Page last updated at 15:23 GMT, Friday, 25 September 2009 16:23 UK

City Diaries: "Stephen"

Man looking at a falling graph

"Stephen" (not his real name) has worked in the City of London for over a decade.

He is writing a diary on the mood in the financial industry as it goes through dramatic changes.

15 October: What does 'recovery' mean?

Yachts in Monte Carlo harbour
Only the 'haves' and 'have-yachts' are benefiting from recovery

Banks are "recovering". With base rates at 0.5%, mortgage and corporate loan rates far higher and the most prolonged rally in share prices in living memory, how could they not be?

The corporates that have survived are "recovering". They employ such huge numbers that politicians naturally think of saving them first. They would rather prop up zombie corporations than risk alienating such large electoral blocs. In one or two bailouts, they can underwrite enormous number of votes.

But what about the rest of the world? Something like 90% of businesses are small businesses. In the last truly serious economic downturn - the 70s - Microsoft, Apple and Intel were all "small". Long ago, Marks and Spencer once had a barrow in a market and Sainsbury's once had a single store. So the global successes of tomorrow are somewhere in the small businesses landscape of today.

And note, none of these successes has blown up in the present crisis, nor needed a government bailout.


"Jobless recovery" is a disingenuous way of saying that there is no recovery for this sector - the one that employs the majority of people. These businesses are so small that individually they are invisible in the corridors of power, yet they are where innovation must inevitably come from. Small businesses are forced to innovate because they can't compete with established businesses unless they have an edge. They're also nimbler than corporations.

People I know who are trying to launch innovative businesses simply cannot get funding. And yet, the corporate sector has received the largest cheque ever written in history because that's where the easiest political impact is to be had.

It's a recovery for economists and investors, not the millions out of work

So "jobless recovery" succeeds in making bad news sound good. The term first cropped up after the bubble burst in 2000. Whilst corporate health and national economic figures improved, few jobs were created. And it's the same this time: heralded as a great achievement, it delivers nothing for most of those who have been hurt and does even less for the businesses that will create our as-yet unknown future.

People continue to lose their jobs and so an economic phenomenon that doesn't address this is not worthy of the title "recovery". It's a recovery for economists, corporate balance sheets and investors only. Not the millions out of work.

Those who bail out the failing corporations, mean to do well but are just putting off the problem till another day. Others who want reckless corporates to collapse, so that no business will ever again be "too big to fail", but I doubt any of them have the stomach for what it really entails.

No solutions

Neither the left nor the right has any real solutions to the crisis, other than emergency transfusions of cash borrowed from the future. The problem for politicians globally is that none of them know how to manage the decline of a corporate sector that got too bloated, the resulting mess of decades of ill-considered vote-buying and cover-ups. So the recovery that we see is a recovery for "the haves and the have-yachts".

Those who still have jobs are paying less for their mortgages, but more of their payments are going towards "balance-sheet repair" at the banks, as if the wealth they used to have was somehow unfairly taken away. Fixing our banks is really a euphemism for letting have their lost wealth back. The people are paying to re-enrich the banks and ensure the perpetuation of our political order.

9 September: Aftershock

Alistair Darling
Can the Chancellor regulate greed?

In the summer of 2007 as the first wave of the crisis hit, there was hope that it would be "over by Christmas". Two years on, it's time to take stock. The City is overflowing with bright young things: PhDs, MBAs and debt-laden graduates. However it's not intellect that ultimately drives these people. You get to the top by making more money than your peers. Competitive crafty, greedy people give their employers what they want and rise up the ranks. Greed is inevitable.

We're told by our chancellor that the solution to our crisis is more effective regulation of our banks, but regulation will never stop greed. Chancellor Darling also cites the notion that "spreading your risk is a good thing." This is a classic academic over-simplification and fails to account for human behaviour.

There is no box in which to put the adrenalin rush of being part of a winning crowd, bingeing on the greed that was measured as success. All that happens when risk is "spread" is that it ends up in the weakest hands and overall the system becomes saturated with the same risk. The mantra that diversifying risk is "good" ends up producing the opposite effect: we all fall down together.

It's why we must disentangle investment banking from more ordinary, commercial banking. It's the only way to stop another crunch in however many years' time.

