Uncontrolled capitalism and uncontrolled government

I am glad the Prime Minister has reaffirmed his support for free enterprise and markets, whilst calling for proper regulation. This echoes our calls in the Economic Policy Review for better regulation of banks and the credit they extend by the Bank of England, when we warned of the dangers stemming from the loose monetary controls exercised in the early years of this century. We need the Bank of England to get its old powers back that this government removed. Then it might be better able to judge conditions in money markets, and avoid the excesses of easy money and tight money we have witnessed in recent years.

We also need to call today for proper control of government. The government should not have stepped in so clumsily with new capital for a couple of Scottish banking groups. If the government and Regulator wanted a bank or two to increase the capital required because it thought one or two banks were in a weak position, it could have done so through private discussion with the affected banks without letting their share prices suffer through leaks. If the Regulator wants to raise the minimum required capital for all banks it should make a statement about it, and give banks a period of time to adjust.They could do much more to remedy their own positions, without having to rush to the state as their new paymasters.

Any bank short of capital should as a high priority take action to keep more of the cash it is generating from its operations. Dividends should be cancelled. Bonuses to staff should be cancelled if the bank is running out of cash and capital. People on high salaries – say over £200,000 a year – should be asked to take a pay cut in a bank in need of state aid. If they prefer to move on that helps cut the costs. There should be a staff freeze on new recruitment, and discussions with staff about smarter working to see the bank through the troubled period. There are many ways of conserving cash and generating more profit in a large business. In the UK it is wrong to expect the taxpayer to finance a big merger between two banks. If the banks concerned can only do the merger with public money, they should be told they cannot do it. It is no business of the taxpayer to finance huge deals to reduce the amount of competition in the banking market. The total dividends paid by the three banks seeking public funds amounted to a massive £7 billion in 2007.

If the government presses on with its plans to nationalise RBS I can only see problems ahead. The pay levels, lending policies, attitudes to customers and much else will become legitimate matters of public debate. The rest of the public sector will be jealous of the special treatment highly paid bank workers receive.Taxpayers will be bemused at what is happening to their tax money.We will all be angry if the nationalised bank then proceeds to large write offs and losses. These banks are too big for the taxpayers to own and sleep easily at nights.

Any bank in need of help should receive loans and assistance in the normal way from the Central bank. The taxpayer should be protected by taking sufficient security for such lending.

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12 Comments

  1. Glyn H
    Posted October 18, 2008 at 10:53 am | Permalink

    Sentance one should be judged by his actions, not his words!

    As ever your comments are lucid and sensible. These ammendments should be added to 'The Plan, 12 months to Renew Britain' , by Carswell and Hannan which covers a great deal concerning what is wrong with our administration today.

  2. Acorn
    Posted October 18, 2008 at 11:45 am | Permalink

    Our new FSA big whig, says he will buy in bigger brains to regulate the even bigger brains in the finance industry. I wish him luck. One thing he has to do is to make the system much more transparent, globally.

    Far to many of these dodgy derivatives are not openly traded, they are sold "over-the-counter", privately by entities on other "referenced entities" with which neither party has any connection or ownership (naked); they are simply bets on some disconnected outcome, a lot like some race horses I know.

    Even the BIS – the central bankers central bank – admits it can't track all of them, let alone price them at anything other than there "nominal" price. As I understand it, next Tuesday every issuer of Lehman CDS has to pay up; hopefully they will have the cash. If not, there is a hint that the global CDS market will be shut down while every player "nets out" what A owes B against what B owes A. That's the limit of my understanding, what say you.

    "If the Regulator wants to raise the minimum required capital for all banks it should make a statement about it, and give banks a period of time to adjust – JR". Again, as far as I understand it, the eastern states do this openly. India and China to name but two usually announce the required capital ration when they announce a change in the base/repo rates. China put it up to 13% at one stage earlier this year; India 9%, on inflation worries. The BoE was at 2% and apparently went to 5% – was this an inflation worry or capital building for the then coming Armageddon?

    Until all this stuff becomes 100% visible in a global, regulated, open market, every player – including taxpayers and shareholders – will remain fixed to the worst case scenario.

    I have decided to give up my amateur studies of macroeconomics; it makes my brain hurt.

  3. Kit
    Posted October 18, 2008 at 12:55 pm | Permalink

    This may be a silly question but do we have a credit crisis? Yes I know that some banks are buggered but my letter box is still filled with loan offers at reasonable rates, I've just taken out a large (for me) commercial loan again with a good rate, and speaking to business friends none seem to be finding it difficult to find credit. I know this is anecdotal but before we bankrupt future generations do we really have a problem?

