That was no light touch regulation – that was wrong touch regulation

The way Labour and the BBC framed the debate yesterday about financial regulation was typical of the skewed view of the what is going on that now passes for public debate in this country.

The Labour spokesman on Newsnight tried yet again to blame Margaret Thatcher for the crisis for “deregulating” the banks in 1986. If that policy was so wrong why did they not reverse it in 1997? If it was so bad, why weren”t the banks in financial trouble ten years later on the eve of Labour coming to power? Did they not notice that she kept in place strong regulation of capital and cash by the Bank of England, which worked? No bank over lent and overstretched in the way they have been doing this century because they were not allowed to. As Michael Fallon rightly pointed out, it was Gordon Brown who put in a new system of regulation in 1997. It was that system of regulation which failed to control the over expansion of bank activities with too little cash and capital in some cases to support them.

Even more ridiculous was John Mc Fall’s further attempt to blame the Conservative’s Economic Policy Review for recommending “the deregulation of mortgages”. If he could be bothered to read the Report and be accurate he would have stressed how right we were to tell the government they needed to regulate the capital and cash of the mortgage banks, not the process of granting the mortgages through a useless box ticking procedure which demonstrably did not prevent the disaster which hit the mortgage market. The government designed expensive and complex new mortgage regulation which did not stop a single excessive mortgage being lent to someone who now cannot repay, and did nothing to keep Northern Rock solvent. They destroyed a regualtory system which had kept all main banks solvent for more than 100 years.

The argument should not be about light touch or heavy handed regulation.Lurching from so called light touch to heavy handed will not help. There is no susbtitute for having just a few good regulators who know how to control cash and capital for banks and near banks. The Bank of England used to do that. It is a pity it was stopped from doing so during the period of irresponsibility , 2003-6. This disaster happened in a heavily regulated industry, regulated to Labour’s standards under a new and expensive system designed by Labour in 1997.

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31 Comments

  1. Ian Jones
    Posted February 26, 2009 at 7:38 am | Permalink

    The saddest part about it is that Gordon was told his system would fail by those at the Bank of England (Eddie George). Did he listen?

    Gordon Brown will destroy this economy if he stays much longer.

  2. Jim Pearson
    Posted February 26, 2009 at 7:53 am | Permalink

    I read and enjoy the thrust of your Blog with great Gusto. I have just bought my first home, and needed the help of my parents to provide me with a deposit. The deposit was 35% of the house value but lenders were reluctant to give me credit. This is the first time I’ve ever applied for anything and the difficulties were immense. All the banks explained that in order for me to get a morgage I should act more like Gordon Brown and be a spender. I spend ten years saving and raising a family and have a steady job, but am less likely to get credit than a credit junkie. Any idea when this madness will end?

    • chris southern
      Posted February 26, 2009 at 11:52 pm | Permalink

      It’s because banks prefer people who they know won’t always make payments on time but do pay up, as well as people who generaly pay off the interest only.
      They make a fortune from it, as we all know.

  3. Frustrated taxpayer
    Posted February 26, 2009 at 8:35 am | Permalink

    I agree that Paxman did a poor job of interviewing the two MPs last night, although he did manage to get McFall to squirm over whether the PM should apologise for his failed reorganisation of banking regulation.
    I also agree when you say: “Even more ridiculous was John Mc Fall’s further attempt to blame the Conservative’s Economic Policy Review for recommending ‘the deregulation of mortgages’. If he could be bothered to read the Report”. However I think that Michael Fallon actually let the Conservatives down in his response to Mc Fall – he should have made it clear that Mc Fall was talking rubbish and clearly had not read or understood the Conservative’s Economic Policy Review.
    The testimony before the Committee yesterday by Lord Turner was considered and exposes the lie about this being a crisis originating from the US. If an appropriate regulatory regime had been in place with strong regulation of capital and cash banks would not have got themselves so enmeshed in complex financial products. Lord Turner is a respected figure – his testimony needs to be constantly referred to by the Conservatives and Lib Dems to constantly highlight Brown’s failure.

