The intelligent bank manager will win in the end

Yesterday the Institute for Economic Affairs gave me a platform at one of their lunches to set out my analysis of the Credit Crunch and my proposals for resolving it. The lunch was unsually well attended. There was little dissent from what I had to say. I set out why I thought the government should be the intelligent bank manager to the banks, not their owner.

Most seemed to agree that the crisis had been brought on by a broken Bank of England, by loose regulation of cash and capital, by an MPC that made the wrong calls, by Competition authorities who allowed over large bank mergers and by banks that did not understand how much excessive risk they were running. Many agreed that nationalisation was an expensive and dangerous option. The audience liked my intelligent bank manager approach, based on rebuilding the Bank of England as a competent Central Bank with the full range of central banking powers and duties. All seemed to agree we need to break up RBS, cutting taxpayer risk and disposing of assets.

The main disagreements centred around why this view did not regularly get represented on the BBC and wider media, and over Glass Steagall.

I am always surprised that people expect to hear intelligent and rational analysis on the BBC from an anti government position. BBC journalists take their lead from government spin doctors. The last thing they want at the moment is any idea that the idiotic “rescue” of the banks last autumn was anything other than inevitable or inspired. Conservative critics either have to be kept off the airwaves, or made to sound out of touch or extreme. Mr Cable is put up as the voice of “opposition” and given soft appearances as well to be made to look good, for he also suppports nationalisation. I have set out this alternative thesis many times, on this blog, in public and private meetings and in the Commons. All these methods are good ways of keeping it secret from the BBC audience.

If I asked the BBC why, they would probably say because the main Establishments do not agree with you so it is not going to happen your way. I think in the end they will even be wrong about that. I suspect any Conservative government would follow a risk reduction strategy on the nationalised banks they inherit, and would say No to any more nationalisation. I suspect even this government will be forced into asset sales and risk reduction, as the magnitude of the sums involved becomes more apparent.

As to Glass Steagall, I do not think in modern banking it is easy to make the distinction between clearing banking and investment banking, and keep them seperate. To cut banking risk you just need a regulator who demands more capital for both activities. Banks would soon work out that low margins on risky large trading books is not such a good way of deploying capital.

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27 Comments

  1. Ian Jones
    Posted March 5, 2009 at 7:28 am | Permalink

    Deposit taking banks should not be allowed to use the money as investment banks! This means that the only way a financial institution can raise money for speculative investment is by selling it through a broker and this must be highly regulated.

    I’ll be damned if someone should be betting on what is effectively nothing more than a horse race with my savings and my pension without my knowledge.

  2. Johnny Norfolk
    Posted March 5, 2009 at 7:37 am | Permalink

    The BBC is full of Labour supporters with many ex BBC people in government.

    Its no suprise the BBC has let Labour off the hook. They are basicly one and the same.

