Philip Augar is a financial expert who worked in investment banking for 20 years and made a lot of money in the process. A former head of the global securities division at NatWest and a former managing director at the Schroders investment bank, he left the industry in 2000. Since then, he has written books warning against the excesses of the industry and possible collapse of the markets.
As the River Cam flows past the lattice windows of his large house in Cambridge, Augar says that the British financial sector, built on an extremely shaky foundation, has developed into a monster over time.
More than 20 years ago, then Prime Minister Margaret Thatcher broke apart or privatized ailing traditional industries like shipping, mining and automobile manufacturing. Thatcher made it clear that the future, in her eyes, lay in a deregulated financial industry that would emulate the United States, which she considered Britain's role model.
US investment giants like Goldman Sachs, Merrill Lynch and Morgan Stanley set up shop in the British capital, and major continental European financial institutions like Deutsche Bank and Credit Suisse made London a center of their investment banking businesses.
When Tony Blair came into power in 1997, his Labour government did not reverse any of Thatcher's neoliberal reforms. On the contrary, Labour even loosened the reins on the financial caste a little further.
Its approach was one of "light-touch regulation," which removed onerous restrictions and reduced taxes on capital gains. London became the private equity and hedge fund capital of the world. According to Augar, bonus payments jumped from £1.7 billion ($2.4 billion) to £8.5 billion ($12.1 billion) over 10 years of Labour government.
"The effect the financial industry had on the economy was like a big stone thrown into the water," says Augar. The waves of artificial affluence spread to include lawyers, consultants, shop owners and restaurants. Most of all, however, they drove up the real estate market, where prices almost tripled in only 10 years, making people feel rich.
"Rising house prices," says Augar, "gave the consumers confidence to spend money, to borrow money. Actually, the whole boom was based on debt." This conclusion helps to explain why the British economy is now in so much trouble. When it comes to debt British private households, having accumulated £1.5 trillion ($2.1 trillion) in debt, are at the leaders in Europe.
Aside from its impact on the economy, the process also changed British society. "Great Britain developed from a nation of savers into a society of borrowers," says Augar, "and from a nation of investors into one of traders, no longer oriented toward long-term profits but interested only in short-term gains."
The words of Prime Minister Gordon Brown, who only last year insisted that the United Kingdom was better prepared for the global crisis than most other countries, sound like a mockery today. Few Britons still believe that Brown is the right person to lead the country through the crisis. According to recent surveys, only 28 percent of citizens would vote for Labour in a new election, while 48 percent say they would choose the Conservatives and their leader, David Cameron.
Mervyn King, the governor of the Bank of England, has warned his fellow Britons of difficult times ahead and what may be "the worst recession" since World War II.