The Financial Rust Belt (New York and London)

[marmar]

from the Asia Times:



Financial services rust belts
By Martin Hutchinson


Those who have visited Michigan recently or the Mahoning Valley of Ohio in the 1980s can recognize the symptoms of a rust belt. A hitherto prosperous industry, paying high wages to its employees, has been overtaken by market changes and is forced into harsh downsizing or even bankruptcy. As a result, the lives of many inhabitants degenerate into alcoholism, home foreclosures and welfare.

This time around, the decaying industry is finance, and the rust belt cities are London and New York.

The parallels with the US automobile industry are closer than they look. In the early years of the auto industry, it included both large companies and small specialty manufacturers, the latter being remembered now as producers of "vintage" cars of very high quality. Then the Great Depression wiped out most of the specialty producers, which could not compete with the mass producers' costs. For the next several decades, the business was dominated by a heavily capitalized oligopoly with extremely highly paid employees, quite high profitability but deteriorating product quality. Finally, it became clear that the oligopoly was uncompetitive and the industry began to shed workers and close plants.

In finance, the early specialty producers were the London merchant banks; for Duisenberg, Packard and Stutz you can substitute Hambros, Warburgs and Hill Samuel. They, too, had superb product quality and are remembered with great fondness by their former customers. They were driven out of the business by heavily capitalized competitors, in this case running behemoth high-risk trading desks rather than mass-production assembly-line factories. The employees of the well-capitalized behemoths were even better paid than the unionionized, UAW car workforce in the 1950s. Then gradually product quality began to deteriorate, and bad practices such as "liar loan" securitized mortgages, accounting "mark-ups" of assets that had not been sold and self-deluding risk management crept in. ........(more)

The complete piece is at: http://www.atimes.com/atimes/Global_Economy/KA28Dj02.html