Rachel Reeves wants to deregulate finance - again

Rachel Reeves' Mansion House speech announced another round of deregulation for the City. It won't boost growth, but it will probably make some Labour donors very rich.

Rachel Reeves thinks that the regulation imposed on the UK financial sector in the wake of the Great Financial Crisis has ‘gone too far’.

She described the UK finance sector as the ‘crown jewel’ of the UK economy and argued that its potential had been hemmed in by unnecessary regulation since 2008. Reeves pledged to reform financial regulation, arguing that regulators had been focusing too much on ‘risk’ and not enough on ‘growth’.

In my book Vulture Capitalism, I discuss the role deregulation played in the Boeing 737 Max disasters in which two Boeing planes nosedived out of the sky, killing nearly 350 people. While Boeing initially tried to blame the pilots for the crashes, it later transpired that there had been a flaw with the plane’s software – a flaw of which senior Boeing executives had been aware before the plane went to market.

Where was the regulator in all this? Like the banks before the financial crisis, the Federal Aviation Authority (FAA) had adopted a philosophy of ‘self regulation’ for the aviation industry. This shift meant that, at the time of the 737 Max disasters, Boeing was being regulated by a unit of the FAA that sat inside Boeing and whose workers were paid by Boeing.

In fact, not long before the crashes, Congress had passed another round of deregulation for the aviation sector. One Republican Congressman explained that deregulation was necessary because ‘we are seeing unnecessary regulatory burdens that do not serve to improve actual aircraft safety’, but which instead represent ‘process simply for the sake of process’. Another Congressman argued that no aerospace company would knowingly manufacture unsafe planes, as it would be punished by ‘the market’.

The issue with this argument is that the aerospace industry is remarkably concentrated, with just two main manufacturers – Boeing and Airbus. What’s more, each of these firms is allied to a particular government or multinational institution. The US state supports Boeing, while the EU supports Airbus.

In the run up to the 737 Max disasters, Boeing was the single largest recipient of corporate welfare in the US. And even after the wrongdoing of its executives had been brought to light, it managed to get a backdoor bailout during the COVID-19 pandemic. The astonishing support Boeing receives from the government is perhaps unsurprising given that the firm spends millions of dollars each year lobbying Congress.

A huge multinational corporation lobbied the state for financial favours and light-touch regulation, leading to a huge disaster, only for that company to be bailed out by the government once again. Does this ring any bells? It should, because that’s exactly the model big finance has been following for decades now.

Financial lobbying follows a very predictable course. Millions of dollars are spent arguing that any new regulation undermines growth and reduces the competitiveness of the sector relative to other economies. As the memory of the last crisis recedes from the minds of politicians, and the donations pile up, this argument becomes more and more convincing, and regulation is relaxed.

Financial markets start booming. For as long as the good times keep going, none of the financial institutions have any incentive to behave cautiously, as doing so means they’ll lose out relative to their competitors. They also know that if one of them goes down, they’ll all go down, so the government will have no choice other than to bail them out.

Eventually, a new crisis takes place. It emerges that that crisis was either caused or exacerbated by the extremely loose financial regulation introduced in the years preceding. But the main priority for the political class is ‘saving the economy’, which, of course, means bailing out the banks.

Vast sums of public money go to supporting financial executives. And politicians claim that punishing anyone involved in the crisis for their wrongdoing would undermine risk taking and therefore economic growth. Under the weight of public pressure, new regulation is introduced, only for the cycle to repeat itself all over again.

While it’s highly unlikely that we’ll see another financial crisis on the scale of 2008 at any point in the near future, there are plenty of risks in the global economy that pose a potential threat to financial stability. And the whole point of financial crises is that many of these risks are unpredictable.

But what is interesting about the world we inhabit today is that there is one massive, predictable threat on the horizon that has the potential to bring the global financial system to its knees: climate breakdown.

How might climate breakdown affect global finance? There’s the carbon bubble, which describes how polluting companies are overvalued by financial markets. This overvaluation means that, at some point, there will be a large ‘correction’ in the share prices of these companies, potentially knocking billions of dollars off equity markets in one fell swoop.

Then there is the impact of ongoing extreme weather events on national economies – as well as commodities, debt, and equity markets. For example, many global South states will face significant bills for cleaning up after climate-breakdown induced national disasters. If such a disaster affects many countries at once, they may all find themselves unable to repay their debts to international creditors, causing a debt crisis.

At some point, commodities producers may be unable to produce many of the resources upon which the global economy, not to mention the global population, relies. Flooding, desertification, and soil degradation all threaten global food production – and therefore commodities markets.

In fact, entire nations may soon find themselves underwater. Nations like Tuvalu have been lobbying to change international law to ensure they are still able to claim the rights of sovereign states even after their territory has been submerged by the ocean. What’s going to happen to the country’s sovereign debt when it sinks?

More significantly for global finance is the steady collapse of the Atlantic meridional overturning circulation (AMOC). This collapse threaten to wipe millions of dollars off GDP in some of the world’s largest economies, including UK, as a collapse in the AMOC would put an end to the relatively mild weather these countries experience given their latitude.

A new study from the world’s central banks finds that climate breakdown is likely to reduce global growth by 1/3 by the end of the century. The authors of the study also acknowledge that this estimate should be seen as a floor rather than a ceiling as they aren’t able to account for all the potential shocks coming down the line.

The impact that this kind of collapse in growth would have on financial markets would be enormous. Investors can ignore the potential impacts of climate breakdown for as long as they remain in the far-distant future, and for as long as everyone else is choosing to ignore them. But as these threats arrive, there is the danger of a sudden correction and mass panic in financial markets.  

None of this was mentioned in Reeves’ Mansion House speech.

I can understand the desire to focus on ‘growth’. All chancellors want the economy to grow, as it makes them seem like capable managers that people can trust. But Reeves constant repetition of the word ‘growth’ in the absence of any real plan to deal with the ongoing structural weakness of the UK economy, not to mention the significant economic threats coming down the line, just seems absurd.

Even without the impending threat of a climate-induced financial meltdown, global growth is going to slow over the next several years. Trump is going to introduce tax cuts that support growth today, but which will be likely to lead to a slump further down the line. He’s also going to kick off a global trade war, which could mean anything from a mild slowdown in growth to a significant shock depending on the size of the tariffs he introduces.

China is facing its own set of massive financial and economic problems that are forcing its leaders to undertake a careful balancing act between growth and financial stability. And Europe is the sick man of the world, with low investment, lagging productivity, and political uncertainty.

Reeves’ refusal to face up to economic reality makes her look like a political ostrich. She is refusing to acknowledge and prepare for all the risks to global growth and financial stability that are obvious today, let alone those which may emerge tomorrow. Instead, she is implementing a new round of financial deregulation in an attempt to spur investment.

But with the levels of uncertainty in the world economy – and the UK economy specifically – you’d have to be mad to make the kinds of long-term investments that Reeves wants to see. Who is going to help the Chancellor build a railway line that could end up inoperable three months of the year when the collapse of AMOC brings intense winter snowfall to the UK?

Ultimately, Reeves’ deregulation drive will only succeed in unlocking the kind of short-term, extractive investment that has undermined the UK’s growth and productivity for many years now. This model hasn’t boosted growth, but it has made a very small number of people extremely rich. Maybe Reeves is hoping that some of them will donate to Labour’s next election campaign.