Who will control the Regulators?

The government’s White Paper on banking regulation will be based on a toxic mixture of misunderstandings and the wish to deflect attention from the mistakes the government and monetary authorities have made.

The main cause of the Credit Crunch was the boom and bust monetary policies followed independently by the UK and US authorities 2003-9. In 2003-6 they kept interest rates too low and sent signals that credit should be easy. In 2007-8 they pushed rates up too far and left markets short of funds. Today there will be no apology and no proposal on how they can start getting it right in the future.

The crash was made worse in the UK by the tripartite system of regulation. The authorities did not require enough cash and capital of the banks in the easy money years, though they had the powers to do so. Now they are demanding too much. The Chancellor failed to provide leadership to read the cycyle well and to prevent the banking crisis. The Bank of England, stripped of its powers to regulate the banks, was unable to stop them responding to its easy money policy by lending too much and overstretching balance sheets.

The government encouraged the easy money off balance sheet culture. In the UK it encouraged massive PFI/PPP schemes so it could join in with oiff balance sheet finance. It enjoyed the never never buy now pay later culture. In the US the administration encouraged sub prime lending.

The UK government will be right to say “No” to trying to separate investment and clearing banking. It is right to say in future regulators should dampen rather than intensify the cycle.

It is wrong to trust the tripartite system which has failed. It is wrong to want to keep the mega banks that it now owns. It is wrong to ignore the monetary origins of the crisis. It should split up RBS and LLoyds/HBOS for disposal. It should apologise for its boom and bust monetary policy and explain how in future it might get it right.

Why should we believe new and more regulators will get it any more right than the last lot?

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20 Comments

  1. Mark M
    Posted July 8, 2009 at 9:09 am | Permalink

    Funny how lefties see a failure of regulation as a reason to have more of it. “It will work”, they think, “if we have enough of it”.

    You are right John. We need smaller banks (i.e. ones that won’t bring the system down if they fail) and regulation of the things that matter.

  2. Paul
    Posted July 8, 2009 at 9:39 am | Permalink

    Have to say I agree with all you say here John. The one thing I’m not sure about and would be interested in your argument against the reintroduction of a form of Glass-Steagall seperating Clearing and Investment Banks.. I would welcome a blog on your reason for this.

  3. Posted July 8, 2009 at 9:48 am | Permalink

    I am anti-globalisation as we have it in the modern era. It puts self-interest and power before common sense and decency. That The G8 and G20 politicians promote more of the same edifice that has collapsed in “all eggs in one basket” style, is evidence of this failure. Smaller, local banks and industries with local knowledge, independence and support will be forced to happen when energy and fuel become so much more scarce and prohibitive.

  4. Posted July 8, 2009 at 10:01 am | Permalink

    I don’t know how much the banking crisis was caused by bankers knowing in advance that government would bail them out (moral hazard) & how much by government regulation having sharply limited the possibility of investing in industries that actually produce things leaving them no option but gambling. The alternative is that bankers, as a class, are now so very much less competent than they have ever been before which strikes me as improbable.

  5. jean baker
    Posted July 8, 2009 at 10:57 am | Permalink

    John,

    It will not work for the good of the country and it’s taxpayers; ‘regulators’ will be appointed by the ‘ruling socialists’.

    Focussing on the ‘winners’, those benefitting from Blair’s immediate abolition of financial regulation on his arrival as PM – Tesco announced some months ago it’s aim of becoming a ‘banker’, has since reportedly been offered Northern Rock (devalued and ‘managed’) by the ruling party.

    The government, reportedly, took no action preventing taxpayer funded massive bonus payments to banking executives.

    Conversely, prudent Lloyds inherited, according to reports, monumental ‘toxic debts’ of HBOS, only reported in the media weeks after the ‘ink dried’ on the merger. The Chief Executive stepped down and shareholders known believe Lloyds would not have merged had the level of ‘toxicity’ been transparent at the outset. Brown was shown on TV alongside Lloyds Chief Executive, reported as the ‘merger arranger’.

    The outcome – the toxic debt of a Scottish Bank have been neatly transferred to British taxpayers – long established (reportedly solvent) British bank, Lloyds duly devalued in the process.

