Witch hunting

Witch hunting was always an overrated and unpleasant pastime. It is popular today. We will receive another instalment in the battle of the regulators, as the Lords concludes that the FSA were most at fault in the run up to the Credit Crunch. There will be further pressure to shift powers to the Bank of England.

The whole Tripartite system of regulation failed . Not one single senior person in the Treasury, Bank or FSA thought the banks were lending too much. Not one tried to blow the whistle on the most extraordinary credit binge we have ever seen.

They did not lack powers to stop it if they wished. They did not lack information. You could see it just by reading the published balance sheets of the top banks. The rules allowed excess and no-one making or enforcing the rules did anything about it.

The important issue today is not who was most to blame. It is why are we still operating with the same system? How can we be sure the regulators are now getting it right. They need to answer some serious questions about the current situation:

1. What is their view of bank support? When will they force the state banks to cut costs, improve business, sell assets so the taxpayer can be repaid?

2. Do the regulators agree our banks are too big to bail and too big to fail? When will they start to split them up to create a more competitive and more manageable industry?

3. Do they now understand that hiring more regulators to make more people tick more boxes did not keep the system safe? Why do they want to do more of the same?

4. Why do they want more and better paid people? How will they find the one or two senior people they need with overall judgement – and courage – to do what it takes to keep the system stable?

5. Why is the MPC happy with the current level of government deficit? Why doesn’t it warn the government that the size of bond issues needed threatens market stability and sensible interest rate policy?

6. How does the MPC plan to get out of quantitative easing? Is it worried about the big devaluation last year, and surge in commodity prices this year?

7. Is any regulator concerned about the bond bubble that seems to have built up?

My view throughout the last fifteen years has been that the Bank of England is best placed to regulate the banks, set interest rates and manage the money markets, subject to the overall political responsibiltiy of the Chancellor. I am not proposing more powers to the Bank because they had a good credit crunch, or following a witch hunt of the FSA. It just makes sense to put together all the levers you need to control to run orderly money markets and to keep credit within sensible limits.

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33 Comments

  1. Kevin Lohse
    Posted June 2, 2009 at 7:14 am | Permalink

    Dear john. You are as usual, a fount of common sense on these issues.
    In a bid to drum up business, HBOS are running an ad promising that one of their current accounts will attract a bonus of £5 each month. How can a bank wholly dependent on the taxpayer for it’s survival be allowed by the regulatory system to get away with giving away other peoples’ money as a bribe?

    • Kevin Lohse
      Posted June 2, 2009 at 7:15 am | Permalink

      John, not john. Post in haste, edit at leisure.

    • Cliff.
      Posted June 2, 2009 at 2:41 pm | Permalink

      Interesting point, almost as interesting as the DVLA offering the chance to win a car if you renew your road tax online.

  2. alan jutson
    Posted June 2, 2009 at 7:37 am | Permalink

    John

    Good to see someone has their finger on the pulse.

    Yes the patient (UK PLC) is still alive (just) but in dire need of perhaps an operation or two, some medication, and certainly some tough love.

    After bailing out the Banks what have we actually done to improve things, or even make sure we do not have a repeat performance.

    It would appear that there have been no regulation changes (not even in the pipeline as far as I can see) either here or worldwide.

    The board of Directors of all institutions appear to be very similar, with the exception of a few CEO’s who have been well rewarded for their efforts or failure.

    The Banks and the FSA are still paying large bonuses to staff.

    Companies are still being starved of credit.

    The Government appears to be in limbo on almost everything except tax raising.

    Me thinks nothing much will happen until we have a General Election, which in my view cannot happen until the Telegraph have stopped drip feeding the Public with more and more revelations about MP’s expense claims and dodgy dealings.

    Yes for the first time we have a National newspaper running the political agenda on a day – day basis.

    The good news.
    It has woken some people up to the fact that politics does matter, our system is not as good as some thought it was, and all should take more of an interest in what goes on in Parliament, and Europe, (including MP’s) because the effects of decisions made in these places really do determine our future, and the future of our children and grandchildren in so many ways.

