The Spanish-American philosopher George Santayana was known for his snappy quotes. One of the most memorable is that “those who cannot remember the past are condemned to repeat it.” Santayana was referring to our extraordinary human ability to keep making the same mistakes over and over again.
When the short lived career of the former British Chancellor of the Exchequer Kwasi Kwarteng fell apart after his disastrous budget on 23 September, it was surprising that someone so intelligent, engaging and open to ideas (according to those who know him) made such a big error of judgment.
As The National’s Damien McElroy pointed out in these pages at the time, Mr Kwarteng’s doctoral thesis when he studied at Cambridge University was on 17th century English economic history. The subject was the 1695 re-coinage crisis that crashed the markets just one year after the Bank of England was established. But it was something even more up to date and very current in political economic circles that surprised me.
Why did Mr Kwarteng not reflect on Bill Clinton’s great U-turn following his election as president of the United States in November 1992? Candidate Clinton had one big economic promise, a middle class tax cut. But during the transition period, the two months when Mr Clinton prepared for his inauguration in January 1993, he played host in his home state of Arkansas to the chairman of the US Federal Reserve Alan Greenspan.
Mr Greenspan persuaded Mr Clinton that a tax cut would be disastrous. It would unnerve the bond market. Interest rates would go up, making middle class mortgages more expensive. Bearing down on the deficit would instead stabilise the US economy. Mr Clinton was angry, but rational. He reversed his core economic policy, paving the way for America’s economic boom years of the 1990s.
One of Mr Clinton’s key advisers, James Carville, famously said: “I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.”
This was one of the great U-turns in politics and economics yet for some reason Mr Kwarteng’s tax cuts a generation later were more or less what the fiscally conservative Alan Greenspan warned Mr Clinton not to do. And now Mr Kwarteng’s successor as the British Chancellor of the Exchequer, Jeremy Hunt, appears also to be struggling with the lessons of recent history.
Mr Hunt wants to tear up regulations affecting the UK’s financial markets. Many of these regulations were brought in after the 2007-2008 financial crisis to prevent economic history repeating itself with another financial crisis.
Britain’s financial services sector is hugely important, employing in various roles a million people, 3.3 per cent of all UK jobs, with another million in support services. Financial services workers are also early adopters of new technologies, and “the output per hour in the sector in 2020 was £83.30 compared with £39 for the whole (UK) economy” according to analysis by TheCityUK.
Back in 1986, British prime minister Margaret Thatcher initiated a hugely significant freeing up of London’s financial markets known as the Big Bang. Chancellor Hunt appears to want to repeat that piece of successful economic and political history. But critics – and there are many – think the scale of deregulation being proposed will risk repeating the mistakes of the past.
Sir John Vickers, the economist who led the inquiry into the banking industry after the 2007-2008 crisis, suggested Mr Hunt is on an “extremely dangerous and wrong path” and risks destroying “the bedrock of how we regulate banks in the UK.”
Mr Vickers believes loosening the rules will not be a Big Bang but a big mistake. Prime Minister Rishi Sunak’s view however is that the British banking sector will be reinvigorated. The Financial Secretary to the Treasury Andrew Griffith robustly defended the possible rule changes in media appearances. He, however, refused to engage on one key issue that has clearly diminished the UK financial sector: Brexit.
According to the accountancy firm EY, at least 7000 British City finance jobs moved to the European Union after Brexit. Dublin is one favoured location. Back in 2018 Business Insider reported that “US bank giants Goldman Sachs, JP Morgan, Morgan Stanley, and Citigroup have moved $250 billion euros of balance sheet assets to Frankfurt because of Brexit.” Goldman Sachs chairman Lloyd Blankfein tweeted how much he enjoyed Frankfurt because “I’ll be spending a lot more time there.”
Mr Griffith and Mr Hunt may be right about loosening the rules, but even so, failure to address the damage of Brexit suggests that the biggest lesson of the past still has not been learnt. It may even be repeated.
To make the UK more prosperous, one top tip is to avoid economic self-harm. Brexit has undoubtedly diminished Britain, made us poorer as a nation and hit financial services. To add to George Santayana’s observation, if we don't face up to the mistakes of the past, we cannot correct them.