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Big Bang, Now and Then

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Philip Augar in the Financial Times notes that this week represents the 25th anniversary of London's Big Bang. Many beneath a certain age, particularly in the U.S., will wonder what this now-antique event in October 1986 was all about; it had nothing to do, I can assure you, with the birth of the universe or an inexplicably silly American situation comedy. Big Bang was the date upon which British finance -- otherwise known as the City -- was deregulated by the Thatcher government, beginning with sweeping reforms of the stock exchange but quickly triggering a vast reshuffling and consolidation of financial assets, and the swift invasion of larger, more integrated U.S. and European banks. The City, in short, was placed on the same platform as Wall Street, thus creating the paradigm known as Anglo-Saxon Capitalism. And like the United States, the resulting efficiencies produced a huge expansion of finance, with consequences that we are still wrestling to understand and control.

Augar, an author on finance subjects ("The Death of Gentlemanly Capitalism: The Life and Death of London's Investment Banks") who was an equities broker at the time of Big Bang, sorts through the pluses and minuses, both of the fragmented, sharply defined world before Big Bang, with its ethical codes, leisurely life styles and, relatively speaking, large number of smaller firms, and the high-volume, high-efficiency, high-volume markets that emerged after deregulation, with their very large (predominately foreign), highly capitalized banks and firms and ambiguous each-man-for-himself morality. The Americans, as Augar notes, worked harder, but standards of permissible behavior eroded. "The rewards for practitioners became so great that greed wars broke out as individuals saw the chance to make life-changing sums from a year's pay. There developed a tacit assumption that it was every man or woman for himself or herself [note: even after Big Bang, women in high positions in the City were a rarity], and these values rippled out across society, changing behavior and attitudes in unexpected ways."

Very true, and applicable as well to the U.S. where millions of ordinary folks found themselves sucked into the market casino. Big Bang was essentially a reprise of the deregulation that swept Wall Street in the '70s, culminating in May Day 1975 when brokerage commissions were freed. Augar notes how the one-stop-shop American model led, if often circuitously, to our current crisis. "The power of this model allied to the winds of free market economics and financial liberalisation made monsters of these institutions. ... Big Bang was not the only cause of this but it set them along the road."

So it's worth pondering both May Day and Big Bang, if only to get a better grasp of the difficulties (bordering on the impossible) of long-term prediction and a more modest understanding of our own limitations. It's easily forgotten now, but both these bouts of deregulation resulted from chronic economic problems -- in the U.S., the confounding stagflation of the '70s, with its accompanying sense of imminent decline, and in Britain, the high unemployment and deepening growth problems of the '70s and '80s, accompanied by evidence of real decline and fear of the future. Like today, the banks, the brokers, Wall Street and the City received much of the blame for these macroeconomic woes. Both Wall Street and the City were heavily regulated, compartmentalized, defined by personal relations: In both, insider dealings were sanctified by custom and regulation. There was relatively little energy, or liquidity, in either place -- though most of what there was went to serving corporate clients. Both countries -- and this is important -- were dominated by large corporations. There was little new company formation; even the power of venture capital and Silicon Valley were not yet obvious in the early '70s. In fact, part of the transformation of finance -- the explosion of finance -- in both countries was a diffusion of capital in various and evolving forms, much of which fed the ranks of startups, particularly in tech. It's often forgotten now, but the Steve Jobsian entrepreneur as artist and hero -- and Jobs was the very model -- emerged in the U.S. in the '70s. And it was that model that, despite Jobs' countercultural style, helped fuel the already advancing free market movement. Then, of course, the entrepreneur as insurgent met his banker in the ascendancy of Mike Milken and junk in the '80s.

In Britain, the question to ask is: So what economic path would Britain have embarked upon if Big Bang had never occurred and if bankers and brokers were still wandering about taking long lunches and doffing their bowler hats? It is one thing to decry Thatcherite policies and tactics; but you can't deny the sheer desperation of the British situation in those years. Nothing seemed to work, and the notion that a more efficient, less class- and rules-bound financial sector could catalyze change was hardly crazy. Did the change have to be so abrupt and radical? Did the Thatcher government have to essentially call in the Americans to take over ancient British firms? Could the post-Big Bang City have been regulated more tightly and controlled more rigorously, more in the line of the French and the Germans? Perhaps -- and the same applies to the American system. But the advantages of the reforms appeared far more quickly and clearly than the disadvantages. In London, the City boomed again -- in terms of activity, taxes, real estate development, employment, energy. Finance for two decades became a key -- perhaps the key -- British export, and London consolidated its position as one of only a handful of entrenched (and increasingly dominant) financial capitals. At least in the City, no one needed to talk about decline.

The disadvantages, the consequences, the evils, the excesses and the scandals emerged in their most virulent forms far more slowly. They are now on display, some known, others conjectured, some wondered about. But historically at least, many of these negatives take on a more complex, ambiguous air. What's ethically more challenging? A system that rewards (albeit relatively modestly) a small club of pedigreed insiders or outsiders operating on the edge of nihilism and betting with huge stakes? What's economically more challenging? A financial system that doles out capital to a relatively small set of powerful institutions or one that spins out liquidity to corporations and consumers with little discrimination and increasingly lax standards? What is the optimal size and structure of the financial magneto needed to extract optimal growth from the real economy, without blowing up or overheating? We didn't have a clue in 1975 or 1986 to that last fundamental question, and we don't know now. Before we rush back to a past wrapped in nostalgia, we need to recall all the reasons we were so eager to undertake reform in the first place. And we need to understand how little we know of what we're doing.

The fact is, we can't go back. We can only try to reform the system, plane off its sharp edges, defuse its tendency to explode or implode, and keep trudging forward. This isn't half as much fun as the kind of transformational roll of the dice that Big Bang represents. Revolutions are nearly always exciting at the start; it's living with them that's difficult. But given our abundant limitations and imperfections, it may make a lot more sense to favor reform over revolution.