A bit of a bunfight has broken out in London about whether the City (read investment bankers) is socially useless or not. Lord Adair Turner, head of the FSA, said that some types of financial innovation are socially useless, according to Financial News. Michael Spencer, chairman of uber-broker ICAP begged to differ. He said he was "genuinely offended" that Lord Turner would say such a thing, then blamed the Labour party for allowing the financial crisis to happen. The City of London has not changed much under Labour, nor has the regulatory system in the UK, so that was a bit self-serving (Spencer is treasurer of the Conservative party). Spencer also spoke out against Lord Turner’s recommendation of a Tobin Tax on financial transactions. Here, I agree with him. A tax on transactions will only force more players out of London. Switzerland is already gaining the lion's share of hedge funds that are moving out.
The City has its uses, the biggest of which is that it generates huge amounts of corporate and income taxes to spread all around the country. As for financial innovation, I am going to wade in here and say that I think most financial 'innovation' comes from US banks - certainly most of the credit derivatives that helped cause the crisis were invented here. The innovation of such products cannot be called 'socially useful' unless you define it as 'money spinning'. The obfuscation and complexity that they add to the system are not in any other way useful.