Was light touch regulation the cause of the crisis?

 

It is a popular myth that the whole western crisis was brought on by an outbreak of light touch “Anglo-Saxon” regulation which allowed irresponsbile banks to lend too much. Ultimately the authorities had to act and managed to bring the whole system crashing down.

This convenient myth ignores some basic truths.

1. The European banking system is in a worse mess than the UK or US systems today. There is no evidence that the EU, Spaniards, Italians, Greeks and Germans suddenly fell in love with “light touch Anglos Saxon regulation” and made the same mistake, yet they ended up with more weak  banks.

2. The volume of regulations expanded substantialy during the build up of the boom. The EU came into the game and added many pages of new financial regulation at their level, on top of all the extra regulations the UK and US authorities were issuing.  The UK was governed by a left of centre administration which believed in the efficacy of more regulation. The FSA reviewed all past banking regulation and added to it.

3. The authorities themselves were enthusiastic proponents of the easier credit they allowed under their myriad of new detailed regulations. In the US a Democrat President promoted more mortgages to people on low incomes as a social policy, which led directly to the junk loans which jeopardised the system later. They called the crisis the “sub prime” crisis in honour of the loans advanced by mortgage banks and by a couple of state financing arms that were fully nationalised in the crisis. The UK government ran up big bills paid for by off balance sheet transactions called PFI and PPP in the spirit of the lend more age.

4. The UK administration was particularly keen on promoting the growth of Northern Rock, a North Eastern company, and RBS,a Scottish company, as they grew very quickly. They took pride in  the huge expansions of their balance sheets, and in the way they used off balance sheet vehicles to speed their growth. In the good days these were northern and Scottish companies showing London and the south how to  run modern banking and financial services.

The regulators managed to combine ever more detailed regulations and more enforcement of them with an inability to see the bigger picture. They missed the obvious. There was too much credit in circulation and being extended. The balance sheets of some leading banks were becoming too racy. We will look tomorrow at could all this be predicted? Did the authorities have the powers to rein it in?

 

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75 Comments

  1. lifelogic
    Posted May 27, 2012 at 5:34 am | Permalink

    Lots of the wrong sort of regulation but missing the nut as usual.

    Accounting and other rules that allowed RBS to get away with a huge rights issue in April 2008 only to collapse in October 2008.

    The regulation needed is one that ensure a proper balance of risk and reward for all the stakeholders depositors, bond holders, directors and any government depositor guarantees given. One that allow shareholders to control directors, the risks they take and proper accounting of these risks.

    Not as we seem to have had a system that allows the staff to gamble with others money on the heads they win tales the government & shareholders loose principle. Rather like the duff legal system we also often have.

    • lifelogic
      Posted May 27, 2012 at 7:21 am | Permalink

      Above all perhaps people should always remember that a piece of paper, when push comes to shove, is often just a piece of worthless paper – however fancy the writing or the triple A the names or governments printed on it. Printing fancy paper and selling it to the gullible is a profitable business.

      I have always preferred real assets that deliver real income and have not regretted it so far.

      • Bazman
        Posted May 27, 2012 at 6:22 pm | Permalink

        Smells like crap, most probably is. Got to agree with this.

    • Bob
      Posted May 27, 2012 at 4:15 pm | Permalink

      @lifelogic

      You are correct. And the reason for this lack of accountability to shareholders is the way that the tax and pensions regulations strip shareholders of voting rights, because the shares must be held in FSA approved “managed funds”, which means the fund managers get our votes and they use this voting power to vote for each others pay, bonus and share option awards.

      In turn they pay large donations to political parties to maintain the status quo. That is why Lib-Lab-Con will not reform the system to allow the small guys a vote.

      • lifelogic
        Posted May 27, 2012 at 7:49 pm | Permalink

        Indeed there is truth in that, but even so the shareholders control over directors are too weak – there is a clear parallel in politics between voters and the powers that be.

  2. lojolondon
    Posted May 27, 2012 at 6:12 am | Permalink

    John, I am not sure where you are going with this. Facts remain :
    – G.Brown split up the BOE which had responsibility for the banking structure and ensuring banks were sustainable. Additionally, he drove the regulators not to interfere, calling publicly several times for ‘light touch’ and ‘self-regulation’
    – ALL commonwealth countries have banking regulations based on the old British system
    – No commonwealth country had to bail out a single bank, in the UK nearly ALL banks were bailed, whether by the taxpayer or by foreign investors

    The fact that EU banks are not properly regulated, and that weak governments use banks to boost their economies in the short term with devastating long term results is neither here nor there.

