Where does the money come from?

Simple question, really.

We’re told that the City is essential to the economy. We know that Labour dared not do anything about it, because of the tax revenues it generates.

It generates lots of money and its highly-paid staff pay lots of taxes that are used to to pay for public services.

But what’s not clear is where the money actually comes from.

City banks are profitable. Nothing wrong with that, on its own. But when even the bankers don’t really understand how the profits are made, we are in trouble.  And I’m not sure they do.

My experience tells me that institutions profit from my money. They don’t profit in proportion to the profits they earn for me, but in proportion to the products they sell to me. If those products (like the pension and endowment savings policies I’ve bought over my lifetime) turn out to be worthless, they’ve already made the profits.

We got wise to most managed funds. Endowments stopped making any sense once the tax relief went, but we were still mis-sold them. A lot of insurance was mis-sold.  Packages of mortgage debt were mis-sold, and I am sure somewhere there’s someone who’s got units in a gold-plated sovereign debt fund that’s not so gold-plated now. But when it was sold, the bank profited in two ways. First, by offloading junky assets at the top of the market; next by taking a commission on the sale.  Every IPO/MBO cycle results in the bank profiting and the ordinary saver losing out.

My hunch – no, it’s much more than a hunch, it’s a conviction, but I haven’t done the detailed analysis to prove it – is that all the surplus profit made by the City was generated by looting its clients’ money. Not real profits, then, but theft.

The only wise investment I’ve made in my lifetime has been in my house. That’s the same for most of my generation, and it’s had two bad effects. First, it’s priced the next generation out of the market; and second, it’s meant that there’s been no capital or money or – ultimately – talent  left for doing real stuff that actually makes us all better off.

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