Institutions that are "too big to fail" should be "too big to exist"

After the Great Crash of 1929, the Glass-Steagall Act in the USA forbade commercial banks from conducting investment banking business. Since then, financial crises came and went without the disaster we've just witnessed. Separation of the two forms of banking prevented contagion. The investment banks could be as greedy as they liked without recklessly endangering the rest of the population. Glass-Steagall was repealed after nearly seventy years in 1999 and it then took just eight years for the investment bankers to bring our entire global financial system to its knees, hold it to ransom and then get paid to fix it.

The politicians' solution? Merge more banks together and embed investment banking even more deeply into our financial blood system. Institutions that are "too big to fail" should, if we apply common sense, be "too big to exist". But instead they have become "too big to resist".

If I am right, the next financial crisis, when it comes, stands to make the last two years look like a "warm up". When these newly engrossed banks fail, what then? For the time being, more of the same is the only prescription the politicians can conceive of. The bailouts that were sold to the public on the grounds they would help the ordinary citizen have failed to do anything other than nationalise previously private debt, leaving the "little guy" to fend for himself and pay up to the hilt for the privilege. How many house repossessions have been halted, versus the number of banks that have been "saved"?

The firms that survived the bust have never known it so good

Closer to the ground, it's common to believe that these are uniformly hard times for everyone in the City. Not necessarily so. The firms that survived the bust have never known it so good - less competition, fees have gone up, margins have got larger - all courtesy of the reduced competition created by our politicians waving-through mergers as a solution to the crisis.

But none of what I see makes me any more hopeful for a better, leaner City. I want a City that properly serves the economy and acts as the lubricant, rather than the engine, of growth. I want commercial banks to make boring, safe loans. I want investment banks to be able to blow up without taking the country down. I want the ordinary citizen to be insulated from financial excess, not left out in the good times and then billed for the bad times. Yet none of this is on the way. Leaving me to simply ask: Why?

21 August: Are we near the end yet?

Prices of shares and houses have an irritating habit of crashing just when it feels like the party is never going to end.

Job centre queue
Talk of the recession being "over" is meaningless to the millions of unemployed

The same goes for economic data. This decade we became accustomed to rising Gross Domestic Product or GDP and falling unemployment. In early 2007 it was inconceivable that it was time to head for the exits. Recessions had been abolished, our leaders told us, and they dismissed the first tremor of the subprime crisis as "a blip".

With devastating power and breathtaking scope, the worldwide crash of 2008 changed all of that. A generation that had never seen anything other than "good times" was stunned. The conventional wisdom of the boom years was laid bare as a delusion.

Younger colleagues had only heard about recessions in textbooks or from their parents. Now, as they labour under enormous student debts, they are shocked to be living through one. Suddenly debt doesn't seem like such a good idea.

In recent days there have been news reports that Germany, France, Hong Kong and Japan are heading out of recession. The fix, perhaps, is in.

Suddenly debt doesn't seem like such a good idea

Let's think about what this means though.

Economic definitions of "recession" hinge on whether GDP is contracting. The end of a recession is signalled when this contraction halts. But this completely ignores the amount of damage that needs repairing.

To understand this, we need a more common-sense definition of recession: if I lose my job, then my personal recession only ends once I get another job of a similar standing. If I fail to find work or have to take a reduced role, then my personal recession carries on.

So talk of the recession being "over" is meaningless to the millions of people who are out of work. And public debate about "the end of recession" is frankly missing the point. Until unemployment not only shrinks but gets back to a more normal level, millions of personal recessions will continue.


In recent weeks I've been hearing rumours that our state-owned mortgage lenders are holding tens or even hundreds of thousands of repossessed houses on their books. The government cannot face the humiliation of dumping them on the market but at some point this inventory will need to be disposed of. Just what price this will occur at, nobody can say for sure.

So when "end of recession" is spoken of as a wishful shorthand for a return to "2007 levels of lending" and steadily rising house prices, the collective delusion of our times is laid bare. We seem to be hellbent on trying to forget the lessons of the crisis.

We seem to be hellbent on trying to forget the lessons of the crisis

In the most old-fashioned sense, there's only a few ways to create wealth: digging things up, making things or transforming things. Repackaging things and shuffling paper are no substitute and there is no period in economic history where house prices, rather than industry, were the engine of the economy. Yet this is apparently what we have learned to crave as normal.

I would like to advance a positive thought, though - one that I've not read elsewhere. It's common to lambast the UK for having few manufacturing industries and its over-reliance on financial services. In the short-term this may well be a problem.