    If Canada or Australia or South Africa or India or Pakistan or any other commonwealth country was situated right here, 20 miles West of Europe, they would be in a far stronger position, because they would have had no banks to bail out, and their economies are cash positive, ie. they spend less than they earn.

    • sjb
      Posted May 28, 2012 at 9:32 pm | Permalink

      “At some point during the crisis, three of Canada’s banks—CIBC, BMO, and Scotiabank—were completely under water, with government support exceeding the market value of the company,” says Macdonald. “Without government supports to fall back on, Canadian banks would have been in serious trouble.”

      Canada’s secret bank bailout revealed

    • sjb
      Posted May 30, 2012 at 7:58 am | Permalink

      “[...] National Australia Bank [ASX: NAB] had to borrow USD$4.5 billion from the US Federal Reserve during 2008 and 2009.

      And Westpac Banking Corp [ASX: WBC] needed USD$1.09 billion in January of 2008 and 2009.”

  3. Martin
    Posted May 27, 2012 at 7:54 am | Permalink

    Item 1 – depends on when things become unfashionable. At present Greek Government debt and Spanish property is very unfashionable. The US government’s debt hasn’t gone away and as for much of the UK property market don’t think about it.

    Item 4 – At the time Northern Rock and RBS were all private companies. If the government had prevented them from expanding I can imagine the howls from some quarters.

    How we can regulate the froth I’m not sure. Perhaps it is societies attitude as a whole. In the UK borrowing by individuals has been regarded as very fashionable while saving seems to be regarded as a rather eccentric activity – penalised by governments via inflation, and the tax and benefit system.

  4. colliemum
    Posted May 27, 2012 at 7:55 am | Permalink

    Good points which our EU neighbours would do well to read and remember.

    Point 2) especially needs to be hammered home at every opportunity: the US government interfering to create the sub-prime mortgage market for social reasons … and yes, as you say in point three, the previous Labour Chancellor and then Prime Minister are as guilty with PFI and PPP.

    It may be worth recalling that using tax payers’ money to finance this, and to finance bail-outs, means in the end that taxes cannot be lowered, and thus there’s less and less money available in private hands to stimulate the economy. What is called fiscal drag in relation to income tax is one strategy employed by the Treasury to increase their revenue.

    • uanime5
      Posted May 27, 2012 at 1:21 pm | Permalink

      1) The sub prime mortgage crisis occurred because banks turned risky mortgages into good mortgages so they could make more money. Had they been honest about how risky these mortgages really were then various banks and investors wouldn’t have had so many bad assets.

      2) Given how many billions the private sector has hoarded the problem isn’t that they don’t have enough money.

      • Bob
        Posted May 27, 2012 at 9:05 pm | Permalink

        @uanime5

        As I mentioned before, the government forced the sub prime mortgages onto the banks, the banks did what anyone would do, they gave the mortgage, ticked the box, fulfilled their politically correct duty to fill the racial quotas and then sold the loan on as fast as they could.

        I wonder why Bill Clinton didn’t lend some of his millions to the same people that he forced the banks to lend to?

        • uanime5
          Posted May 28, 2012 at 6:38 pm | Permalink

          As I stated the banks could have sold the loan honestly, rather than try to make as much money as possible irrespective of the harm it would cause.

          • Bob
            Posted May 28, 2012 at 9:32 pm | Permalink

            @uanime5

            Why did the government force the banks to make loans to people who could not afford to repay them?

  5. Gary
    Posted May 27, 2012 at 7:59 am | Permalink

    No. Crony capitalism was the cause. Govt underwriting bad business for quid pro quo favours. The quicker that sewer is flushed, the better.

  6. Pete the Bike
    Posted May 27, 2012 at 8:01 am | Permalink

    The entire financial crisis has been brought about by regulation which promotes too big to fail banks, crony capitalism and bubble economics. If we actually had a free market then banks would have to be far more responsible otherwise their customers would pull their money at the first whiff of a problem as they would know that no bailouts would be forthcoming. Bring back the days when customers faced some risk when putting their money in a bank account then they would be far more choosy as to which bank was likely to be in business next week. Also the huge international banks would face competition from new smaller, more efficient banks if government didn’t erect so many barriers to newcomer banks.
    Government is the problem, not the solution.

