What the Regulator should say today

Most people now seem to agree the Regulators should have been tougher on banking cash and capital in the private sector, to stop the private sector credit excesses.

Instead of talking about how to prevent the last crisis, as they are now doing,we need to look ahead.

Shouldn’t the Uk Regulator today be warning about excess credit and borrowing in the public sector? And shouldn’t a tough Regulator be taking action to ensure that does not get out of hand? Don’t they have a view on how much banks should lend to the government, and on how much money should be printed? That’s all pretty important to the stability of the system.

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19 Comments

  1. Posted March 13, 2009 at 9:56 am | Permalink

    Are you saying really that the government should be slimming down somewhere so as to keep borrowing down? And, as they are not the regulators should force them into a corner to make these cuts? If so, where could they cut that would have an immediate effect?

  2. Brian Tomkinson
    Posted March 13, 2009 at 10:08 am | Permalink

    If the regulator was truly independent what you say would be the case but these people are merely Brown’s puppets, as is the BoE. What about regulation of government? How much Parliamentary scrutiny is given to the succession of disastrous actions taken by Brown? Has there been a debate and vote on the advisability of printing money and if not why not?
    How is this miscreant government being held to account on behalf of the public?

  3. Alan Wheatley
    Posted March 13, 2009 at 10:16 am | Permalink

    To hear from the FSA that from now on they are an organisation to be feared is very worrying. This sounds like a spin machine in full flow, trying to compensate for a lack of substance.

    I do not see why any properly run organisation should have anything to “fear” from a competent regulator. Surely if the regulations are sound, the regulatory processes effective and the regulated honest and competent, then the relationship should be business like, and any problems that may arise dealt with in a professional manner.

    The government have been saying there should be no reward for risk taking, but surely this misses the point. There is nothing inherently wrong in taking a risk, as long as those taking the risk understand what they are doing and it is not obscured from the regulator. The higher the risk the bigger should be the reward for success.

    What there should be none of is a reward for failure, irrespective of the level of risk.

    If the government are seeking to impose a risk-averse culture they will be putting a damper on enterprise just at the time when that is what we need.

    • Posted March 13, 2009 at 6:14 pm | Permalink

      Well said indeed, why should you fear any regulator if its rules are clear and implementable? The FSA should not model itself on Robespierre and the terror as it now seems to be suggesting. As ever, it is most likley spin in place of substance.

  4. HJ
    Posted March 13, 2009 at 10:19 am | Permalink

    John,

    When have the same standards ever applied to the public sector as are applied to the private sector?

    For example, the rules on private sector pension plan funds are simply avoided in most of the public sector by the simple expedient of not having a fund to back most public sector pension commitments. They’re all giant Madoff-style schemes which (unlike the Madoff investors) will have to be bailed out by future taxpayers.

    If you ran a private sector fund like this, you’d be in jail.

  5. Posted March 13, 2009 at 10:20 am | Permalink

    Don’t they have a view on how much banks should lend to the government, and on how much money should be printed? That’s all pretty important to the stability of the system.

    We have to wait awhile until Browbama has total control of all the UK banks. He’ll regard this as stability.

  6. Posted March 13, 2009 at 11:54 am | Permalink

    International author and (words left out) Jeffrey Robinson, appeared on Newsnight last night and said “the FSA is useless”.

    I’d go with that and disband it on grounds of complete incompetence.

    I note the FSA implements European Directives.

    If the FSA is useless then so are they.

    Gordon Brown can’t put it right either, since he ignored a warning of systemic risk occurring, given by the Bank of International Settlements in March 2001.

    Obviously the FSA and the EU are not alone in being “useless”.

    What do they need to say?

    “We resign”.

    • alan jutson
      Posted March 13, 2009 at 6:15 pm | Permalink

      We all knew the FSA was useless since they failed to spot the problems with Equitable life some 10 years ago, and Northern Rock 12 months ago.

      Many reports have been made on this fiasco and they all say the same Systemic failure of Regulation.

      Problem is the Government failed to action anything to cortrect the problem.
      I assume they control the FSA or at least write the rules under which they operate, so no surpise it has come back to bite them and us Big time.

      Have any rules changed yet !!!!!!!!!!

  7. chris southern
    Posted March 13, 2009 at 12:53 pm | Permalink

    The problem is, the goverment control/over ride everything.
    It prints when it wants and ignores the regulators when it wants.

    rubber leavers for every body except mr brown.

  8. APL
    Posted March 13, 2009 at 1:55 pm | Permalink

    JR: “What the Regulator should say today”

    As an organisation and an individual within this organisation I have failed. I resign.

