10 UK regulatory howlers which mean this is also a Credit Crunch made in Britain

This morning we learn from government sources that the PM has taken the action necssary to see us through the crisis. Did I miss something?

I heard the US authorities announce large extra liquduity for markets, and heard them announce a buy up plan for unloved mortgages. The US Congress, which is allowed to meet, will be passing emergency legislation next week. The UK Parliament has been prevented from meeting throughout this summer’s crisis and remains uninformed of the government’s latest forecasts and thinking.I saw the US slash interest rates some time ago to only 2%. I have not heard a thing from the Uk authorities, other than to say they will waive the Competition rules to allow a merge of a couple of UK banks, and are banning short selling for a few weeks.

The truth is that the UK version of the Credit Crunch is a particularly bad one, and has been made worse by this government’s actions in recent years. Far from helping solve the crisis, the government has helped the banks create a UK crunch through bad central banking and bad regulation. The main regulatory mistakes have been:

1. Taking crucial powers away from the Bank of England to run and understand the money markets in the 1997 reforms.The Bank needs to be the daily regulator of the main banks and needs to manage the government debt.That was always a disaster waiting to happen.
2. Appointing people – and reappointing – to the Monetary Policy Committee who kept interest rates too low in 2003-6 and are keeping rates too high in 2008. We need an MPC with better judgement.
3. Setting a new target for inflation control prior to the 2005 election which encouraged the Bank of England to keep interest rates too low – that was obviously a dangerous mistake at the time.
4. Abandoning Prudence after 2000, building up huge deficits in the public sector during a boom, instead of taking some heat out of the binge by cutting the growth rate of spending and by reducing borrowing.
5. Accepting and negotiating Basel I and Basel II regulatory systems for the banks, which encouraged banks to put as much borrowing as possible off balance sheet, and encouraged securitisation, selling loans into less regulated funds. Far from controlling the banks, the global regulatory rules encouraged the type of excess which brought the system down.
6. Introducing expensive and elaborate mortgage regulation, giving the impression that it would make things safe, when it had no beneficial impact whatsoever. Never have mortages been so regulated in the UK as today and never have we had such a big mortgage mess.
7. Showing the priavte sector how to use off balance sheet borrowing on a huge scale, through the big PFI and PPP schemes to buy extra public facilities on the never never without putting them properly into the public accounts.
8. Failing to put enough money into the money markets in the sumnmer of 2007, allowing the run on the Rock to develop.
9. Nationalising Northern Rock – so the taxpayer has to pay all the losses,and so one of our once largest mortgage lenders can no longer lend any new money!
10.Making foolish statements at crucial times for confidence – ln the summer of 2007 telling everyone there would be no bail out which encouraged a run on the Rock, just before announcing the bail out, and more recently telling us the conditions are the worst for 60 years whilst failing to give us any hard information about what that means and what the government’s forecasts are.

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9 Comments

  1. figurewizard
    Posted September 20, 2008 at 10:34 am | Permalink

    It’s good to see that while Northern Rock is pretty much gone, it’s not forgotten. What we should all be asking ourselves now though is if a £100 million commitment to a relatively small provincial mortgage company was crucial to ‘financial stability’ as Gordon Brown told us at the time, why wasn’t this also true for HBOS? The answer is twofold. Firstly Northern Rock was located in Newcastle; the hinterland of which contained some twenty three safe Labour seats that could have been put at risk if thousands of jobs had been lost there and secondly unlike HBOS, it was completely bust. Not only had it run out of cash, the value of its assets were worth far less than its debts. We are all going to be paying a long and heavy price for a decision that Gordon Brown forced on us all purely on behalf of the Labour party in general and what he saw at the time as the long term security of his position as Prime Minister in particular.
    Reply: I think it was a £100 billion commitment

  2. Kit
    Posted September 20, 2008 at 11:32 am | Permalink

    The FSA is dysfunctional and is a risk to the stability to the financial sector it is supposed to regulate.
    It has made many misleading statements, accusations of illegal activities with no evidence, and appears politically motivated.