  7. Alte Fritz
    Posted May 27, 2012 at 8:02 am | Permalink

    Regulation has become the supposed sovereign remedy. Anyone having contact with a regulated industry soon becomes aware that regulators cannot see the wood for the trees. Regulation becomes an end in itself rather than a means to improve an industry.

    The hostility of those who regulate to the regulated is unpleasant and speaks to an unhealthy atmosphere. Short of a revolution, we are stuck with it.

  8. Brian Tomkinson
    Posted May 27, 2012 at 8:12 am | Permalink

    It seems to me that myths abound in relation to what caused the economic problems and what is being done to reverse and recover from them. What particularly irks me is the continuing myth that the government is spending less when it is spending more and has planned to virtually double the national debt from its already high base in just five years.

  9. Posted May 27, 2012 at 8:16 am | Permalink

    I think you could look deeper to a process of unenlightenment going on in society.

    • Posted May 27, 2012 at 3:14 pm | Permalink

      What??? Is this the sort of rot you teach the kiddies? Grammar schools, please!

    • libertarian
      Posted May 27, 2012 at 8:08 pm | Permalink

      If by “unenlightenment ” you mean ignorance, then I agree and the root cause of that is our totally failed and discredited educational system over the last 40 years,

    • Bob
      Posted May 27, 2012 at 9:16 pm | Permalink

      Social Mobility has decreased and the Benighted Kingdom has slipped to the bottom of the educational league table since Grammar Schools were declared “undesirable”.

      Well done Shirley Williams, and thanks for nothing from the millions who’s life chances were ruined by your idealogical obsession with equality of outcome. We’re all dummies now.

      • lifelogic
        Posted May 28, 2012 at 3:10 pm | Permalink

        The “obsession with forced equality of outcome” exists mainly because it is a good excuse to justify pointless jobs in the state sector. It is driven by self interest of the parasitic worker sectors and the politics of envy (not ideology thought it has almost become one). Is it fair that he earns X and you are a cleaner? You clearly need to pay for thousands of parasitic workers to correct this “unfairness” from your taxes they will argue (as they fill in their expense claims and check on their pensions).

      • uanime5
        Posted May 28, 2012 at 6:39 pm | Permalink

        Why are you praising Shirley Williams when Margaret Thatcher closed down the most Grammar Schools when she was the education minister?

    • lifelogic
      Posted May 28, 2012 at 4:31 am | Permalink

      By “unenlightenment” do you mean the attempted indoctrination of the population (and their children) by government, schools and the BBC with the quack, carbon “pollution” and renewable agenda, and the great benefits of the non democratic, regulate to death, socialist EU?

  10. Denis Cooper
    Posted May 27, 2012 at 8:29 am | Permalink

    When a pandemic sweeps across the world then the root common cause everywhere is the pathogen which causes the disease.

    Afterwards investigators may conclude that country A suffered more because it had relaxed its precautions against the spread of disease, while in country B the mortality rate was much lower because the population had inherited some degree of natural immunity, and so on, but in all cases the root common cause remains the pathogen.

    I suggest that the Chinese created the root common cause of the present global financial plague, by suddenly emerging as large scale manufacturers and low price exporters.

    Wherever central banks had been instructed to concentrate on, indeed obsess about, retail price inflation, and to largely ignore asset price inflation, the monetary control systems were thrown off balance by the so-called “Great Moderation”, and with the Chinese recycling the flows of money from their exports back to their customer countries credit became too cheap and plentiful, luring both governments and private individuals into excessive debt.

    Of course it hasn’t helped us that Brown decided to follow the EU model by instructing the Bank of England to concentrate on retail price inflation, and then changing to the EU measure of inflation so that rising house prices played an even smaller part in its calculations, and splitting off regulation of commercial banks from the Bank to a separate regulator, the FSA, which turned out to a bunch of novices and incompetents.

    But I think it would be impossible to design a system which would be immune to all possible shocks, of which the rapid emergence of China as a major low cost exporter is just one example.

    Which suggests that while some kind of system is necessary it’s also necessary for there to be enough legal and political flexibility for the system to be quickly and intelligently adapted as new and unforeseen circumstances begin to arise.

    Although it can provide politicians with good soundbites to prove their statesmanlike sense of responsibility there are clearly risks in putting a set system on a statutory basis, and there are even greater risks in enshrining a set system in a national constitution so that it becomes even more difficult to change, and perhaps the worst idea of all is to enshrine a set system in an international treaty.