  4. oldtimer
    Posted February 26, 2009 at 8:40 am | Permalink

    I, too, watched the exchanges on Newsnight and thought Mr McFalls comments were disgraceful. It was just as well that Mr Fallon was there to correct the falsehoods and to point out that five of of the UK`s 9 largest banks had gone bust under ths government`s regulatory regime. It is a catastrophe of the first order.

  5. Brian Tomkinson
    Posted February 26, 2009 at 8:51 am | Permalink

    Mc Fall’s performance on Newsnight last night was quite pathetic particularly as he is the Chairman of Treasury Select Committee. I have also noticed the Labour spin machine in action trying to blame Mrs Thatcher for all these current problems – even David Davies, formerly at the FA and clearly a Labour apologist, was trotting out this line on the BBC newspaper review last night. Michael Fallon is always impressive and I think that you and he would make a formidable partnership.

  6. THE ESSEX BOYS
    Posted February 26, 2009 at 9:33 am | Permalink

    We have said this before. It is entirely wrong that the chairman of the watchdog committee should be sent out to promote government policy.
    For the first time that we can recall his deputy, Michael Fallon, at least was allowed to appear alongside to reveal much dissent in the camp – thankfully and quite understandably. (This is a man who does know how to interrogate and hold to account and clearly he should be in the chair.)

    Mr Mc Fall was again on the media circuit on Sky this morning but could offer no reason why Mr Goodwin had not been challenged on his pension when he appeared in front of the Committee or why – for goodness sake – the chairman had only learned about the obscene arrangement in the past 2 days!

    ARE THESE PEOPLE TOTALLY INEPT – OR PLAIN DAFT – OR DO THEY JUST THINK WE ARE?

    • APL
      Posted February 27, 2009 at 5:42 pm | Permalink

      The Essex Boys: “ARE THESE PEOPLE TOTALLY INEPT – OR PLAIN DAFT – OR DO THEY JUST THINK WE ARE?”

      We know they think we are and in truth we must be, because only a short while ago MPs were justifying their pay rises on the grounds that since running the fifth largest economy in the world was a big job, they all ought to get a spanking big pay rise too.

      Now, oddly enough, the focus is not on the MPs pay but the pay of bankers who, after all worked within the regulatary framework set up by the politicians.

      And of course, Gordon Brown our self appointed Prime Minister and former chancelor – that is the man in charge of the british economy for a decade – blams it all on the USA.

      Talk about passing the buck.

  7. Deborah
    Posted February 26, 2009 at 9:40 am | Permalink

    I hate the way the media allows politicians to get away with rewriting history.

  8. brian kelly
    Posted February 26, 2009 at 10:16 am | Permalink

    I entirely agree. Sums it all up. It is tiresome but it needs to said again and again. Labour are ignorant of the way ‘things’ work in the ‘real world’ and utterly incompetent in the way they deliver on their policies. They are leaving this country in an horrendous mess across all areas of policy. I heard Alistair Darling interviewed by Evan Davis on the BBC’s Today program this morning and it was a disservice to the people of this country to hear such gentle questioning of Darling. I think we deserve better than this – in many ways the BBC is becoming more and more an arm of the govt. Nor was there any follow up by a ‘proper’ economic commentator or opposition spokesman.

  9. arisaig
    Posted February 26, 2009 at 10:34 am | Permalink

    John,

    I am a solicitor involved with residential conveyancing for over 20 years and although we do not deal with arranging mortgages we do act on behalf of lender and borrower in putting the security in place. The Northern Rock loans that were being granted to (very often) first time buyers were drawn down on the basis of a security over the property for its full value plus additional unsecured personal borrowing regulated by agreements under the consumer credit regulations.

    This is the means by which people were borrowing far in excess of already inflated property prices, and achieving the purchase of the property, all legal and other costs,and money to kit out the home or take a cruise!

    Years ago MIRAS enabled many to puchase a property without resorting to overborrowing, and equity release was mainly available only for approved improvements etc to enhance the value of the home…. a return to this type of structure would make sense without inflating prices in the spiral we have seen.

