, which the government expects to see most of repaid, new regulatory bodies were set up, UK banks were to be hit with a levy on their annual balance sheets and in order to encourage top bankers not to be greedy in the short term the EU imposed restrictions on bankers’ bonuses.

Despite this,  worldwide this year bankers bonuses increased by 29%, but bankers in London saw increases of nearly 50%.  This doesn’t seem to provide much impetus for change.  That said, perhaps they genuinely deserved such disproportionate bonuses if the banks have changed and are doing better than ever.  After all, the UK government argues that the high pay and bonuses serve to retain the best bankers in the world.  Sadly, while executives’ pay has continued to grow, the performance of many of the UK banks is actually considered poor on a wide range of metrics.  This sounds more like extra pay for the worst bankers.

David Cameron has responded to this rather unsavoury situation by saying he will fight the EU cap on bonuses and the UK Treasury has launched a legal challenge to exempt the largest financial sector in Europe from these caps. They argue that banks would try to get around this by increasing the basic pay for top bankers so that their overall yearly earnings are the same or higher.  While such a deliberate attempt to circumvent the regulation should be deemed unethical and counterproductive, the prediction has been proven correct.  Indeed, this year bankers have been receiving increases in yearly salaries and expenses, along with large bonuses, before the new caps are introduced.

Despite the PM’s position to oppose the regulations on these grounds, it seems that it was expected that the UK would ensure this did not happen. One of the architects of the bonus cap has actually called for the EU to take the UK government to court for allowing the banks to do this as it is against the spirit of the legislation.  So it seems that the UK was expected to take action to prevent their institutions from deliberately abusing the system.  But they didn’t.

An argument could be made that the UK had no choice but to bail out the banks and that the government has no way to prevent them from continuing to award excessive bonuses for poor business performance.  While this excuse that the government has no control over the financial sector should stick in the back of people’s throats, it’s simply not true. As I mentioned in the previous article, Iceland tried a different route and it has been rewarded with much diminished personal debt, a more democratic political system and unemployment has fallen to less than 4%, though this is short of their long term goal of 2%.

But growth is still growth and the economy is, on paper at least, doing well.  So despite the frittering away of the oil, the failure to rein in banks and the large personal debt of its subjects, the UK is still one of the wealthiest nations on earth. In the next article I will look at how this wealth is distributed across the UK to ascertain if being a wealthy nation is in itself enough to make sure that all of its people are well taken care of.

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