    So I’m not exactly an enthusiast for Merkel’s idea that all EU countries should commit themselves to an international treaty which required them to put a set “balanced budget” rule into their national constitutions and beyond the reach of their national parliaments, and if I was Irish I’d be strongly inclined to vote “no” next Thursday despite all the scaremongering about the national disaster which would ensue.

    • Mark
      Posted May 27, 2012 at 11:43 pm | Permalink

      The Chinese phenomenon merely repeated what happened earlier with Japan, which built up massive trade surpluses that it was effectively forced to “invest” in other Western debt. The debt was devalued via a strengthened Yen, reducing the effective earnings of their exports retrospectively, but also undermining the credibility of ever rising prosperity implied by the Nikkei approaching 40,000. When the Yuan/Renminbi delinks the illusion for China will be clear. Perhaps the key difference is Chinese involvement in the economies of raw materials producers: they may become more overtly colonial in response.

  11. Lindsay McDougall
    Posted May 27, 2012 at 8:39 am | Permalink

    What is undeniable is that there was a huge property bubble that burst, and that that was a major cause of the bust. I have consistently argued the Bank of England’s inflation target should have been based on an index that included asset prices – particularly house prices. Had that happened, monetary policy would have been tighter and the boom would not have got out of control.

    • A Different Simon
      Posted May 27, 2012 at 12:36 pm | Permalink

      “huge property bubble that burst”

      It hasn’t burst over here yet though has it . Even including devaluation of sterling prices have only dropped 30% or so .

      That people consider a drop of 30% a crash illustrates that they did not consider peek prices to be that outrageous .

      For the next generation to have any future and be able to pay state pensions to us they cannot be spending excessive amounts of their income on mortgages or rent as that money just percolates straight up to the people at the top and the banks .

      We have an ill conceived NEST pension scheme which is due to come in in October 2012 . This is absolutely doomed to failure and consign people to an even more impoverised future .

      The stock market can no longer provide the gains needed to support pensions and the charges will ensure that people get out less than they paid in in real terms .

      Instead , why not set up a national pension fund financing infrastructure like nuclear power stations and build high quality social housing with a target rent of a maximum of £200 per month for a 3 bed house ?

      These things add real wealth and the tools for the next generation to build upon .

      • Lindsay McDougall
        Posted May 28, 2012 at 8:33 am | Permalink

        House prices are still falling in real terms and have further to go. It’s only inflation that is disguising this.

        • A Different Simon
          Posted May 28, 2012 at 1:45 pm | Permalink

          Working in I.T. , an industry which has been contracting over here for 25 years I could see that the only way for most people from the late 1990’s was down .

          Unfortunately my sister and her husband couldn’t see this and wouldn’t listen to me and are now deep in negative equity and I don’t have the means to help them .

          They have been reduced to selling stuff at a market stall and this weekend was so slow that the didn’t even take enough to cover their pitch and lost more money due to the perishable stock not selling .

          Pretty tough to spend your last £200 to earn money and coming back with less than you started .

          No matter what they do they can’t make enough money to live and we have sensitive Eric Pickles telling people to work harder when he knows full well it won’t make a blind bit of difference .

          Consequently people are giving up in their droves – which partially explains the drop in output .

          Property bubbles are just so damaging .

          Anybody see that councils are selling off the farms that they rented out ? Why couldn’t these be transferred to a national pension fund ?

          Why is the Govt letting the City of London swap all that worthless paper money for distressed real assets like farms at rock bottom prices ?

          Hasn’t the taxpayer given them enough already ?

          Or are farms the only thing left for them to take ?

        • lifelogic
          Posted May 28, 2012 at 3:10 pm | Permalink

          Not in London.

          • lifelogic
            Posted May 28, 2012 at 7:22 pm | Permalink

            Because in London they are being bought, in the main, by people from overseas who do not have to pay taxes at 50% + or put up with the absurd over regulation of everything.

      • a-tracy
        Posted May 28, 2012 at 8:39 am | Permalink

        I agree, well said.

    • Sue Doughty
      Posted May 27, 2012 at 1:56 pm | Permalink

      Lindsay, you are right. You could go on and infer that the powers that were deliberately allowed more credit than there is money in order to have the capitalist system destroy itself, as prescribed in Tony Blair’s Singapore speech, circa 1995.

  12. NickW
    Posted May 27, 2012 at 8:40 am | Permalink

    “Too big to fail” Banks need a heavy regulatory structure to (try) and protect the taxpayer who becomes liable for the cost of preventing failure.