    Open Europe reported in June on controversial EU plans to create three new EU authorities with the power to override national regulators in areas of banking, securities and insurance. For this to succeed in Britain, the ‘ruling party’ would, of course, need to gain control to comply with the ultimate aim of Brussels controlling our financial institutions.

    The outcomes of Blair’s/Brown’s/Mandleson’s policies support Brussels ‘ideology’ – Federalism – Labour’s loathing and increasing destruction of democratic procedures in Britain is clearly illustrated by your reports of Parliamentary restrictions on questions being asked and/or not answered, or democratically debated.

    Playing’ at democracy to fool those they are paid to serve – the ‘clenched fist in the velvet’ glove will only appoint regulators who obey Nulabor’s/Brussels diktat. A further waste of taxpayers money.

  6. Ed
    Posted July 8, 2009 at 11:13 am | Permalink

    Sooner or later a US or UK Government is going to have to create a legal framework to manage the massive fraud perpetuated by one set of political and business leaders on a successor society. It seems to me that the Conservatives, lied to, maligned and intimidated as they were through the late 90’s and early 2000’s, are in a position to do that. When you consider the “off-balance sheet” model it clearly lends itself to unconscionable risk and de facto fraud. Therefore those who promulgated such a model heedless of these risks, of both a theoretical and practical nature, obvious on face value and blatant through experience, should be brought to account by a legal process.

  7. Acorn
    Posted July 8, 2009 at 11:21 am | Permalink

    JR, please take time to watch this link, fascinating. This is the guy who is liquidating Leyman Bros. His comments about regulators could be music for your ears!

    http://www.calculatedriskblog.com/2009/07/cnbc-interview-with-bryan-marsal-ceo-of.html

    • Baldwin
      Posted July 8, 2009 at 5:14 pm | Permalink

      The guy is brilliant.

      I liked his comment that multi-regulators perform poorly because of lack of co-ordination and ‘turf’ considerations.

      Also his suggestion that mortgages should need a minimum 20% deposit had merit.

  8. Lola
    Posted July 8, 2009 at 11:51 am | Permalink

    You know that I agree with all you say, as I have been saying the saem thing for the last oooo say 8 or 9 years.

    How then can this message be got out?

    I listened to Today on R4 this a.m about the new regulatory white paper. not one, not one, of the interviewers or the pundits made any attempt at all to make the points you make. Even Evan Davis, who is allegedly and economist, didn’t tackle the inherent deceit. If the media cannot be bothered to chellenge the governments talking heads what really is there to do about this?

  9. Waramess
    Posted July 8, 2009 at 1:09 pm | Permalink

    The moment the Government decided that they had to save depositors the need for regulation was born, and basically it hasn’t mattered much whether the regulation or the regulators were effective because the banking business in the developed world is rarely in trouble.

    Yes, we had the sovereign debt crisis that the banks managed to sort out for themselves and now we have the so called banking crisis, but broadly speaking we have few crisis; not because of the regulations but in spite of them.

    Regulations are always framed with the last crisis in mind and of course the last crisis never repeats itself.

    By far the best course of action any government can take would be to stop supporting the banks and make sure that depositors were well aware that if they did not take a sensible approach to the inherent risks of depositing money with banks then they would lose their money.

    That done the system of regulation could be dropped entirely and banks left to raise money from suitably cautious depositors.

    We live in a world where the legislators want to control the banks’ capital levels, their leverage, their lending ratios their asset book and anything else they can think of, and when they get it wrong they cast around for someone else to blame, whilst the taxpayer gets to foot the bill.

    In all aspects of life, when we go in persuit of a red herring it inevitably leads us down a convoluted maze that is difficult to escape from.

  10. Adam Collyer
    Posted July 8, 2009 at 1:47 pm | Permalink

    The idea of counter-cyclical regulation is silly. How do you identify the cycle while it is happening (as opposed to with hindsight)?

    And even if you could identify it, who decides? During the last decade Gordon Brown was loudly telling us he had abolished boom and bust and we were in a nice sustainable growth path. How would he have responded had a counter-cyclical regulator demanded tighter credit during his boom? Remember how he kept changing the definitions to prove he was running a balanced budget “over the cycle”?

    The only solution here is to have stable regulation (i.e. for example fixed capital requirements regardless of the cycle) so that there is no room for debate about whether we are in boom or bust. At least such a scheme would have taken out the worst excesses of the last decade. A counter-cyclical regulation regime would simply have been manipulated and “fiddled” by the government of the day.