  3. guy de Moubray
    Posted March 5, 2009 at 8:19 am | Permalink

    This present crisis has made me think again about the role of the Bank of England. When I wrote my memoirs, five years ago now, i said that the FSA should be abolished and responsibility for regulating the banking system returned to the Bank of England. I would add now that the day to day management of the National Debt should also revert to the Bank.
    But I am not at all sure, however, that if that had been done the Bank would have done any better than the FSA. I have a feeling that the Bank has lost its fine touch. And I think the causes of that stretch back to the 1960s. When I was head of the Bank’s economic section it was called General Studies in the Central Banking Information Department. In retrospect I feel that Humphrey Mynors was right to reject any title including the words economic or economist. In the mid 1960s there was only one man in the Bank who could have been called an econometrician. Nobody was yet building computer models, not even in the Treasury or the Board of Trade. Models are so crucially dependent on the assumptions fed in to them. Look at the ridiculous models which fuel the global warming hysteria. When I talk of “fine touch” I am thinking of Montagu Norman and Cameron Cobbold. I am not sure about Rowley Cromer, but certainly Leslie O’Brien, Gordon Richardson and Leigh Pemberton lacked it. At a lower level in the Bank a prime example of a man with touch was Hilton Clarke. I blame a lot on Maurice Allen, John Fforde and Kit McMahon. They all wanted to do things in a new more rational way. But Incomes Policies were in fact irrational.
    Box ticking began to take hold in the Clearing Banks. Credit rating forms began to be more important than the views of the Branch Manager. Kit McMahon bears a heavy responsibility for the loss of touch in the Midland Bank. I wrote an article in the late 80s for the Long Rang Planning magazine called “Banking is not like Selling Toothpaste” But that is exactly what Kit was doing in the Midland.
    Exchange Control in the Bank changed too. At the beginning of the 60s Cyril Hamilton’s ambition was to abolish exchange control as soon as possible, but by the end of the decade numbers of staff grew by leaps and bounds. In the Manpower Plan which I presented to the Governors in 1970 I said that by 1980 exchange control would have been abolished or would otherwise double in staff numbers. I turned out to be right on both counts, staff numbers doubled and it was abolished!
    McKinsey’s report didn’t help much.. As Management Development Manager I rejected the method of staff appraisal they proposed.
    They had proposed what today would be called “target setting” and those who govern by targets tend to watch only the targets and fail to notice, and are not rewarded, for looking at any other emerging problems.
    In the 80s the Bank should have been much more tough about the Building Societies demutualising and should have done something to stop the securitisation of debt.
    I don’t think the Governor of the Bank of England or the Chairman of the Federal Reserve should ever be economists. Current policies of both seem to me to be absurd. They are both piling up a vast problem of inflation in the next couple of years without any beneficial present effect on the recession. FDR was not the success he is reputed to have been in the 1930s. He made the same mistake that Obama is making of raising taxes on successful businesses. Rearmament cured the depression – not the New Deal.

    Reply: Yes, I think we need a Governor with market understanding, judgement and feel.

    • alan jutson
      Posted March 5, 2009 at 5:59 pm | Permalink

      What an interesting insight. Tha

      • alan jutson
        Posted March 5, 2009 at 6:02 pm | Permalink

        thankyou for that.

  4. John Lancaster
    Posted March 5, 2009 at 8:42 am | Permalink

    As an expat living in Belgium, I have observed that at post offices here, officials cross out England on envelopes addressed to that country and replace it with “GB”. However, whether Scottish, Irish or Welsh, or indeed English, one is always assumed to be English. I was brought up to call myself British, rather than English, presumably as an inclusive term. This is now considered (politically) incorrect, even though officially one is not allowed to speak the name of the country. I am definitely not a GB.

  5. alan jutson
    Posted March 5, 2009 at 8:49 am | Permalink

    John.
    As usual your well thought out procastinations and arguments are not reaching the ears of the General Public through the media.

    Whilst I fully understand that these are your thoughts, on your Blog, cannot the Conservative Party shove some official weight behind them, or at least develop them more fully, and so get it into the media, or is it not yet Conservative Party Policy to do so.

    The sad fact is the “do nothing party” phrase being used by Labour in its spinning, is keeping them in the race and leaving the Conservatives waiting to be tarnished with the “anyone can be right with hindsight” spin in a few months time.

  6. Alistair Watson
    Posted March 5, 2009 at 8:58 am | Permalink

    On the issue of unreported views and consequences of present government financial policy I am stunned by the acceptance of “Quantitative Easing” without comment on the plight of savers. Common sense (for I am not a banker or politician) tells me that if a community has in total £3 in value with £1 in the hands of a saver and then without increasing the real value of the pot issues a fourth £1 then the value of each £1 is reduced by 25%. It follows that Quantitative Easing is devaluation of savings on a massive scale – without compensation by the issuing authority this must be classified as theft of value. Will you comment?