But taking the experience of Germany and Japan after the Second World War, they were able to become the world's leading manufacturing powers precisely because they had been so decimated. They had to rebuild and this is what allowed them to leap ahead of us. Thankfully in this present era we have no such war to recover from, but the UK does have a unique way out: to build entirely new industries. Green energy, for example?

7 August: Bank results

The basic beliefs that our generation held about money have been comprehensively demolished since 2007.

Generation Bubble has now learned that tearaway stock and housing booms always end with the "Winner's Curse" - especially when the notion that there is a bubble seems inconceivable. No longer are eternally rising house and share prices taken for granted as a basic human right.

One thing remains - that the workings of markets are as confusing to the average person as ever.

Yes, you read that correctly: as an insider, I think it is a disgrace that bailed out institutions - that would not exist were it not for the bailouts - are making such payments

Against a miserable economic backdrop, share prices have risen dramatically since March, a move almost unprecedented in the last 100 years.

So how can the markets be thriving?

And how can the banks that survived the crash without being nationalised, such as Barclays, HSBC and Goldman Sachs, be reporting such enormous profits?

The market surely knows about the Great Mortgage Famine.  It knows too about this dilemma: that if we bring back "2007 levels" of lending, we're just heading back to what caused the problem in the first place - but if we don't, we have no other ideas for where "economic growth" will come from.

And despite the recent chatter over City bonuses courtesy of the public purse, there is not enough in this pool of ill-gotten wealth to lift house prices across the nation.

Yes, you read that correctly: as an insider, I think it is a disgrace that bailed out institutions - that would not exist were it not for the bailouts - are making such payments.  It is simply not right that my industry can hold the entire economy hostage and then reap such brazen rewards.

It's true that it was only a handful of people that caused the problem. But the nature of working at a firm is that you share the risk of everyone you work with.

Credit card, cash
Europe is set for a credit card crisis, warns Stephen

And then there's the impending European credit card crisis. The IMF predicts this will be at least as bad as in the USA and worst of all in the UK. In the US something like 15% of credit card balances will not be repaid.

With the talk that commercial property is "the next shoe to drop" and that hundreds of thousands of British mortgages are in arrears and soon to default, we have an almost perfect storm of economic news.

So what are the markets celebrating?

There are various theories. On the one hand, computerised or "algorithmic" trading now dominates the exchanges. These machines are designed to exploit so-called "market inefficiencies" at millisecond timescales, but at the larger level these machines tend to amplify arbitrary trends.

Another theory is that the market is looking far ahead and seeing better times, which are yet to filter through in earnings reports and not just at the surviving banks.  The negatives are all known and understood and so things can only get better

Or it could be simply that the central banks of the world have been engaging in "quantitative easing" - shorthand for giving money away.

Central banks around the world are pre-announcing which securities they will buy, and when. Dealers in these instruments have been loading up in advance in order to offload them at inflated prices when the central banks start buying.

Until the risk-taking activities of our banks are disentangled from the basic financial plumbing of our economy, I will continue my lament.

16 July: Cycles of boom and bust

The bubble in internet stocks popped in March 2000, bottoming over two years later in October 2002. Nine years on, the Nasdaq is still nearer the bottom of that fall, at levels first seen in 1998.

Depression era food line, Iowa, USA
After the Great Crash of 1929, stocks were universally hated and debt was so shameful as to be taboo

Generally the rule of history is that every generation has a financial bubble of some kind and learns from it roughly the same lessons as its forebears - that speculative manias are near-impossible for the inexperienced to spot, but entirely self-evident to old-timers. The bursting of a bubble is part of the tough love through which each generation accrues wisdom and financial sense.

After the Great Crash of 1929, stocks were universally hated and debt was so shameful as to be taboo. Those still with us from that time carry the habits learned in the Great Depression of the 1930s to this day.

After the financial crisis of the 1970s, people were proclaiming "the death of equities" as another generation learned the discipline of money.

There are two striking things about our present financial era. First, when stocks bottomed in the early part of this decade it was shrugged off almost instantly with record numbers continuing to invest in the markets. Second, having blown and popped the internet bubble, we plunged head-long into blowing another, vastly more dangerous bubble in the housing market.