  4. Tony Makara
    Posted October 18, 2008 at 2:41 pm | Permalink

    We only get accountable government if we get effective opposition. The Conservative and Liberal parties must ensure that the recession does not lead to wasteful spending by the government. Mr Brown et al may well see the recession as a golden opportunity to bind all aspects of national life to state spending, and in so doing shift the political landscape of the country. I hope all opposition politicians will be vocal if the government moves from providing economic stimulus to ideological self-aggrandizement.

  5. gordon-bennett
    Posted October 18, 2008 at 3:30 pm | Permalink

    If the free market system feels that bonuses are a good way of enhancing productivity and/or profitability then such systems should be allowed by the regulator.

    However, bonuses should only be payable in the form of shares or share options and this will ensure that bonus systems are tied to the long term success of the business.

    Much as I hate to interfere with free markets, it should not be allowed for an employee to be rewarded for a deal until the passage of time shows that the deal was sound.

    Also, when are they going to repeal or amend the Community Reinvestment Act in the USA? Until this is done this financial crisis will repeatedly recur.

    • not an economist
      Posted October 19, 2008 at 1:29 pm | Permalink

      “If the free market system feels that bonuses are a good way of enhancing productivity and/or profitability then such systems should be allowed by the regulator.”

      Where the free market is allowed operate then this is fine. But if public money is being used to bail out an entity then the rules of the market have been effectively suspended. As Cameron pointed out in an interview the other day on Radio 4, we have to be sensitive to the sense of public outrage that may very well arise if a govt bails out an ailing bank and then we witness the spectacle of huge bonuses being paid effectively out of public money.

  6. Lola
    Posted October 18, 2008 at 3:47 pm | Permalink

    Mr Redwood, that's a bit naive. When banks run out of their money the last thing they do is cut the divi or keep a control on staff pay and bonuses – they just increase their prices. It has always been thus and will become ever more thus after Browns bail out. Retail banking is an unprofitable cartel. The only way I can see to solve this is to break up the banks and get them to segregate retail – and preferably very well capitalised banking -from investment – and hence very risky – investment banking. But the cartel must go.

  7. mikestallard
    Posted October 18, 2008 at 5:54 pm | Permalink

    It seems, from this article, that you think the government as well as the banks can – and indeed should – reduce their spending.
    The myth we are being sold is, however, that the banks cannot do this and the only hope is to nationalise them. Secondly, there seems to be no discussion at all about reducing government wastage/expenditure/inefficiency.
    I do not hear a lot from the Conservatives – present company always excepted – about this.
    Meanwhile, I take the dog for a walk and get an earful about Mr Brown from a nice stranger with a labrador who works in a local factory driving a fork lift. His dream is to emigrate to Canada because has had it up to here….
    We need leadership.
    Please.

  8. oldtimer
    Posted October 18, 2008 at 6:06 pm | Permalink

    I agree totally with your view. The Elliott/Wighton article in today`s Times is revealing in two important respects (other than the authorship of the “rescue”). First it says that it needed a sharp drop in the share price to persuade them of the need for action, an aspect of which (ie Mr Peston`s role) has already been questioned by Mr Howard. The second is the way that Matthew Greenberg of Merril Lynch (representing Lloyds-TSB) was forced into a corner to the agreement presented to the media. This was no way to determine the terms of a merger.

    I hope that you and the Conservative party will pursue these issues vigorously in the House of Commons.

  9. Bazman
    Posted October 18, 2008 at 6:18 pm | Permalink

    How about the red tape and regulations involved in building, running and decommissioning nuclear power stations? The market could solve all our energy problems! Every town and city could have their own power supply. Built and run by private individuals and companies. Each built by cheap foreign labour and run by a middle aged smart Alec. Grants will be of course be available for everything. Any elf and safety can be ‘managed’ and if the worst comes to the worst all the right people will have private jets on standby the mess will be bailed out by the taxpayer.
    It’s like any crime scene. Look for motive and opportunity.

  10. Bazman
    Posted October 18, 2008 at 9:38 pm | Permalink

    “special treatment highly paid bank workers” Like it John. Many of these ‘smart people’ on millions a year did their best to hold down the salaries of tens of thousands of bank workers who claimed benefits from the state. No bonuses for them boy! No I do not want to ‘upgrade’ my account! Subsides no less, not politics. Facts! Disgusting and outrageous mikestallard. By the way they paid me £2.50 interest on my current account this month. Long day if I have to pay!

  11. not an economist
    Posted October 20, 2008 at 8:25 am | Permalink

    Has anyone in this govt actually said that the nationalisation of the banks is planned to be temporary?

    It just that it occurs to me that for some in the labour party this provides an ideal opportunity for the permanent state ownership of what is an essential part of capitalism. Any talk of re-privatising them could always potentially be countered by a long monologue about recent events and how they (in their eyes) demonstrate that the capitalist model has failed.

  • About John Redwood


    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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