  3. oldrightie
    Posted June 2, 2009 at 7:46 am | Permalink

    I understood that the regulatory system did issue warnings which were not accepted by the Chancellor who put the system in place?

  4. Simon D
    Posted June 2, 2009 at 7:48 am | Permalink

    I agree we must end the blame game and suggest that we put the existing rule book to one side and conduct the following exercise:

    1. Ask what lessons can we learn with the benefit of hindsight.
    2. If there were another dot com or house price/credit bubble, how and at what point should we apply the brakes?
    3. What blueprint would a man or woman from Mars, designing the system anew, use to achieve this?
    4. What other proportionate aspects of regulation need to apply.
    5. If the answer is Bank of England + Treasury how do we staff such organisations with people of the right ability and experience.

    Naturally, we need a serious and grown up public debate about it but, as ever, our national institutions are incapable of giving us one.

    In July 2007 the Chief Executive of Citigroup said “As long as the music is playing you’ve got to get up and dance. We’re still dancing.” We all know what happened next. If Sir Fred Goodwin had stopped dancing in 2007 he would have been vilified by bonus- driven traders, RBS shareholders screaming for growth and non-executive directors demanding his his head. Meanwhile the Government wallowed in the success of the banks and pocketed the tax revenue to fritter away on the public sector. Invitations for the RBS high command to drinks at 10 Downing Street would have dried up. How do you regulate all that in the future? Doesn’t the buck stop with the political class? We all know about Mr. Brown’s role as banking industry cheer leader but where were David Cameron and George Osborne when the Atlantic spray began to soak the Titanic deck chairs and why was there almost no public debate about the ever growing fragility of the economy?

  5. Robin
    Posted June 2, 2009 at 8:05 am | Permalink

    John,

    You forget to mention who was the “brains” behind the tri-partate system of regulation and the MPC interst rate targets – Ed Balls.

    On Sunday The Times ran a story on how Ed Balls was “well respected” in the City. Close political pundits say that the compliment was penned by … Ed Balls himself.

    I work at well respected global bank and I can’t think of a person who has respect for Ed Balls. Ed Balls is the architect of failure. There are no conversations, or even sentences when it comes to Ed – there is simply one word response. Ed Balls can’t even run tests for 12 year olds. He is not expected grasp the complexities of financial instruments, and he will no doubt come up with more sophistic ideological systems that will take years to unravel.

    Which brings us onto the more important issue, of political appointments. I understand you want to focus on finance, but the appointment of Ed Balls shows that the current set-up in Government, of a power-centric, unelected and unaccounatble PM is VERY bad for the country.

    The appointment of Ed Balls proves that we cannot clear up the country until we clear up Parliament.

  6. mike rolph
    Posted June 2, 2009 at 8:09 am | Permalink

    As always Mr Redwood gets to the nub of it, but the call of “action this day” will go unheeded by this government as it would indicate past error and they don’t do error.
    Can we really stand twelve more months?

  7. Waramess
    Posted June 2, 2009 at 8:20 am | Permalink

    Interest rates kept too low, ludicrously high bank leverage against capital, excessive credit availability, these were the main cause of the crash.

    Banking regulation was a secondary issue and maybe just a red herring: had it been better they might only have caught a few institutions before they failed, but not much more.

    The system is bad but to expect anything to be done about it would be to expect too much; far too many wise heads involved to imagine more than a little bit of tinkering will take place.

    Leave interest rates to the market. Does anyone imagine interest rates over the last ten years would have stayed so low given the huge demand for loans?

    Leave leverage to the markets. Does anyone imagine lenders to banks would have risked so much against such a thin veneer of capital if they were not guided by the capital adequacy requirements established by central banks?

    Why trust the Bank of England, or any of them, with any of it? leave it to the markets who have money at risk.

    You make some really powerful points but is anyone interested in listening?

    Certainly no one in government, because they are mesmerised with their own omnipotence and I suspect no one in opposition because they are all too wary of stepping out of line with what the government think.

    So why not have a witch hunt? If we can’t influence decisions then we might as well have a bit of fun.