The way that the bailouts work is that the problem is simply distributed across a larger and larger number of people. This guarantees that at some point we will have a crisis so big that there is nobody left to bring into the party. When everyone is loaded with stocks and debt, there's nothing else to be done except push the debts out in time and hope (even pray) that our children agree to pay for them. Some kind of parents WE are, huh?

Will our children view us as wise stewards of our finances and their futures?

There's been much chatter in recent weeks of "green shoots" or "yellow weeds".  For my tastes such place is misplaced as it ignores the totality of what we have achieved.  Sure, it might be possible to engineer an economic up-swing just as we approach the next general election - but this ignores not just what the next government will deal with (the biggest spending deficit this nation has ever known), but also what we are bequeathing to the next generations.

Will our children view us as wise stewards of our finances and their futures? Or would it be like coming home to find your parents have thrown an almighty party and wrecked the house - and now expect it all to be paid for?

There's also the matter of the statistics we hear about.  House prices have, according some reports, picked up in recent months - even as the mortgage famine continues. In others, the economy is "recovering" simply because house prices are "falling less fast". Nonsense in both cases.

When the history of the first decade of the new millennium is written, will we look back on this era with affection or puzzlement? Will it ever again be viewed as normal that we tried to borrow ourselves rich, spend ourselves out of debt or get rich by selling each other ever more expensive houses?

8 July: Politicians, journalists and bankers
People cross the road at Poultry in the City of London, with the Royal Exchange in the background
"Stephen" reflects on his career on the City.

Writing this blog has been a curiously self-exploratory process. I grew up surrounded by politics, journalism and public service - and a general disdain of the world of big money and finance.

It was not exactly a true rebellion - I mean I'm hardly Trotsky - but I entered the world of finance because I wanted to find out for myself, first-hand, whether it really was worthy of such nose-pinching contempt.

I entered the City as a young graduate expecting to find figurative sacks of cash lying around waiting to be doled out to the army of bankers.

How wrong I was.

I learned quickly that the number of people who can consistently make money over the long term through genuine insight and talent is very limited. The craft of profiting in the markets is so little understood that it's generally up to the individual to figure out if they've got this mysterious ability and how they're going to use it. The rest of the City is largely a jamboree of commissions, services, fees and interest.

My City career took me from trading to broking and back again. I learned that the paranoid disdain that traders have for brokers is mostly misplaced. Brokers are like the estate agents of the financial world. Equally, brokers operate under the unhealthy illusion that traders (the ones who move money around) are always doing business - only with other brokers. The two tribes despise each other even if their need is mutual. They learn to make do but frankly, the behaviour on both sides is at times pretty disgraceful. They have fixed opinions of each other that the facts won't change.

This had a curious echo of an earlier experience, where I saw the same between politicians and journalists. They need each other but, at times, wish they did not.

Likewise, the mutual mistrust of politicians and bankers is largely based on ignorance - the Chancellor is a lawyer and his predecessor was a historian; neither has any experience other than that learned on the job. I've been pretty scathing about politicians in earlier blogs, but bankers deserve at least as much wrath. Their mutual ignorance has become mutual distrust. But solving the current crisis requires politicians to understand more about finance and banking, not just political ideals, and bankers to accept that career politicians will always be motivated by the low horizon of the electoral cycle more than absolute truth.

At some point tomorrow becomes today and all of this spending has to be paid for - by us

We see this most clearly in the simmering stand-off between Chancellor Darling and Governor Mervyn King, although King is not strictly a banker, I have in mind to blame him for this crisis.

Milton Friedman, the late great monetarist economist, explained that there are four basic ways to spend money: I can spend my money or I can spend your money. You can spend your money or you can spend my money.

Friedman's pithy analysis needs a note of caution: the distinction between "you" and "me" blurs when dealing with public finances. When our government spends our money on bail-outs, we believe they are spending someone else's money to save us, quietly ignoring or maybe just secretly accepting that we'll pay for it later with taxes or inflation.

In a way, this is what lies at the heart of the current crisis and, indeed, its origins. Too many people are trying to spend somebody else's money, or trying to tell other people what to do with theirs. Not enough people have been thinking about their own money - that accumulating enormous debts and throwing mind-boggling sums at bail-outs will eventually be paid for by all of us. When I was a young graduate, too many of us believed that there were sacks of cash lying around, waiting for the government to hand out to solve all our problems - there aren't.

At some point tomorrow becomes today and all of this spending has to be paid for - by us. Or worse, our children and grandchildren - who might refuse.

