Sunday, January 23, 2011

Eggs in one basket

It's been fascinating listening to various economic experts and politicians discussing the "too big to fail" banking industry and deciding that the only way this can be addressed is by breaking them up in some way.

There is nothing fascinating in what they say - just the way they reach their conclusions as if there is no other way.

But there is.

The first thing you need to ask yourself is why is the banking industry "too big to fail". There are two main reasons for this. The first is that the "banking industry" has become - by design - a huge part of our economic makeup. Since the nineteen eighties we have gone through a progressive and deliberate change from a manufacturing based economy to a service based economy.

Of course, we've always had a service contingent to our economy because a manufacturing based economy requires services, but the service sector was always secondary to manufacturing. It's also worth pointing out that the financial services sector of the service based economy is not the largest part of that sector either - that honour belongs to retail - but it was by far the largest "exporter".

The second problem we have is that the "banking industry" is concentrated in the hands of a few large corporations who have been allowed to expand and crush competition. In other words, a substantial proportion of our economy is concentrated in the hands of a very few people. It's not really an industry at all - it is little short of an authorised cartel and only a few steps away from a total monopoly. I won't go into the detail of this right now, but all of this has happened not because of a lack of regulation, but because of a proliferation of regulation - it just happened to be the wrong sort of regulation.

So, we have too big a part of our economy in the hands of too few people and that is why the banking sector is deemed "too big to fail" - we've not just put all our eggs into one basket we have chosen to chuck away the all the eggs that we didn't think we'd need until we only had a few left.

The answer to the problem can not be solved by simply breaking up the banking industry. You will have more eggs, but they will still be in the same basket. The problem will still exist - the hope is that some of those eggs might survive any future crash, but that is far from guaranteed.

The real solution to the problem has to be more fundamental than that. It requires redressing the balance of our economy so that no single sector dominates so utterly. The best way to do that is to make manufacturing the basis of our economy once more. Only by rebuilding our manufacturing and production sectors of the economy will we solve our problems. It will solve the problems of unemployment, the balance of trade, the structural deficit and the banks that are too big to fail.

It won't stop inflation or boom and bust, but those are constituent parts of a capital based economy anyway - and as long as they are managed they aren't always a bad thing.

Yet none of this occurs to the people who govern the country. They'll continue to keep putting all our eggs in the same basket and we'll still be the ones cleaning up the mess when they drop the lot.

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