    • alan jutson
      Posted June 3, 2009 at 4:53 am | Permalink

      Waramess

      See from the TV news that the average rate for an authorised overdraft is now 18%

      Unauthorised are now above that level, with some close to credit card levels.

      Me thinks the Banks are attempting to recoup and restore their balance sheets at almost any cost.

      Whilst I accept to a degree that there is no place sentiment in business, Is this really acceptable, given that the base rate is 0.5% and savings rates are so low.

  8. Mike Stallard
    Posted June 2, 2009 at 8:30 am | Permalink

    Does this fit?
    The Executive has arrogated all powers to itself. It is currently unchecked by either parliament or any of the regulators – Bank of England, FSA, MPC, Chancellor, even indeed several of the High Street banks – because all of these now fall under the sway of the Prime Minister and his expert team in Downing Street.
    The Executive can, therefore, do pretty well what it likes.
    When things go wrong, the last people to take the blame are, of course, the source of all the trouble: Downing Street.
    It is one of the regulators who is the scapegoat because they are there for that very purpose.
    Any thought of reforming the system is not even considered. It works, after all!

    In an ideal world, though, these obvious and sensible proposals ought to have been considered long, long ago.

  9. Pete Chown
    Posted June 2, 2009 at 8:51 am | Permalink

    “Is any regulator concerned about the bond bubble that seems to have built up?”

    The government could have a problem with the stock market too. At the moment it’s up a lot because money is so cheap. As the economy starts to recover, the government is going to have a horrible job removing that cheap money without making the stock market crash.

    If the stock market does crash, the losses will damage the banks’ capital positions. We will then be back to square one, with banks wanting support from the taxpayer.

    • Freddy
      Posted June 2, 2009 at 4:58 pm | Permalink

      “As the economy starts to recover, the government is going to have a horrible job removing that cheap money without making the stock market crash.”

      Of course, that is likely to be the Tory government.
      The phrase “scorched earth” comes to mind …

  10. Brigham
    Posted June 2, 2009 at 9:34 am | Permalink

    There is only one person who is to blame. The man (who is the PM -ed) He was in charge during the run up to all this trouble. I saw him on Sunday with Andrew Marr. He still thinks he has saved the world, and that only he can bring about full recovery. To questions he cannot answer he adopts the PMQ technique of spouting a Brown party political broadcast. Oh for an interviewer who would make him speak the truth.

  11. Richard
    Posted June 2, 2009 at 9:34 am | Permalink
    • alan jutson
      Posted June 3, 2009 at 5:00 am | Permalink

      Richard

      looks like Gordon may get what he wants (inter Country Banking Regulation) after all, but not by the method he thought it would be formed (his own).

      Will be interesting to see if he goes along with this, or fights against it.

      Any thoughts John ????

  12. Deborah
    Posted June 2, 2009 at 9:41 am | Permalink

    Government ministers have to worry about their expenses and saving their jobs – they are far too busy to get involved in routine matters like restoring governance in the banking system.

    And in any case, giving the responsibility back to the BoE might mean less quango jobs and clearly ministers wouldn’t want to add to the unemployment figures…..

  13. Mark M
    Posted June 2, 2009 at 10:12 am | Permalink

    Sadly to number 3, no they don’t. They actually think they need more box tickers. Labour has always been the same. If you look at the boxes ticked, Haringey was fantastic. Their answer is more rules and more boxes, even though the cause of nearly every problem we find ourselves faced with is the result of people complying with (badly written) rules.

  14. Paul
    Posted June 2, 2009 at 10:12 am | Permalink

    I totally agree John.

    Not just in the banking sector either. The car industry is also over “capacitized” with megagiant businesses.

  15. sm
    Posted June 2, 2009 at 10:14 am | Permalink

    What would have been the individual cost of action?
    What would the individual lose as a result of inaction?

    You can draw parallels with the ‘expenses/parachute culture’ .

    Perhaps we need a constitutionally protected central bank with powers of overwatch and control of other regulators in cases of systemic failure. It certainly needs to be beyond the effective control of one man/one party over such a long period. Should a chancellor be able to remain in position for so long and then become PM?