But knowing bankers and politicians like I do, it'll be a struggle to persuade them to understand each other better.

4 June: The mini crash in the bond market

N Korean military officers celebrate the nuclear test at Pyongyang Indoor Stadium on 26 May (KCNA)
Stephen says the threat of nuclear conflict registers barely a blip

Most traders close to the action are struggling to overcome their bafflement at what has unfolded since March. The market's eerie upsurge defies all rational explanations.

Earnings have been shredded, North Korea waves nuclear bombs at its neighbours, Pakistan threatens to implode and, closer to home, there are no obvious drivers for a new round of growth or job creation.

The news is awful, but nobody sells. The threat of nuclear conflict in the Korean peninsula registers barely a blip. But the market grinds higher, and nobody cares.

Most of what sounds like good news is merely speculation about "green shoots". Newspapers seize upon whispers that house-prices are "rebounding" and these whispers risk turning into beliefs. But why should house prices be rising and where is the money to pay those still-high prices going to come from?

Around 600,000 Americans have been losing their jobs each month since Obama was elected. And now nearly 10% of American mortgages are default. The proportions are equivalent, if not worse, here in the UK.

Traders look on, baffled by the news reports even more than by the rally. Who is coming up with these reports, where do they get their ideas from and which data give them hope that things are improving? Are they aware of the dangers of false hope?

Bond 'crash'

Those traders who still have jobs are happy to have them. In their determination not to make a wrong bet, nobody is taking on risk

Which lender, whether in receipt of government funds or not, would believe in "green shoots" when faced with a looming threat that might make the subprime crisis look like the warm up?

Between 2004 to 2007, many home-owners apparently logged Mr Greenspan's endorsement of "financial innovation" and took out mortgages with exotic names such as Option ARM. Many such mortgages had five-year terms and these will expire in various waves in the next three years, requiring a replacement. The interest rates at which these will reset depends on the bond market.

Whilst not widely reported in the regular news, the bond markets had a mini crash in May. There's even talk of the ending of the multi-decade bull market - a market characterised by rising prices - in bonds.

The bond market dwarfs the stock market. It's also generally considered to be more boring. But this market determines the price of long-term credit. Crashing bonds mean higher mortgage rates just as millions of mortgages are going to reset.

The risk is this: millions of home-owners who are already financially stretched will be pushed to breaking point once their mortgage resets, triggering another spiral of defaults, repossessions, write-downs, implosions and lay-offs.

Despite this economic outlook, the stock markets in the last three months have agreed with the unstated assumptions in the whispers of "green shoots" - that growth is a prerogative of the modern era, that rebounds are always V-shaped and that central banks and politicians have abolished the business cycle that has plagued economic life since ancient times.

The rally we've seen is almost without peer in financial history. Day by day, week by week, the rally ground higher yet it displayed few of the qualities that generally mark the beginning of a new bull market, if any. It's been a low-quality bounce that slowly dismembered the bears but failed to create new bulls. Financial historians point to 1937 as a rough parallel but it's an inexact one and, despite one of the greatest stock market rallies ever, few traders came out on the right side of it.

The ways of this bear market (a market characterised by falling prices) mightier than almost any in living memory, are difficult and paradoxical.

Those traders who still have jobs are happy to have them. In their determination not to make a wrong bet, nobody is taking on risk. This basically undermines the point of employing them.

Even if we do not see another round of mortgage crises, it's rational to fear more closures and lay-offs in the financial sector, boding ill for London and the wider economy.

Talented people continue to leave London

If Brown seems incapable of assessing his own role in the bust, the overwhelming feeling in the City is that he never really grasped what goes on here during the good times either. He shows little understanding of the true nature of what is unfolding - which might explain the tirades we keep hearing. Economist Tim Congdon explained recently, on Radio 4's Today programme, that monetary economics remains an enormously unfashionable subject, despite its pivotal importance to the present crisis. It's hard to emphasise just quite how important this subject is, probably because the label "monetary economics" sounds so extraordinarily dull, but failing to bring it into any discussion about booms and busts is, quite simply, like describing breathing without acknowledging air.

We can gripe about Brown's faults or fantasise about who else might lead us but, even if leaders change or governments fall, the City view is that it will not make slightest difference until public attention turns to the biggest issue of our age, the nature of money itself. The absence of political, or even public, debate on the topic is reminiscent of the lack of general awareness of climate change before Al Gore made his movie. In that light, it's prescient that the full force of the crunch was followed by the coldest winter in a generation.