  9. Denis Cooper
    Posted March 13, 2009 at 1:59 pm | Permalink

    Shouldn’t the FSA have a view on the government rigging the market in its own bonds?

    And shouldn’t the Official Opposition also have, and forcibly express, a view on that?

    Mondays and Wednesdays, Bank of England uses newly created money to buy existing gilts and remove them from circulation.

    Tuesdays and Thursdays, Treasury’s Debt Management Office sells new gilts to help fund the government’s budget deficit.

    Nothing peculiar about that? And no political or electoral implications worthy of note by the Official Opposition?

    I’ll offer two parallels. Neither are exact, and I’ll point out some of the differences.

    First – I vaguely remember a huge scandal a few decades ago, when it came to light that a prominent company had secretly arranged a “concert party” to buy its shares in the market and ramp up the price.

    I don’t recall the details, ie which company did it, and why – maybe they wanted to issue new shares at a high price, or maybe they were offering their shares as part of a deal to take over a competitor.

    So how does the government’s current attempt to rig the market in its own bonds differ from that company’s attempt to rig the market in its own shares?

    Well, for a start it’s legal, because Parliament has agreed to it, and also it isn’t secret – it’s just being covered up in technical verbiage and reassuring metaphors – “pumping money into the economy”, “breaking the ending credit logjam and getting the economy moving again”, and so on, with the help of the compliant (or ignorant, or unthinking) mass media.

    Second – remember the EU’s “butter mountain”, and its “wine lake”, and so on?

    To support the market price of butter, the EU Commission bought up surplus production and put it into cold storage. Unfortunately that intervention in the market encouraged even more surplus production, and in the end the EU had so much butter in cold store that a large chunk of the CAP budget was being spent just on keeping it cold. Finally, as I recall, a lot of it was gifted to countries which were then our enemies.

    Obviously gilts don’t need to be kept refrigerated, so one difference is that it isn’t going to cost the Bank of England anything to store its accumulated stockpile of gilts; but once again this market intervention to buy up surplus production can only encourage further surplus production.

    Another difference is that while the EU Commission had a department to buy up surplus butter, it didn’t have another department actually producing it; in this case, one branch of the British state, the Bank, will be buying up the surplus gilts, while another branch of the state, the Treasury, will carry on producing more and more gilts – more than it could possibly sell, without the intervention of the Bank to rig the market.

    And, of course, in neither of these two cases was the currency being deliberately, systematically, debased for essentially party political ends.

  10. Robin
    Posted March 13, 2009 at 2:15 pm | Permalink

    You keep using the work “British” – don’t you mean Scottish.

    Why generalise when you can be more exacting ???

    It’s the Scottish bankers (spiv merchants) and Scottish politicians (spin merchants) who have screwed this economy up.

    We don’t live on Iceland-on-Thames but Scotland-on-Thames.

    History will judge this as a very Scottish Crisis.

    Next time you read the small print you may like to question why Scottish liabilities have been transferred onto the English taxpayer.

  11. SJB
    Posted March 13, 2009 at 2:49 pm | Permalink

    Wouldn’t he be crippled by the doctrine of parliamentary sovereignty? Let us assume such a regulator was already in place and he determined that borrowing was excessive. Even if he had powers to take remedial action New Labour could simply mobilise its lobby fodder and enact legislation to remove his powers.

  12. Acorn
    Posted March 13, 2009 at 3:44 pm | Permalink

    Two good posts JR, spot on as usual. No bank is too big to fail; but should one or more become insolvent, or rather, more insolvent than a fractional reserved bank normally is; does the regulator have the horse power to take it/them into administration and liquidation fast enough?

    Perhaps the retail / clearing departments should be enclosed in an escape pod; so it can be ejected quickly should the Klingons or the Borg Collective attack. The Glass Steagall Act, I suggest, was quite successful at doing this until Bill C repealed it in 1999, which is when the banking system went native.

    Question JR. Can the BoE hold assets / liabilities / equity “off balance sheet”? As it is now going into the Quantitative Easing business, (or quantitative inflation business as some would call it); I assume we should see the BoE balance sheet expand. It was £184 billion this morning. It was up around £260 billion at one point last year, if I remember correctly. We need someone to explain all this to us taxpayers.

    I am beginning to think Ron Paul is correct. Central Banks are part of the problem, not part of the solution. “A system of capitalism presumes sound money, not fiat money manipulated by a central bank. Capitalism cherishes voluntary contracts and interest rates that are determined by savings, not credit creation by a central bank”.