  7. figurewizard
    Posted March 5, 2009 at 9:02 am | Permalink

    Instead of simply shovelling toxic securities from our leading banks into ‘bad banks’ to liquify their balance sheets without a fundamental reform as to their present and future regulation, a Glass Steagall approach could be the answer. It would separate and expose both the strength or otherwise of their non securities business while at the same time allowing a realistic valuation of the scale of the problems that need resolving.

    The crucial element of this would be information. This would enable the government to make informed decisions when committing the huge funds needed to rescue our banks, while removing the uncertainties here in the UK at least, that have led to the freezing of the world’s wholesale money markets.

  8. oldrightie
    Posted March 5, 2009 at 9:29 am | Permalink

    “To cut banking risk you just need a regulator who demands more capital for both activities.”
    Capital earnt and saved not borrowed and parcelled to look like capital.
    Brilliant as ever, Mr Redwood. Please come and talk to my Association!

  9. Robert
    Posted March 5, 2009 at 10:04 am | Permalink

    Actually, it’s not just the BBC. In the broadsheets, criticism of the bank bailouts is surprisingly muted with the possible exception of the Telegraph. It is remarkable, for example, how all the papers and news channels fell hook line and sinker for the Goodwin pension “scandal” which, by an amazing coincidence, broke on the day the folly of the government’s banking strategy became even more glaringly obvious.
    I find myself turning to this blog for a the most robust critique and dialogue of the day’s events. Which raises another issue – why is John not on the Conservative front bench?

    • Johnny Norfolk
      Posted March 5, 2009 at 11:49 pm | Permalink

      Because he says it as it is ie tells the truth. I am afraid its all propaganda now. The BBC has always tried to show John in a bad light for the same reason. He may rock the boat.

    • jim
      Posted March 6, 2009 at 4:25 am | Permalink

      Yes, it is quite alarming how the media has failed to do its job, I suppose that’s why it is dying. The Russians used to say that they had an advantage over the west because they knew that their media was lying, whereas we believed ours told the truth. Hopefully this crisis will make people realise that the mainstream media seeks to limit options and debate, rarely reporting the truth.

  10. Lola
    Posted March 5, 2009 at 10:21 am | Permalink

    Ahhh, I see. Is that why I never, or rarely, hear you on the BBC and why you’ve not been on QT?

  11. Jonathan Cook
    Posted March 5, 2009 at 10:43 am | Permalink

    I spent the evening with 4 people who are loudly and proudly left wing. A not just the Labour brand of left wing either.

    I found that it is impossible to move them off of ‘first base’ in a debate on how we should respond to problems with the banks.

    They can’t see beyond the logic of panic. They think we would all be living in the stone age if the government hadn’t thrown billions to prop up the banks.

    To them I sounded like the madest mad person from the asylum, even just by venturing a few syllables that started to contradict the bail out notion.

    The BBC have not aired any constructive criticism of the government’s plans. Given the whopping size of the bail outs and risk we are now carrying – isn’t it the duty of the BBC to investigate the whole issue in the best interests of the public?

    As it stands, intelligent people are totally unaware that there is even an alternative view out there.

    That is a shameful. I would have hoped that the BBC could have shown a lead to other media organisations and ensured that the public understood that there are alternative view points.

  12. John Charlton (an ex-Labour Voter)
    Posted March 5, 2009 at 10:53 am | Permalink

    I totally endorse John Redwood’s ‘intelligent Bank Manager’ proposal and his succinct analysis of the BBC’s bias.

    The latter poses an interesting challenge. In Opposition, The Conservatives can be ignored or marginalised as extreme or out of touch. Once in Government however, we the BBC’s line of attack will change and they will start undermining us more directly.

    My question is, what will the next Conservative Government do to deal with this state funded left wing propaganda machine?