    Your insight into the financial chaos created by Gordons Labour is invaluable, like many of your readers I just wish your profile was raised and that your questions were answered by the Government…

  10. Demetrius
    Posted February 26, 2009 at 10:45 am | Permalink

    I am surprised only that Labour is not blaming Stanley Baldwin, Lloyd George, Balfour, Disraeli, and Peel. Or even Walpole.

  11. Robert
    Posted February 26, 2009 at 12:04 pm | Permalink

    The history of regulation of financial markets is one of doors being closed after horses have bolted. Sarbanes Oxley in the US was enacted to address corporate and accounting scandals following Enron, Tyco and WorldCom yet did nothing to stop the implosion of the US banking system. The US securities market is the most highly regulated in the world but no-one spotted Madoff. The Basel regulations were supposed to monitor the banks but failed to stop the credit crunch.
    The expansion of the hedge fund industry and derivaties markets was probably encouraged by the fact that they were less heavily regulated than more mainstream investment. Add more layers of regulation then the risk takers active in those markets will simply dream up new high risk vehicles in even more opaque areas (tulips maybe?). What is left behind is a high water mark of regulation in the mainstream that hampers, not helps, market activity.
    Surely what we need is a government that does not egg on specific segments of the economy so it can crow about that segment’s success to the benefit of its political book. The way the debate is being framed at the moment anyone might think that the chief execs of the banks wanted to drive their businesses over a cliff, which hardly seems probable. If a Prime Minister/Chancellor says to the banking segment, as the Newsnight clip last night so neatly showed, “we think you’re doing great and we have the regulatory structure to prove your safe” then you can’t then turn round 18 months later and castigate the same bankers for their foolhardiness.
    John, you may disagree, but in my view the root cause of the problem was a government that was reckless in its control of the money supply whilst trumpeting its regulatory prowess. The result was that it distorted debt markets, particularly in terms of the risk perception of investors, depositors and, most importantly, bank boards.
    In other words, a politicised regulatory system is one of the causes of the banking crisis, not the solution.

  12. oldrightie
    Posted February 26, 2009 at 12:11 pm | Permalink

    “If he could be bothered to read the Report and be accurate”.

    The BBC are asked to run a propaganda item to blame anyone but Labour and if they can smear The Opposition it’s seen as even better TV.
    I suspect that if we looked closely we might have seen the almost invisible strings operating this buffoon. Just like Muffin’s were visible in years gone by.
    Labour and The BBC are shameless in their avoidance of gross culpability and compliance ,in wrecking this Country.

  13. APL
    Posted February 26, 2009 at 1:48 pm | Permalink

    JR: “The Labour spokesman on Newsnight …”

    Do you mean Jeremy Paxman?

    Gordon Brown is responsible, Gordon Brown was the finance minister, Gordon Brown in now the *self appointed* Prime minister.

    Gordon did for us!

    Can we at least ensure that he is a poor in his old age as many of the rest of the victims of his economic policies?

    • APL
      Posted February 27, 2009 at 8:16 am | Permalink

      Who is Lord Myners and what is his qualification to have an opinion on anything? Has he been elected to the Lords (a rhetorical question)?

      We know the list of Labour unelected meddlers is getting longer by the day.

      ‘Lord’ Kinnock, still obliged by his pension to the European Union.
      ‘Lord’ M(andels)on, twice (resigned-ed) Labour cabinet member and still receiving his pension from the European Union.

      ‘Lord’ Ahmed. a convicted criminal.

      And ‘Lord’ Myners. A ( ex financial sector director-ed) and extremely rich as a result of Gordon Browns financial (mis) engineering that has led the country to the dire situation we find ourselves in just now.

      ‘Lord’ Myners has the bare faced cheek to criticize Fred Goodwin for taking a pension. The Brass neck to criticize the ‘practices’ of the City of London.

      I do not criticize Myners for his wealth, I do criticize him for his hypocracy.

      ———-
      Amusing defination of ‘hyprocracy’.

      What Democracy turns into when all of the politicians in your country (mislead and spin-ed).

  14. basementcat
    Posted February 26, 2009 at 2:28 pm | Permalink

    Well said.

