The Finance Curse: How Global Finance Is Making Us All Poorer by Nicholas Shaxson

The Times
By John Arlidge

Eight years ago Nick Shaxson wrote one of the best books about modern finance. Treasure Islands was an exposé of tax havens and it is even more relevant today, after the leak of the Panama Papers. The book was so racy (a Cayman Islands banker ends up in the boot of a burning car in one chapter) that I read it cover to cover nonstop.

 

Now Shaxson is back, with something bigger to say. The “financialisation” of many of the companies that provide the goods and services we need and, with it, much of our economy, is a curse that is impoverishing us. Too many banks and businesses and too many professionals have moved away from creating wealth for the economy towards extracting wealth from the economy. That’s good for them but bad for their workers and for consumers and taxpayers.

 

With forensic accounting analysis, sharp reporting and interviews, he demonstrates how individual company leaders, private equity advisers and the big banks, aided and abetted by government and the large audit firms, structure their businesses to increase their and their investors’ share of the economic spoils in good times, while offloading risk and the costs of failure in bad times on staff, customers and the public at large.

 

Here are just three very different examples. In the run-up to the financial crisis, banks all over the world created complex, risky yet highly lucrative investment vehicles backed by low-quality American real estate. They got away with it for years and grew big. So big that when the US housing market crashed, governments around the world were forced to use taxpayers’ money to bail them out for fear that the financial chaos their collapse would cause would be worse than the price of a bail-out. Heads the banks win, tails everyone else loses. And after a decade of austerity and sluggish growth, we’re still losing.

 

Carillion, the contractor that was supposed to save taxpayers’ money by injecting private-sector rigour into stodgy state procurement, collapsed earlier this year because, while it did build roads, schools and hospitals, its leaders paid more attention to hitting complex financial targets to enrich themselves and shareholders. When it ran out of money, the taxpayer stepped in again.

 

David Cameron’s decision, later backed by Theresa May, to allow Chinese firms to build the Hinkley Point C nuclear power station in Somerset, was taken in part to help to improve relations with Beijing and cement the City of London’s new role as a centre for trading of the Chinese currency, the renminbi. No matter that the terms of the deal are lousy for the taxpayer, nor that many think it is extremely risky to allow China to become a key partner in one of our utilities. Finance trumps all. Until it trumps all of us.

 

Shaxson goes on to argue that the growth of the City of London has impoverished the country by sucking up talent that might otherwise have gone into manufacturing, entrepreneurship and politics. “Once a financial sector grows above an optimal size, it begins to harm the country that hosts it,” he writes. He claims, without a lot of scientific evidence, that “the financial brain drain is a reason why Britain has had such poor prime ministers recently”. That’s certainly a reach — however, given our current political predicament, it’s not a claim to dismiss out of hand.

 

Some readers will find the level of financial detail, especially regarding private-equity deals, tough going. Others will feel that the tone is a little ranty and negative. But Shaxson leavens the mix with some great writing. “Britain owes its pre-eminence as a financial centre to the combination of a strong legal system, which stops people stealing your money, with a weak regulatory one, which allows you to steal other people’s,” is one of the best sentences ever written about the City.

 

He promises us that if we stick with him through the numbers bit, he will reward us with a manifesto for change in this final chapter. “This book contains a tremendous piece of good news,” he writes. Getting rid of negative forms of financialisation “is a prize well within our grasp”.

 

But in the final chapter, he does not deliver. He says “the time for timidity has passed. The changes that are now needed are revolutionary ones.” But he fails to come up with much more than encouraging the establishment of new pressure groups to campaign to curb tax havens, control dirty money coming into Britain, and reform the cosy cartel of the big four accountancy firms (PwC, KPMG, Deloitte and EY).

 

I wish he had set out detailed proposals for how Britain could take an independent stand against the forces of big capital. The freedom (and the chaos) that Brexit provides is a great opportunity. Better yet, it is an agenda around which the left and the right could unite, the right wishing to preserve the purity and efficiency of free markets and the left to drive social change. Perhaps that will be the subject of his next book.

Nicholas Shaxson
Business