At the same time, the ballooning of trading activities was starving basic banking of resources. In consequence, the offering to bank customers became a rather different one. The humble, regional loan officer was pensioned-off, replaced by a centralised credit risk model which neither answered back nor required a pension. Branches were closed in an effort to contain costs. Banking became a transactional business, underpinned by a sales-driven, commission-focussed culture. The down-escalator Nonetheless, as long as asset prices were rising, the cheap credit strategy seemed to be working like a dream. For those who had borrowed, debt was being inflated away, not by the traditional route of goods price inflation but by asset price inflation. The world was experiencing the biggest bank bubble, perhaps in its history. In 2007, that bubble burst. Asset prices and balance sheets collapsed. The dream turned into a nightmare, as asset price deflation combined with high debts to put many balance sheets underwater. As the most leveraged institutions on the planet, banks were deepest underwater. To prevent those institutions sinking without a trace, governments were forced to ride to the rescue. This support came from both governments and central banks, in both cases underpinned by the tax-payer. All in, this support to the financial sector amounted to perhaps as much as two-thirds of annual GDP in the UK and US, somewhat less (but still rising) in the euro-area. Those government transfers were not shared equally even across the financial sector, with a strong skew towards institutions deemed too-big-to-fail.

With returns sky-high, there was then a great sucking sound as both people and monies were drawn into banking, in particular the high-risk/high return, sharp-suited parts such as investment banking. A generation of scientists’ and mathematicians’ heads were turned towards finance. Funds flowed into the bank money machine, with balance sheets rising fivefold in less than 20 years, much of it to support short-term trading activities rather than long-term investment. Yet even while it was still inflating, this bubble was already having silent costs – costs to the economy and indeed costs to other parts of banking. Many of the best people and the best financial resources were drawn away from other sectors, including the retail banking sector. Industries outside of finance were starved of sunlight. The costs of this great sucking sound are only now being properly understood. Recent research by the Bank for International Settlements suggests that, once bank assets exceed annual GDP in size, they begin to act as a drag on growth.3  1  Philippon and Reshef (2009). 2  Haldane (2011). 3  Cecchetti and Kharroubi (2012). 2  BIS central bankers’ speeches  Why? Because human and financial resources are drained from elsewhere in the economy. The sectors hardest-hit by this financial vacuum-cleaner effect are R&D-intensive businesses (who might otherwise have attracted the scarce, skilled labour that flowed into finance) and businesses reliant on external funds (whose financial cake was instead being eaten by the banking system). These are the very businesses that today we are seeking to re-nurture.