  13. Demetrius
    Posted March 5, 2009 at 11:01 am | Permalink

    Unluckily, no surprises there. Even when it was apparent to an informed and thinking minority that there was trouble coming, the BBC were frantically busy stoking up the property market with programmes enticing people to go to their limits, commit to major projects, and take out second mortgages. Just as much of the media was fauning on people taking the highest risks. In any case the BBC has long lost any critical faculty it ever had.

  14. Waramess
    Posted March 5, 2009 at 11:15 am | Permalink

    I believe the Opposition should not be cautious about the direction in which they perceive public opinion is moving and concentrate on common sense.

    The public are a damned sight smarter than the politicians give them credit for and I have little doubt that your own views on the bank bailout go a long way towards the current thinking of the public at large.

    I was pleasantly surprised (although I shouldn’t have been) to see that the AOL vote on whether the Bank of England quantative easing would improve the economy was met with a resounding sixty six percent who voted “No”.

    (Hands up all those politicians who thought the public could not pronounce the word let alone provide sane commentary on it).

    I despair at the volume of our money that is being spent on truly stupid measures (including bank bail-outs) without the public being properly consulted.

    Maybe the planning assumption, as with the European Treaty, is that the public are not sufficiently well informed to be trusted to vote the right way.

    Might we hope therefore that the Conservatives will earnestly try to offer common sense approaches to problems and have a little more trust in the people who will elect them at the next election?

    After all the three main tenets of economics have been described as common sense, courage and communication and these are all attributes that the electorate have in spades.

  15. David Eyles
    Posted March 5, 2009 at 11:19 am | Permalink

    As well as sensible banking reform, a new Conservative government might like to consider a reformed BBC as a condition of its receiving any kind of licence fee.

    Its reportage of many issues: the economy, the breakdown of our society; the lack of defence spending leaving our servicemen dangerously exposed; the Israeli/Palestinian conflict; climate change and many other issues, seems be done in such a way as to comply with the way that a tiny caucus of centre left Notting Hill types think the world should be presented to us, the hoi poloi, as opposed to how it really is.

    I have just come in from two hours of feeding livestock and trying to talk the sheep and cattle to come out from their shelter in the hedge to come and eat. It has taken twice as long as usual because of the amount of global warming I have had to push out the way to get to silage bales etc. Thank God for heated tractor cabs and 4 wheel drive.

  16. Neil Craig
    Posted March 5, 2009 at 11:22 am | Permalink

    The bias, dishonesty & censorship of the BBC (not always in an anti-Conservative direction but always in a big statist/more civil servants/more taxes/more regulation one) is not to be bourne & is a very serious restriction on free debate & therefore freedom.

    Having said that I don’t know how to unbear it.

  17. David Belchamber
    Posted March 5, 2009 at 12:17 pm | Permalink

    Once again, thank you Mr Redwood for producing an article of such common sense. Can you not get it out to a wider audience, starting with the Conservative party? Can you not offer it to Time Montgomerie as a Platform article on ConHome, the Telegraph or Sun and to C4 News?
    As for the BBC, they should be reminded that they will in all probability have to deal with a conservative government the next time their charter comes up for renewal and they had better start being politically balanced from now on.

    Reply: I am very happy for it to be reproduced elsewhere.

  18. Stuart Fairney
    Posted March 5, 2009 at 4:00 pm | Permalink

    Do you know if this is on youtube, google videos or some such? I have seen a few presentations of yours and may I request that if they are available, you put a link in the text?

    Reply: Will see if I can do that next time

  19. Simon Lamb
    Posted March 5, 2009 at 5:05 pm | Permalink

    Have you had the time to read Warren Buffett’s 2008 letter to shareholders?

    He firmly blames derivatives for making many large financial institutions unmanageable since it is simply impossible to accurately quantify risk.

    He also exposes the myth that the lack of regulation was the cause of our difficulties. Intelligent regulation – as currently practised – is as much an oxymoron as military intelligence. He highlights the US government department that had over 100 staff and only 1 task – to regulate Fannie Mae and Freddie Mac – and singularly failed to achieve it.