    The regulators need to have some skin in the game. At least
    e.g. a money purchase pension plan and salary linked to real average earnings.. not just an upside bonus.

    Come to think about it perhaps this could work for MP’s and Ministers?

    I increasing feel its come down to confidence in the UK.
    How confident would you be to lend money to the UK under the current government. It has to quantitatively eased out of your pocket by inflation.

    Part of the answer is a quick election, and substantial work to increase legal protections against long serving, large majority party unrepresentative government.

  16. Neil Craig
    Posted June 2, 2009 at 11:15 am | Permalink

    The nice thing about witchhunting is that it lets us feel good about ourselves & whoever is running it. The recession can be blamed of Sir Fred Goodwin, or bankers generally, or the Americans or indeed witchcraft & therefore it wasn’t the fault of Gordon, or indeed opposition leaders who didn’t say enything much different or indeed us who didn’t want our elected leaders to tell us bad news.

    The bad thing is that if you don’t acknowledge the real problem you can’t stop it happening again.

  17. Robert george
    Posted June 2, 2009 at 12:06 pm | Permalink

    Gordon Brown’s so called reforms were deeply flawed by his separation of FSA responsibilities from the BOE. Both should be responsible to the Governor. However, I doubt this government has either the courage or the capacity to acknowledge its own error.

    I also suspect that Treasury prefers the current arrangement as they would fear that the concentration of power in the BOE might limit their own importance.

  18. Adrian Peirson
    Posted June 2, 2009 at 1:01 pm | Permalink

    These witch hunts are a smoke screen for a Heist, no one is asking where the Bailout money has gone to.

  19. Lola
    Posted June 2, 2009 at 3:15 pm | Permalink

    The division of power between three regulators was a deliberate policy by one G Brown to ensure that he could get away with his lunatic expansion of the money supply without having his actions ajudged by one strong responsible monetary authority charged with maintaining sound money. The regulatory system was looking the wrong way – downwards to the wealth creators and businesses, not upwards to the irresponsible and clueless politicians. This regulatory system isn’t broken. It was just set up that way. That is it was always NBG as that was how it was supposed to work – to give Brown freedom to do what he liked. The consequences of whose idiotic fiscal actions we are now suffering.

    On a related matter someone has to do something about the FSA. As in do something now. I was at a meeting recently with a very senior manager of a very large financial services business who has regular contacts with the regulatory system at a very senior level. I made the observation that it seemed to me that, like all failed bureaucracies (e.g. left out ed) having failed all they had left was coercion. And so to demonstrate that they were still had power (but no authority) they were setting about metaphorically shooting people, as the Stasi really did to those trying to crosss the Berlin wall. The manger looked me straight in the eye and said that I ‘didn’t know just how right I was’. This correlates with Hector Sants pronouncement in a recent speech that regulated FS firms ‘should be afraid, very afraid’ (of the FSA). This is a deeply offensive remark and shows how dangerous to liberty and freedom these quangos have become. In a democrcacy, Hector old son, it is governments and their apparatchiks who need to be afraid, very afraid – of the people. And Hector, that hot breath you’re feeling on the back of your neck is the people like me coming for you.

    I don’t know Sants. I would quite like to meet him and test his mettle. But it’ll be on ground of my choosing, not his. I will no longer fight them on their ground with their rules in their game. I will fight them on my ground and my rules. The rules of freedom, economics, the philosophy of the free market, responsibility, democracy, the rule of law (do you know that IFA’s uniquely among the advisory professions are arbitrarily denied by the FSA the protection of the 15 year long stop?) and accountability to the client (not the quangocracy).

    On those grounds regulation always fails.