    Unfortunately the Banks then do everything in their power to circumvent the regulations, and having done that, still expect the tax payer to pick up the bill.

    Looking at where we are now, it is my personal feeling that in persuading Governments to bail out Banks, that Gordon Brown has been responsible for “destroying” the world; not “saving” it.

    The “Too big to fail” Banks are now completely parasitic, making money, (and losing it Mr Dimon), by “Bets” which are different only in magnitude to the ones Andy Capp puts on the horses and greyhounds.

    I can’t help feeling that the concept of “Limited liability” along with “too big too fail” has made the game too one sided.

    Putting it bluntly, Bankers whose reckless and care less behaviour leave the state with large liabilities need to be personally bankrupted and to know that that will be the reward for failure. Similar treatments should await any Board which fails in its duty of oversight.

    If the Board cannot understand what the Bank’s employees are doing, they self evidently shouldn’t be doing it. Zero oversight and profit related bonuses inevitably lead to disaster.

    • NickW
      Posted May 27, 2012 at 9:12 am | Permalink

      Mr Redwood asks the question, “How did we get where we are”?

      This link is worth reading because it describes in gory detail where Europe is now, and what is likely to go wrong next.

      http://www.zerohedge.com/news/europe-fighting-wrong-battles-again

      • Denis Cooper
        Posted May 27, 2012 at 2:29 pm | Permalink

        The EU governments, unfortunately and almost incredibly including our own, have been and still are fighting the wrong battle, a battle to preserve the present eurozone intact for geopolitical reasons.

        If economics had taken precedence over geopolitics Greece would not have been allowed to join the euro in the first place, and once it became clear just how big a mistake it had been to allow Greece to join the euro the EU would have drawn up a plan for it to make an orderly withdrawal ASAP.

        The time for that was in 2009 and into 2010; but in 2009 the eurocrats were far more concerned about imposing the Lisbon Treaty, which had barely come into force on December 1st 2009 before the treaties had to be broken on May 9th 2010 in the first attempt to bail out Greece.

        In my view the UK government has committed a massive strategic error by colluding in those efforts to preserve the eurozone intact; whether in the future historians agree with that view will largely depend upon whether the error proves to be fatal, because as we know history is usually written by the victors.

  13. David B
    Posted May 27, 2012 at 8:52 am | Permalink

    The last government (and the left in general) have found a convenient scapegoat. Blame the banks and it diverts the blame from there actions and in actions.

    The regulations in place did not work because they were inflexible. It was clear the regulators (including the politicians who set up the structure) did not understand the banks balance sheet and risk profile. This lead to static regulations that were prescriptive in nature and did not address key areas of the balance sheet

    We need flexible regulations that can evolve with the changing conditions. Light touch regulations are about exerting control when it is needed.

  14. Mike Fowle
    Posted May 27, 2012 at 8:56 am | Permalink

    I don’t claim to understand the dynamics of the whole business – it’s far too complicated for my little brain, but I do think that when Gordon Brown kept repeating “an end to boom and bust” it fostered a climate of irresponsible borrowing and lending. One of history’s might have beens is well described in Andrew Ross Sorkin’s “Too Big to Fail” describing the Lehman collapse, when Wall Street having agreed to chip in to buy up the toxic assets, Barclays were prevented from purchasing the “good” residual bank by the bank regulators over here.

  15. Antisthenes
    Posted May 27, 2012 at 9:04 am | Permalink

    All regulation does is curtailed competition and nudge behaviour in a different direction which more often than not is worse behaviour than that which it is meant to address.

    • lifelogic
      Posted May 28, 2012 at 3:15 pm | Permalink

      Do you think we should have regulations to stop say “kidnapping” or “obtaining money with menaces” – should those be left to the market too? Good regulation is needed sometimes – it just needs to be intelligently designed, honest and organised so as not to back fire as it so often does.