So whilst Brown can easily be criticised for the gaps in his understanding and is viewed here as ineffective, talking only about one leader is wide of the mark. Politicians in general, through their economic ignorance, are seen as almost pitiful figures within the City; the attributes that get them to the top of the political pole serve little practical purpose in tackling deep economic or financial questions. So what's the point engaging with them when they don't understand either their part in this disaster, or what needs to be addressed to make sure it never happens again? Since the monetary system can be used to serve the electoral cycle, why would our politicians ever choose to abandon it? Would they ever be the turkeys who vote for Christmas?

Brown and any other leader will be condemned to produce new booms and busts

Until the debate moves on to what caused the bubble in the first place, namely the paper money system itself, Brown and any other leader will be condemned to produce new booms and busts by printing more money and stacking up more debt, exactly the two things that got us into this mess in the first place. What makes us City folk despair is that politicians of all colours - Brown, Bush, Obama - just can't see this and so it goes on, the familiar pattern of needing to "do something", increasing debt further and laying the seeds of the next crisis when the new bubble pops.

What should be done? I can't see an alternative to a fundamental revamping of our monetary system, with the concomitant political change that would provoke - but I give that even less likelihood now than a year ago, as our leaders have already chosen the other path: more of the same.

In the meantime talented people continue to leave London; the French people want to go home and the Americans want to go to Switzerland, but other destinations are popular too. Everyone leaving seems happy to be escaping the hassles of urban life and the depressed atmosphere - "what's the point of staying here if everyone hates me and the weather is awful?" said one. Once, financial work could only be done in big financial centres or with a satellite link, but the internet has caused an explosion of new ideas and opportunities for those with a pioneering spirit. It's unlikely that London's dominant position is going to end, but this phenomenon should be a factor in the government's thinking.

Indeed, many of those leaving are not home-owners. They came here for the good times while they lasted, and now they're off. So they're the lucky ones, not handcuffed by negative equity; British bankers are more likely to be stuck here by debts they now have no chance of paying off.

The seeds of the next crisis have already been sown

A lot of us "insiders" have been very worried for a very long time. Not all of us are multi-millionaire CEOs. Some of us do it because the work itself is not just interesting, but important to get right! But due to the general prohibition on speaking to the press, this point of view rarely gets aired, if ever.

The sad truth is that both the Democrats AND Republicans in the US stoked the housing bubble, and our Labour party simply played "me too" as they felt that if they could "engineer" prosperity, they would prove once and for all that the Tories were "the nasty party" who had got it all wrong and that Labour could indeed be trusted with economic stewardship. For all the faults of the Tories, they certainly left the economy in amazing shape; the only miracle is that it took so long for Labour to wreck it. And to be completely clear, I am free-thinking floating voter and neither a Tory nor a socialist.

But the single worst thing that happened was the repeal of the Glass-Steagall Act in 1999. Up until then, the commercial banks and investment banks were forced to be separate following the Great Crash of 1929. The then Treasury Secretary Lawrence H. Summers even said in an interview of the time, ''At the end of the 20th century, we will at last be replacing an archaic set of restrictions with a legislative foundation for a 21st-century financial system.'' The measure, he added, ''would provide significant benefits to the national economy.''

Perhaps he didn't realise that this would let the genie out of the bottle, but this is precisely why so many of us insiders were worried. We realised that if there was a problem with the investment banks, they could now only drag down the rest of the banking system with them. So it's with sober awareness that I note Timothy Geithner, the new Treasury Secretary, is a close associate of those who created this mess in the first place - Robert Rubin, Larry Summers, Alan Greenspan and others. Another face from exactly the same gang, it's no surprise that the prescription is more of exactly the same that got us into this mess in the first place: more debt, more money supply. To say it pithily: the cure to too much debt and too much money cannot be more debt and more money, but that is exactly what is happening. No amount of nay saying from us on the inside seems to be able to get this point through, and the few public figures who warned on the issue are still being ignored. Nobody seems to care that our children and grandchildren are being asked to pick up the bill, so long as our politicians can get re-elected.

There's a lot of argument for a return to separation, with the humbled investment banks less mighty and the rest of the sector reborn as good-old "utility banking", no more exciting than a gas or water company but safely in charge of that one thing that regulates everyday activities, our money system. I agree. The investment banks should be separate and independent, not further integrated into the banking system, as has in fact been done. The hedge funds should also go back to being what they used to be - the minority of rebellious kids on the block, not the core of the establishment.