    The failure by Labour was in part owing to a very half-handed tripartite regulatory system. Gordon Brown seemed incapable of deciding who was actually going to have the authority to do anything, which was a point discussed at length when Northern Rock became Northern Wreck. Neither the FSA, the Treasury, nor the Bank of England seemed to know who should have acted and when; a great flaw in their implementation.

    Sad to say, we now get the New Liebour spin machine operating at full capacity. Blame it on Thatcher, she started it. As you quite rightly say, no, she didn’t. Thatcher and Reagan had absolutely the right approach to business and finance, it was the failure of successive governments and administrations to understand how to regulate effectively (and perhaps more importantly, efficiently) that led to this crisis.

    They mistook complicated business legislation as the answer, and presided over a failure to pay attention to the finance market. Instead, they encouraged mass borrowing.

    It seems to be a trait of this Government that it cannot accept that it made mistakes – admitting them is so far off the map its falling over the edge of the world. Passing the buck is a way of life for Brown & Co.

  15. Susan
    Posted February 26, 2009 at 3:35 pm | Permalink

    Exactly. Right touch not light touch. No wonder some of us are so exasperated.

  16. Johnny Norfolk
    Posted February 26, 2009 at 3:51 pm | Permalink

    This is Labour all over. Trying to muddy the waters instead of facing the truth.

  17. Lola
    Posted February 26, 2009 at 4:00 pm | Permalink

    Exactly – what I have been saying since FSMA 2000 came into force in 2001 and from 1997 when by taxing pension funds Brown demonstarted that he had no clue about money and capital.

    Will your party now make a bold statement that the FSMA 200 will fully reformed or better yet repealed and that the FSA/FSCS/FOS structure will be stopped in its trackes whilst it is investogated and that anything that they now do will be up for change.

  18. Barbara
    Posted February 26, 2009 at 5:28 pm | Permalink

    Hear, hear.

  19. Colin Adkins
    Posted February 26, 2009 at 6:18 pm | Permalink

    I agree 100% with your comments but why are there no conservative spokesmen offering up these views on TV and radio.
    Joe public thinks the ony policies offered as an alternative to the disastrous Brown is Vince Cable.
    When will the useless George Osborne have something useful to say instead of his useless platitudes?
    The party is not even attempting to score when the goal is wide open!
    I appreciate there is only so much you can do, but your views are only very occasionally given voice in the mass media were the battle is being fought.

  20. Matthew Reynolds
    Posted February 26, 2009 at 6:57 pm | Permalink

    Well said John ! Mr McFall & his friends are just reinventing history in th usual New Labor way. The BBC & their political masters are up to their usual tricks. Your blog is a wonderful refuge for people who despair of the lies told by this lame excuse for a government – please keep up the good work ! If the Thatcher approach was being followed now ( light , common-sense regulation , falling taxes , a sound anti-inflationary framework , a smaller state etc) then the UK would be far better placed to deal with this global recession.

  21. mad tony
    Posted February 26, 2009 at 7:44 pm | Permalink

    The creation of the FSA is obviously a mistake. The only way to have been able to keep pace with this is to have as many specialist regulators…The FSA clearly did not talk to the DTI and knew nothing about Banks.
    THE PREVIOUS REGULATORY APPROACH MIGHT HAVE ENSURED ALL TRADABLE FINANCIAL INSTRUMENTS WOULD HAVE BEEN AT LEAST REGULATED. Professor Gower would probably have confirmed this if asked because the regulators were up to speed withtheir regulated organisations.
    Ultimately, Labour blames the US working class (and not friends Greenspan and Clinton) for defaulting mortgages.
    Finally, the key to regulation is not to have one super regulator but to have lots of little ones who can keep tags and up to date on instruments. It is too late now

  22. mike stallard
    Posted February 26, 2009 at 8:34 pm | Permalink

    One of the most unpleasant things about this government is its rewriting of history. 1984 starts with Winston Smith rewriting history. Until very recently, the Labour Party were convinced that Ken Clarke left the country in an economic mess and that “Gordon” had freed up the banks.
    One of the first acts of the incoming Conservative government ought to be to restore the position under John Major’s government.
    (And discipline the BBC??)

