It is a paradox that the nation most committed to free enterprise — the United States — can be one of the most aggressively protectionist countries on earth. The accusations made this week by the New York State Department of Financial Services against Standard Chartered Bank are serious and deserve investigation, as were those made by the US Senate against HSBC a fortnight ago. It may turn out that both banks are guilty of serious failings, but there is no mistaking the relish with which the Americans are beating up on the Brits.
They shouldn’t be too quick to point the finger. Gordon Brown’s much-ridiculed refrain about the economic crisis, ‘it started in America’, had a degree of truth. A financial bubble had inflated across the world, but the pin that pricked it was the American subprime market. The federal government had colluded with banks to offer dangerously cheap loans, while good and bad debts were parcelled up together and sold to unsuspecting investors. Yet there is an uncomfortable discrepancy between the enthusiasm with which US authorities have set about foreign banks, and the distinct lack of prosecutions of US banks for their role in the subprime scandal.
American regulators, it seems, are never more vicious than when finding fault in a foreigner. British financial institutions have made big errors, and several of them — those which were rescued by the Brown government — have no real right still to exist. Yet it is a grave and significant development when US financial regulators start to give the appearance of being used as instruments of US trade policy with the aim of thwarting foreign competition. The New York State Department of Financial Services this week went so far as to describe Standard Chartered as a ‘rogue institution’, which could have been calculated to smear a global bank rooted in Asia.
The mission statement of the Department of Financial Services gives a hint about its objectives. It speaks of ‘enhancing New York’s status as the world’s financial centre’. This is a debatable assertion. Many in Wall Street bitterly resent the status of London as the world’s unofficial financial capital. They dislike the fact that the Sarbanes-Oxley Act — an Enron-inspired piece of legislation designed to put US corporations under greater scrutiny — led many firms to list in London rather than New York. It would please them immensely if a few foreign banks could be eliminated.
Nor do they like the high global reputation of the City of London, whose firms have become the most trusted on the planet. That may baffle the supposed Business Secretary, Vince Cable, who described the City as a ‘cesspit’. But the insurance sector and our corporate law sector, both massive employers who bring in billions to the British economy, were almost entirely untouched by the crisis. When a Korean company merges with an Indian company, it is not unusual for the deal to be underwritten in English corporate law. The American courts have a reputation for favouring American interests. Ours have a reputation for justice.
The aggressive protectionism of US authorities and legislators is not limited to financial services. It is two years since Barack Obama’s press secretary said ‘we will keep his boot on the throat of BP’, which was then embroiled in the gulf oil spill. It was more the language one might expect a US president to use about a rogue state than about a company working hard to meet the voracious demand of US consumers for oil. Yet when a British company (or industry) gets in trouble, there is no support from the British authorities. The Mayor of London speaks up for the City this week on page 11, but that will be about it.
The lesson of protectionism, however, is that it rarely succeeds in boosting home-grown businesses, particularly in the long term. The economic crisis of the 1930s was caused as much by protectionist policies as the Wall Street Crash, and the postwar boom was as much the return of global trade as it was a peace dividend. Just as US tariffs on imported steel were later found to have harmed the US car industry more than they aided its steel industry, a heavy-handed and one-sided US campaign to regulate foreign banks is more likely to end up by bolstering London’s reputation as the world’s financial centre.
London is a fitting venue for the Olympic Games because the capital — one third of whose population are immigrants — has become the Rome of the globalised world. This fostering of international talent is a thing of beauty, the same beauty that Voltaire saw when he visited the London Stock Exchange in 1727. ‘Here you will see representatives from all nations gathered together for the utility of men,’ he wrote. ‘Jew, Mohammedan and Christian deal with each other as though they were all of the same faith, and only apply the word infidel to people who go bankrupt.’
The word ‘infidel’ could be applied to the rogue elements of the financial system, both in the City and Wall Street. Even worse epithets could be applied to the regulators in London and New York who were so woefully negligent in supervising banking activities before 2008. We are all still paying the price for that failure. But in improving and strengthening regulation, governments and their agencies would be ill advised to slip in measures that are intended to protect the interests of their own banks at the expense of foreign ones. It can only prolong economic misery.