The sad fact of the matter that the seeds of the next crisis have already been sown, by enormous bailouts and further consolidation of the banking system.

Bubbles are just so intoxicating

I've worked in the financial business for longer than most of my peers. I can add up, I know how markets work, I've managed a few bottom-line businesses and I know a decent amount of economics and finance. All qualities which rule me out of being chancellor. I suppose that's good news, really, as I still feel woefully inexperienced.
Bubbles are just so intoxicating that we are incapable of giving them up

Given my own way, I'd put a pre-emptive dampener on booms mid-track in order to avoid catastrophic busts, the doing of which requires massively unpopular policies. Bubbles are just so intoxicating that we are incapable of giving them up. Like an addict returning to the drug, our need for bubbles is such that the mere absence of a bubble feels like a disaster. A world full of simple pleasures is not enough for Generation Bubble. And so, there's no way I'd ever become chancellor.

But now, like some deadly trial from Greek mythology, our poor Chancellor is faced with deciding what to do with bonuses at the nationalised (and de facto nationalised) banks. Each day his liver re-grows, only to be torn out by the vulture of some new crisis. The desire for revenge and retribution is clear, those who brought the nation to its knees should - no, must - be punished. I'll let you into a secret - many of us inside the industry believe that too!

To borrow a phrase from Bank of England Governor Mervyn King, banking should be as boring as dentistry. It was never meant to be the high-octane nonsense of the middle part of the decade, persuading a generation of graduates to want to be hedge fund managers. It was just so obvious that trouble was brewing, from the mid-1990s, but those in charge simply didn't want to know. They ignored the warnings and naysayers - in fact we now know they sacked them! Preaching "prudence", they kept pumping an already grossly-distended bubble so far that actively pumping it up became necessary merely to maintain it. We lost sight, collectively, that monetary policy is meant to be the lubricant of growth, not the engine itself, but alas our innumerate leaders don't understand that or even if they do will do their best to deny it. The support of normality grew dependent on meddling, which suited our leaders' desire to be seen to be "doing something".

What's all the more difficult is that the people who caused the problem number barely a handful at each firm, but suddenly it's open season on anyone who works in the City. "Hang a banker" fever is right upon us. This stems from a general misunderstanding of what the City is and what it does. Far easier to lump everyone together and lambast the lot, from proprietary traders to fund managers to brokers, and not distinguishing between troops and generals, but it's no more accurate than blaming the army for the navy, or software companies for viruses.

The CDO and mortgage mess was caused by one sector of the City, following misplaced exhortations from above, and many of us refused to have anything to do with it. Turning houses into gambling chips is not what the City is for. The City is there to allocate capital, not perpetuate bubbles and endanger the ordinary folk of the nation. The world became beholden to the idea of "too big to fail", ignoring that this implied "too big to exist" and "too small to save". The ordinary people are, quite rightly, furious.

So against this quite understandably broad-brushed hatred of anyone in the City, it's vital to remember that the future of our public finances hinges on Northern Rock, RBS and Lloyds earning enough to repay the government, and therefore all of us. As has now been done, clamping down on compensation is going to starve the goose before it can lay the golden egg that we all need so desperately. With no golden egg, people who have not yet been born are already in debt.

I've already seen at first hand that many of the brightest, most talented people in the City are planning years off around the world, or even leaving the business permanently to set up their own operations. Their contributions will be removed from the payback. In the end, the problem is that in seeking retribution against the few who did cause this mess, we're going to end up hurting ourselves. But our leaders, so ill-versed in markets, economics and finance, can't be expected to understand that.

Good job it's not me making the decision.

When will things return to normal?

The over-riding question asked within the City and asked of us by others is "when will things return to normal?"

Most of the people asking this are younger or from abroad: they don't remember the City or the markets before these last two euphoric booms. They also don't remember that credit used not to be easy and they've never known hard times.

It seems that, as the baby boomers hit retirement age, two generations are having to learn that the reckless credit-fuelled booms of the last two decades were the anomaly. Their totems are still-unaffordable house prices, record consumer debt and a population unprepared for recession.

Mind you, a very senior contact cautions "even us old ones have never seen anything like this." This is most certainly history in the making.

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