    • Mike Stallard
      Posted June 2, 2009 at 6:53 pm | Permalink

      If we see Brown as a Socialist dictator, you and I agree. He is just that.
      This means the following:
      1. Watch out the people who are his supporters. The purges, surprisingly, fall not on the real rebels but on the most reliable followers. (Remember Dobbin in Animal Farm?) Perhaps this is what your bank manager friend meant.
      2. Watch out for secrecy. Decisions are no longer discussed in public – parliament – the papers – the TV – they are announced. This means that rumours abound.(Allegation left out) On others (websites) they say that he has a foul temper and throws things around. In yet others, that he takes days at a time defending himself in writing, incommunicado. All this is probably lies. But secrecy begets rumours.
      3. Watch out for really wrong decisions. With no real advisers prepared to stand up for the truth without fear or favour, the dictator takes advice from toadies, his wife and family and lobbyists who are in it for themselves. Then, of course,when it all goes wrong, the loyal get punished and purged.

      All the people with plans of reform (above) are barking up the wrong tree; he is just interested in staying in power as dictator. He is in no way interested in reform.

      • Lola
        Posted June 3, 2009 at 2:33 pm | Permalink

        He wasn’t a bank manager and he wasn’t a friend! Otherwise, agreed.

  20. Steve Almond
    Posted June 2, 2009 at 7:54 pm | Permalink

    Is it true that the FSA have just awarded themselves £20,000,000 in bonuses as stated by the Sunday Times?

    • Lola
      Posted June 3, 2009 at 2:37 pm | Permalink

      Yes. Paid for by the fees I pay, earned from the money I charge clients. That is your money. And my FSA fees have risen by 1000% since 2001 whilst my PI insurance premiums have reduced. So who’s right about the risks in financial services? The PI insurer with a commercial interest and for whom an underwriting failure could wipe him out, or a state sponsored quangocacy with zero accountablity to anyone? Don’t bother to answer.

  21. Bazman
    Posted June 3, 2009 at 10:37 am | Permalink

    Its interesting that many MP’s where on many of the boards of non executive directors of many of these failed institutions and did not see anything coming. They must also have gave the nod to the outrageous terms of employment for many of their reckless money grabbing bosses too.
    Mp’s have been sussed thhe media was saying yesterday, with half the population seeing them as corrupt. How far the mighty have fallen. This is a letter in this months Viz comic and is seen as a joke.

    I was one of the 15,000 voters who elected Labour MP Elliot Morely to the House of Commons in 2005. Could I take this opportunity to to apologise unreservedly for my action. I believed he would make a good MP and I made an honest mistake which I will rectify at the next election.

    Bjorn Wilson
    Scunthorpe

  22. Lola
    Posted June 3, 2009 at 5:31 pm | Permalink

    Mr Redwood, I have just re-read your last paragraph. Am I to understand that if you attained power you would return the general fiscal supervisory powers to the Bank of England? If so are you also going to give them some authority over the money supply?

    And in regards to the FSA are you proposing that it should be left alone or are you going to reform it?

    You are probably aware that my opinion is that the whole FSA/FSCS/FOS structure is entirely flawed as it is constituted and run as a form of nationalisation lite; nationalisation by regulation if you like. Are you prepared /able to say what your ideas are? And how do you feel about the FSA/FSCS/FOS structure? Do you think it needs reform? Or do you think that it can be rejigged?

    Reply: My view is the regulation of banks should be given back to the Bank of England, and financial service regulation should be simplified, with less reliance on box ticking

    • Lola
      Posted June 3, 2009 at 9:34 pm | Permalink

      Hmmm!

  23. Brian
    Posted June 3, 2009 at 10:37 pm | Permalink

    I think the decision to exonorate the Bank of England from blame is ridiculous.

    The Bank of England just did not get it, they didn’t get it in Septemer 2007 as shown by the “moral hazard” policy.

    They didn’t get it in April 2008 when the banks forced them into the much needed special liquidity scheme.

    They didn’t get in in August 2008 when they considered raising interest rates when the economy was heading for recession.

    It took the near failure of RBS and HBOS and the failure of Alliance and Leicester and Bradford and Bingley before they understood the problem.

  24. Green Bullets
    Posted June 17, 2009 at 5:24 am | Permalink

    I understood that the regulatory system did issue warnings which were not accepted by the Chancellor who put the system in place? but still witch hunting?

  • 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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