The Values of Money: Starting Out
by The Revd Andrew Studdert-Kennedy
Posted: 24 Jun 2011
With the assistance of contacts, I sent my introductory letter to a good mixture of people. Recipients included investment bankers (both past and present), a couple of City solicitors, two Chief Executives of major companies, two MPs, two Life Peers, a Hedge Fund Manager, the head of an independent think tank, City-based clergy and financial journalists.
Almost everyone responded generously and said that they would be happy to see me. Whilst they thought the project to be both interesting and worthwhile, a number of them were not sure how they could help. I took this to be an indication of the complexity of the subject and also a warning that there would be no single response or 'solution' waiting to be unearthed.
Before the meetings took place, I was anxious about having sufficient background understanding to the financial crisis to ensure that I would make the most of the conversations I would be having.
I discovered that there were a number of accessible accounts of the immediate cause of the banking crash, most notably Vince Cable's book, The Storm, but it was hard to ascertain the true financial consequences of the ensuing bank bail outs. The sums of money involved seemed so huge, but how did these fit into the overall levels of Public Spending and was it true (as some suggested) that rescuing the banks led to significant cuts of Government spending?
I soon found out just how difficult it is for members of the public to access basic information about public spending which we can understand. In a way there is too much information on Government websites (Treasury, Office for National Statistics, Office for Budget Responsibility) and this makes it hard to know the questions we should ask.
My local MP, Claire Perry, was very helpful and her office pointed me in the right direction. Here is some of what I found; that the 'Cuts' in public spending are real alright but they take place at a time when overall Government spending is increasing. The bank bailout is simultaneously on a 'breathtaking' scale to quote Mervyn King but also contributes only a very small part of general Government borrowing.
Here is how this works:
Total Managed Expenditure (£ billion)
The 2010 Spending Review, from where these figures come, adds that when the Government commitments to protect spending on NHS and Overseas Aid are taken into account, the other departments 'will see average real budget cuts of around 19% over the spending review period'
The deficit between receipts and expenditure is projected to be £121bn in 2011/12 and the cost of furnishing the overall debt is £50bn, of the £700bn total.
Establishing the cost of the bank bail out is complex, not least because Government support for banks took a variety of forms, including share purchases, loans and guarantees which have different effects on the public finances. Purchases of shares, for example, are treated as financial transactions - one asset (cash) being swapped for another (shares) - so there is little effect on borrowing. Furthermore, the Treasury has received fees and interest from the loans and in due course may receive dividends from the banks' shares themselves.
One summary (Office of National Statistics) suggests that the financial crisis affected the budget deficit more through its effect on the economy than through direct measures to support the banks, since the proportion of overall borrowing that is directly attributed to the financial crisis was not more than 7% of the total amount the Government would have been borrowing anyway. At the same time another account (new economics foundation) claims that public sector support for the banking sector amounts to £1.2 trillion, equivalent to 85% of Gross Domestic Product.
We know what is said about lies and statistics, but the complexity of these figures leave most of us at a disadvantage - for there is a (unavoidable?) lack of transparency in these matters. And transparency matters, not least because opaque financial instruments seem to have encouraged banks to believe that just because a debt was less visible it thereby became less real.
But whilst we might feel at a disadvantage, perhaps we should remember that for everyone involved, no matter how much of an expert, statistical imprecision rather than accuracy seems to be an inherent part of a complex economy's life. If this is so for economic data, how much more so will we have to live with uncertainties regarding policy and behaviour.
Perhaps this observation would be a good starting point for the first lot of meetings...This piece is part of a series by Revd Andrew Studdert-Kennedy exploring the role of the financial sector and how we might come to understand it better.
The opinions expressed in this article are those of the author, and do not necessarily represent the views of St Paul's Institute or St Paul's Cathedral.