  11. Robert K, Oxford
    Posted July 8, 2009 at 2:01 pm | Permalink

    I can’t disagree with much of this at all. Government blame shifting is the name of the game.
    But what chance is there, John, of the Conservatives reversing these policies, should we vote them into power?

  12. Brigham
    Posted July 8, 2009 at 2:54 pm | Permalink

    I am convinced that everything will be alright now. After all the whole thing will be overseen by our beloved leader. Having saved the world, banking regulation will be a doddle with hardly a thrown telephone.

  13. Adrian Peirson
    Posted July 8, 2009 at 3:50 pm | Permalink

    Well according to some, the Bankers are setting up a One world Government, isn’t this another example of what used to be called Treason.

    http://www.youtube.com/watch?v=y6NiggaXs6o

  14. Adrian Peirson
    Posted July 8, 2009 at 3:53 pm | Permalink

    Ron Paul had managed to get 250 Signatures from Congress demanding that the PRIVATE Fed be Audited.
    Would this be applicable in our case too with the BofE which I believe is also run as a Private Institution.
    http://www.youtube.com/watch?v=Xeb2VnI7S4U&NR=1

  15. Posted July 8, 2009 at 5:00 pm | Permalink

    A footnote here:
    In our little town, a huge PFI scheme is now set in place, after a decent democratic period of consultation, for the two local secondary schools. I questioned the wisdom of this in the local paper.
    Four very angry letters from local worthies, including personal attacks on me, were the result.
    My point was that I thought the Conservatives were against PFIs and monopolistic Comprehensives, and we have just elected a Conservative Council in this stronghold of Conservatism!
    Gove or yet more Balls?

  16. Michael Ney
    Posted July 8, 2009 at 6:01 pm | Permalink

    So having a tripartite structure with nobody actually knowing what is going on we are to rearrange the deckchairs on the Titanic into FOUR different piles with the oversight role being taken by a nebulous body consisting of members (Party Members?) from the other three.
    Why not simplify and instruct the Bank of England to do the job they were chartered to do. Easy control and oversight, massive cost savings, win-win for all except failed Caledonian Politicians.

  17. Paul
    Posted July 8, 2009 at 8:09 pm | Permalink

    Mike Stallard

    In my corner of Conservative Kent we recently kicked out a lib borough council for a tory one. Both the county council and the borough are more keynesian and central controlist than the ones they’ve replaced, council tax has gone up business rates have gone up so our councillors ( already on highest expenses) have awarded themselves an 8 % increase. The local business community are starting to form a protest group. Yes local business people up in arms with a Tory council.

    A conservative vote is nowhere near a foregone conclusion at the moment. Afraid the evidence all points to more Balls !

  18. Javelin
    Posted July 8, 2009 at 9:28 pm | Permalink

    I work in credit derivatives in one of the big banks. I know the system inside out because I wrote it. The fact is some insurance based instruments like CDs really are too complex and need to be managed by actuaries and not bankers. The industry is simplyfing the products (Eg DTCCs efforts) but these prducts remind me of the Mandelbrot set – it’s complex from a distance and is just as complex close up. The problem of an actuary running these products is that they don’t run their business on a balance sheet but on the probabily of making a profit. For companies that can’t fail this creates a problem. I’d be happy to face up to anbody in the industry on these products, I really think some new products are needed.

  19. Jon
    Posted July 9, 2009 at 9:02 pm | Permalink

    When this transmission of a plague happened, don’t remember the date but remember it as a clear sky day, I remember 2 thoughts I had sitting infront of my screen.

    1. This is going to mean a kicking for the 3rd World later.

    2. The EU will see an opportunity to put their hands on the City and the regulators to take more power from the people through finance.

    Regulation has meant protectionism for the Treasury by the FSA. We have seen wholesale dismantlement of fraud squads. Only one, cut down department is left. It is under the Corporation of London which is not quite run by this Government.

    The choice seems to be regulation and see the government take from the people. Or no regulation and be at the behest of the unscrupulous.

    My choice? Beef up the frause squads, forensic fraud offices under the control of the police and Crown. We won’t stop the problems but we could bring them to book. I would rather that than the government picpocket and control access to money.

  • 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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