    Reply: Yes, it may be done by expanding the Bank’s balance sheet, or it could be done by the Treasury

    • Acorn
      Posted March 13, 2009 at 6:10 pm | Permalink

      Redwoodians, have a read of the following. Then say after me; central banks are the problem, not the solution.

      http://www.marketoracle.co.uk/Article9351.html

      • Denis Cooper
        Posted March 14, 2009 at 8:06 am | Permalink

        But, unlike the Federal Reserve, the Bank of England is state owned, by virtue of the 1946 Act of Parliament which nationalised it:

        http://www.bankofengland.co.uk/about/legislation/1946act.pdf

        “An Act to bring the capital stock of the Bank of England into public ownership and bring the Bank under public control … ”

        As that control is exercised on behalf of the public by national politicians, pre-eminently MPs, perhaps that makes it clearer that in our case the problem is not the central bank, per se, but the politicians we freely elect to the House of Commons.

        So I’m afraid that one possible alternative to your dictum would be, say after me; democracy is the problem, not the solution.

        Which is an unpalatable idea, to say the least.

  13. David B
    Posted March 13, 2009 at 10:32 pm | Permalink

    Re the antagonism to Scots above. If this is a united kingdom then you are going to have to accept that people from other member nations than England will now and then be running the country. I am old enough to remember the debate about whether a woman could be Primeminister. One day we will have a coloured person too. Get over it.

    Now the RBS screwed up bigtime. It was a failure of regulation. Remember it was Barclays they pipped to take over toxic ABN Amro. There but for the grace of god went Barclays.

    Many Scots crave independence. It may not seem a bad thing for many Englishmen, but think through the argument rationally. We didn’t rule the world until we were one Nation. Maybe its best we get divorced, but please don’t base your decision on racism.

  14. Matthew Reynolds
    Posted March 14, 2009 at 6:54 am | Permalink

    We need real public sector reform with a view to lower state spending and a budget balanced three or four years earlier than planned for so that the UK gets solvent sooner. Tax rises are unthinkable as they have helped make this situation far worse so the Tories need to get help from The Adam Smith Institute & Center For Policy Studies about how to reform government with a view to shrinking it. By having a watertight set of proposals designed to rescue the economy from Gordon Brown’s debt explosion and all its grim consequences the Conservatives can gain further credibility after David Cameron’s inspired , honest and well judged Mea Culpa over past debt increases. All the Tories need say is Labour created this fiasco , you voters don’t want anymore tax and so sorry we can only spend on the public services what the nation can afford. High spending & rising national debt levels have not worked and after over a decade living on the never never the client state needs ending as it is the now now. After all public services have not improved in proportion to the funds invested , poverty is still high , debt interest charges could be a blight on future generations and as Jimmy Carter managed to prove ( by accident ) that Big Government can seriously threaten your economy. If even the Lib Dem’s are talking about £20 billion in cuts and Labour made £37 billion in reductions in state spending plans then that suggests that the political trend is towards smaller government . The Tories unlike their opponents really believe in a smaller state and so can sell this vision with conviction to what appears to be an increasingly conservative electorate that is receptive to such ideas. Tax & spend has been seen to fail very badly indeed , the voters know that it needs sorting out and so the political & economic case for ending the client state to reduce public borrowing to restore economic stability while protecting people from higher taxes sounds pretty strong.

    Just as Jimmy Carter ended up vindicating Ronald Reagan on cutting federal spending Gordon Brown is living breathing proof that higher taxes are wrong and do damage to living-standards . The bad effects on social mobility , business investment etc are there for all too see. Creating a poverty trap with tax credits explains why social mobility has stalled – ending the complex credits and raising the basic personal allowance could help solve that.

    • Denis Cooper
      Posted March 14, 2009 at 10:15 am | Permalink

      Maybe it’s a clever PR move for the Tories to apologise for their poor opposition in the past, in an attempt to make Labour apologise for their poor government in the past, but I’d be much more impressed if the Tories started to provide a proper opposition now.

      Coming back to the two linked problems –

      a) Not removing “toxic assets” from the financial system, but instead insuring them at potentially huge cost to the taxpayer; and

      b) Not using Quantitative Easing to good effect, but instead misusing it to remove top quality assets from the financial system in the hope that this will make it easier for the government to borrow and spend more –

      when are the Tories going to condemn these strategic blunders, and with such ferocity that the government is forced to think again?

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, He graduated from Magdalen College Oxford, has a DPhil and is a fellow of All Souls College. A businessman by background, he has been a director of NM Rothschild merchant bank and chairman of a quoted industrial PLC.

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