    The FSA is a white elephant with a huge budget and we should go back to something like the old system – “the governors eyebrows” – which seemed to work perfectly well for a century.

    Reply: Yes I have and yes I agree with much of that

  20. Colin Adkins
    Posted March 5, 2009 at 5:24 pm | Permalink

    In your two articles today you appear to throw some light on my comments last week regarding the need for the conservative party to set out, in the national media, their alternative to the apalling labour management of the economy.
    Like you, I have long given up on the BBC ever giving proper coverage to alternatives to the labour views, unless it is from even more extreme left wing commentators.
    Neverthless the conservatives have to deal with the situation as it is, to this end they should be using other broadcasters and the news papers.
    The Geoff Randle program on Sky News gives people the opportunity to explain their ideas whilst also probing the arguments put forward. I also suspect that the major newspapers would be happy to give coverage to alternative approaches which are properly argued.
    No doubt you already know all this but the fact remains that there has been virtually no considered alternative promoted by the Tory shadow cabinet.
    This, no doubt, goes some way to explain why the party has such a small lead in the opinion polls, when given the scale of the financial mismanagement by Labour you should be way in front. Has the party actuall got a policy, clearly a hell of a lot of people think they haven’t.

  21. Ross
    Posted March 5, 2009 at 10:25 pm | Permalink

    John, I don’t share your scepticism about Glass-Steagall.

    My background is in complex systems, and the only way to keep a complex system manageable and evolvable is to have architecture. Architecture means interfaces – boundaries between components and subsystems. If the interfaces remain stable then the subsystems can evolve independently, and the risk of cascade failure can be managed. The main job of the system architect is to control the evolution of the interfaces themsevles.

    The banking system used to have interfaces, in spades. Before the Big Bang, London probably had too many: clearing banks were different from investment banks, of whom the accepting houses were a charmed circle. Stockbrokers were different from stock jobbers, and the firms that dealt in gilts were different again. Insurers and reinsurers and commodity brokers and dozens of other arcane trades made up the ecosystem. It was maybe inevitable that this architecture would eventually crumble; it had been fraying gracefully for years, like India’s caste system.

    The problem was that we lost it all.

    In America the architecture was much more rough and ready, in the form of Glass-Steagall, and it had been cobbled together after the last depression. But at least there was some – until Clinton abolished it.

    We need architecture. Without it there’s no place to stand; the world becomes a big lump of spaghetti code that no-one can understand any more, let alone regulate. We face the same task now that Glass and Steagall faced two generations ago. So what should the architecture be? And who should police the interfaces? These are really serious questions, and I don’t see either Brown or Obama starting to think about them.

    Personally I believe that we taxpayers should know what we’re guaranteeing and on what terms. The difference between guaranteed and risk-bearing financial instruments will then reintroduce architecture of sorts. But some careful thought at this stage could make a real difference

  22. StevenL
    Posted March 6, 2009 at 12:25 am | Permalink

    On the Jeff Randle show on Sky News tonight Mr King said something along the lines of that he wasn’y going to buy bonds from banks, but from ‘pension funds and other people’ implying he was just going to buy them in the market.

    For a start, how does putting the cash in a pension fund get people spending? It will just be re-invested in bonds or shares surely?

    Secondly, unless he’s going to buy them up in little slices from UK retail investors, how is swapping gilts and sterling bonds for cash going to put money into the economy.

    How will he know it isn’t a rich Russian or Arab selling it so they can liquify their exposure to sterling and get out of it pronto before it is debased?

    The pound might not have suffered today, but my prediction is that once he cranks up the presses and starts buying that a lot of the that sterling will be sold immediately to buy forex, driving down the currency.

  23. Robin
    Posted March 6, 2009 at 9:30 am | Permalink

    The BBC is wallpaper to New Labour’s subsidence.

    Not in the national interest.

  • 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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