  23. THE ESSEX BOYS
    Posted February 26, 2009 at 10:05 pm | Permalink

    Like JR, Prof Willem Buiter, former MPC member, is never mealy-mouthed in his criticism of the government and regulators’ flawed actions.
    This evening on ‘Jeff Randall Tonight’ he estimated that of the likely 500bn plus of taxpayer-guaranteed ‘toxic debt’ from RBS and Lloyds/HBOS we could easily sacrifice £100bn; 20% sounds not unreasonable.

    Like us he is mystified why this convoluted and vastly expensive method of engendering increased lending has been adopted and why the existing shareholders and creditors have been given such a good deal at the probable expense of the taxpayer.

    Is there any danger of a conflict of interest at the heart of the government cabal making these enormous decisions? Surely it’s not ALL naievity and incompetence?
    We were asked today if it’s coincidence that both troubled banks hail from Scotland as do the 2 major government players – and the families and friends of prudent Scotsmen invariably hold shares in their banks?
    Never thought of that but how do our decision-makers deal with potential conflicts of financial interest? Surely they’re not as cavalier with their own funds as they are with ours!

    Sounds like someone’s head will roll over the Goodwin pension fiasco. Gordon will ensure it’s Myners rather than his…but how long can we allow the 6 current directors who apparently waived through this unnecessary arrangement in October to remain on the board of OUR bank?

  24. rik
    Posted February 26, 2009 at 11:53 pm | Permalink

    I didn’t see the program but it has been apparent for a long time that the BBC and the media in general are complicit in supporting labours story line. Something has to be done about this otherwise the conservatives will lose the next election. Also I do not know how you will achieve it but your voice and your incisive argument has to reach a wider audience.

  25. chris southern
    Posted February 26, 2009 at 11:59 pm | Permalink

    The scary thing is that various members of the public still think he is doing a good job!

  26. Graeme Howard
    Posted February 28, 2009 at 2:48 pm | Permalink

    Dear Mr Redwood,

    You often state the cause for the boom, and subsequent bust, was the government’s relaxation of the regulation of bank cash and capital.

    Please can you give specific details of the changes in the regulation. I would like to know exactly what the requirements were before and after the government relaxed them.

    I understand that lowering the banks reserve requirements will inevitably cause credit inflation through the money-multiplier effect. I assume this is the mechanism you believe caused the boom.

    Can you demonstrate (in figures) that the changes in regulation led directly the the credit boom, and that the size of the boom (and bust) was in line with what one would expect given the relaxation of capital and cash requirements.

    Reply: I have done so in previous posts. Roughly bank balance sheets expanded by 50% on the same capital base thanks to Basle.

    Regards,
    Graeme Howard

  27. John B
    Posted August 12, 2009 at 4:48 pm | Permalink

    I know this is a late posting to this blog and I apologise.

    I would like to ask a question.

    Given the change in regulation and the disasterous policies of the worst Chancellor in history can the blame for this global disaster be laid at his door?

    My reasoning is as follows:

    AIG FP was the principle underwriter of mortgages both sub prime and prime, in 2000 they began gearing up this division.

    AIG FP was based in Mayfair and their loses reduced the AAA rating of their parent which induced a cash call this directly led to Lehmans failure and we all know the rest.

    Now why base yourself in the UK?

    Kind regards

    John

  28. D B Ward
    Posted September 29, 2009 at 3:38 pm | Permalink

    Dear Sir,
    You are exactly correct. Gordon Brown’s Light regulation of the banks caused the recession. I told my wife 4 years ago, his credit led economy would end in tears.
    I have just seen Gordon Brown giving his speach to the Labour Party Conference. He is in cloud cuckoo land. They want free swimming baths. Brilliant, a Labour Council has shut ours down.
    Obviously they can’t afford it. Everything has to be paid for.
    He blames the Global economy for the recession, never blaming himself.
    He wants to help young teenage mothers more. All that needs doing is to tell these young girls, that if they get pregnant, the child will be adopted and there will be no more unearned hand outs. There is the pill. the morning after pill as well as other forms of birth control. The main one, being celibate before marriage.
    Scrap sex education and advocate love and marriage.

  • 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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