  3. Nick
    Posted September 20, 2008 at 1:41 pm | Permalink

    You're wrong on securitisation. Very wrong.

    If the banks had securitised all their lending, then so long as they didn't act as idiots and buy it all back, there would be no problem. No systemic risk whatso ever. The risk would all be off their books completely, on or off balance sheet.

    So, John. As soon as the Tories are back in power, are you going to put the government liabilities on the books?

    State employee pensions? 1 trillion

    State pension? 4-5 Trillion

    Nuclear decommisioning

    PFI

    Railtrack

    Government guarantees.

    Reply: I have said we should account properly for all the state liabilities. Securitisation can be helpful as you say, but if taken to excess it ends up with far too many overleveraged hedge funds and other financial intermediaries owning too much debt, as we have just seen.

    Or is it just hot air?

    Nick

  4. Bazman
    Posted September 20, 2008 at 6:37 pm | Permalink

    The £1,000,000 Bank-Note By Mark Twain.
    I have always found this one a howler.
    http://www.eastoftheweb.com/short-stories/UBooks/

  5. mikestallard
    Posted September 20, 2008 at 8:29 pm | Permalink

    People are getting moral now. Some lefties are looking disdainfully at the rich bankers who walk away from the disaster with pockets stuffed fully of money, while the cleaners etc etc are left on the dole.

    Is the whole world financial system really built on greed? And fear of the bosses? And a total disregard for the people who actually create wealth through businesses? "I am in the life boat…." etc etc.

    It really seems to me that, in business, respect and empathy for the people who you deal with are vital. So is trust? My word is my bond? Leadership where it is animals first, then soldiers then officers?

    If we have forgotten that, then, surely, we just get a bunch of morons punching computers willy nilly?

    Lemmings?

  6. biltong
    Posted September 22, 2008 at 1:15 am | Permalink

    Dear John,

    Another example of the way our government works against our best interests is what happened last year to the company I worked for.

    The company closed down due to insolvency and all staff were made redundant. It was a manufacturing company (Yes we made things!). The insolvency was due to a combination of bad management and bad luck, and not due to a decline in business. We had orders that we could not fulfil due to us having no cash. The business was still there after we had ceased trading, and our products are now made abroad, the brand name having been sold on.

    The company could not pay our final wages and redundancy pay, so we had to wait 3 months to get these from the Insolvency Service. We got only the statutory minimum amounts, in my case just over £6,000 for 24 years' service.

    At the same time as we were being made redundant, the NHS "Strategic Health Authorities" were being reorganised, and 700 of their staff were made redundant. The government paid them £80 million in redundancy payments. This averages at about £100,000 per person, although senior managers got £350,000 on average. The Strategic Health Authorities were set up in 2002.

    I do not begrudge the SHA staff their redundancy payments. What annoys me is that the cost of just one SHA senior manager's redundancy payments would have been enough to "refloat" our company, and this would have kept 250+ people in employment and their jobs in the UK.

    Reply: Iwas sorry to learn of the loss of your job. I have from time to time highlighted the growing inequality of treatment between public and private sectors. You make a powerful point.

  7. Chris Hutcherson
    Posted October 2, 2008 at 7:27 pm | Permalink

    Now that the Senate has passed the 700 billon bailout has Wall Streets destiny been sealed?

  8. Mohammed
    Posted October 25, 2008 at 6:46 pm | Permalink

    Hi John,
    I am a student and was doing an research in the financial Systems and institutions. One of my very close friend was working with a company and the company had 8 staffs and in one stage the company had a fire accident and they have lost all the stocks which is worth of £50000 and there was a lil bit of damage for the building.

    After the fire the company have closed down and they had a insurance claim for £8 million (Unbelievable) but they gave their staffs of just £500 and said they company is in heavy loss..

    what do you think abt it??

    • mikestallard
      Posted October 26, 2008 at 9:52 pm | Permalink

      Have you read "A House for Mr Biswas" by VS Naipaul?
      Insur'n'burn?

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    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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