  16. Chris Moriarty
    Posted May 27, 2012 at 9:13 am | Permalink

    1. Europe’s banking system is in a worse state because European authorities have printed less money that their US equivalents.
    2. You can try to regulate anything but if the regulations you apply are meaningless or so complex that nobody understands them, then they are useless. IASB rules have prompted more debate about their meaning than their implementation.
    3. A Democratic US President ( who was a big mentor to New Labour ) had to repeal the Glass-Steagall legislation in order to get the banks to lend further down the credit chain. Glass Steagall was created in 1933 to stop a repeat of the 1929-1934 credit-fuelled bust. Glass-Steagall was repealed in 1999 and eight years later we had a crisis brought about by a credit-fuelled boom collapsing. Cause and effect? Coincidence? No. POLITICIANS trying to create a client voter base.
    4. The UK administration wanted to copy the US political attempt to create a client voter base through the creation of a sub-prime property boom. Having a Northern Rock or RBS creating a sub-prime boom over here by lending to the lower reaches of the credit spectrum was a deliberate, calculated policy to enable that administration to claim that “you have never had it so good….”. Allowing commercial banks to load high-risk derivatives onto their balance sheets was always going to end badly unless you paid the RISK MANAGERS more than the risk takers. And that never, ever happens. Especially in the good times.

    Whilst the greed of bankers is a major factor in the creation of the current situation, the moral cowardice, head-in-the-sand short-termism and naked political opportunism of many western politicians renders , in my humble opinion, the political class at least as culpable as any banker.

    Removing legislation, or light touch legislation was a prime driver in creating the boom. Did the authorities have the power to rein it in? Yes. But they gave it up…..

    And finally, as a politician please tell us how you get on debating these issues with voters. I’d guess their eyes cloud over in about 30 seconds. Which means you have 30 seconds to say something meaningful. And it is absolutely impossible to explain, let alone debate this whole sorry mess in 30 seconds. So do you revert to the rabble-rousing hang the rich, tax the banks, fairness for all anthem that gets the voters feeling all warm and cuddly? Or what is your approach?

  17. norman
    Posted May 27, 2012 at 9:42 am | Permalink

    Obviously I know a lot less of this than an MP with their inside knowledge, coupled with the fact I freely admit I know nothing of banking, international or not, further than my mortgage.

    But I can’t help but feel a little hard done by as a Scot (and I’d imagine a lot of Northern English feel the same) at the blame apparently being heaped on us in this article. Especially the ‘showing London how to do things line’, that really rankled. I know RBS has a strong presence in London, maybe Northern Rock do too, and I imagine a lot of the dodgy deals were signed there and arranged in meetings there. Maybe all by Scots? Or is it conceivable these massive multi-national banks were typically made up as other banks were?

    And, rest assured, any Englishmen reading this don’t think all of us Scots (and Northerners) wanted this situation with banks lending extravagantly and living wildly beyond our means, No doubt some did, and no doubt Labour wanted this to be the case in their heartlands, but don’t blame all the crisis on us, at least not on ordinary citizens.

    We’ve been as screwed by politicians as the rest of you and still drag ourselves out of bed at ungodly hours every day in an effort to make things better. Maybe in his next post JR will bring up Barclays and their bailout out by Sovereign wealth funds, or Lehman brothers and their antics in the London market, how about Goldman Sachs, didn’t the US government have to throw money at them (and a ton of others). I’m sure there are a dozen other examples but all we hear is it’s the fault of the Scots and Northerners. They were all at it, don’t just single out areas where the Conservatives don’t do well. Some were at it more than others, admittedly, but no one wanted to miss out on the gravy train.

    If it was up to me they’d all have had to swallow their losses, however bitter that would have been, that the government made an ass of things isn’t anything any rational person should be surprised at nor blame anyone other than politicians for.

    • A Different Simon
      Posted May 27, 2012 at 12:59 pm | Permalink

      My late grandmother was Northern Rock’s first shorthand-typist .

      Think she was employee number 3 or something like that !

      The time has come to move Parliament out of London and out of the South .

    • Sue Doughty
      Posted May 27, 2012 at 1:59 pm | Permalink

      Norman, it might help if you know that the Act of Union with Scotland was to rescue the Scottish banks from bankruptcy by allowing Scotland to enter a monetary union with England. They are repeat offenders. It has happened before and it will happen again

      • Lindsay McDougall
        Posted May 28, 2012 at 8:31 am | Permalink

        Yes, Sue, and Alex Salmon is putting it about that an independent Scotland would retain sterling. Perhaps because I am Glasgow born I can put this more robustly than the English: “Oh no, you b____y won’t. England will not play Germany to Scotland’s Greece.” If Scotland wants independence, it must be complete independence.

  18. Thomas E
    Posted May 27, 2012 at 10:44 am | Permalink

    I think a large part of the problem was found not in the regulated sector of banking but in an unregulated shadow banking sector. Bank failures were largely caused because funding sources other than traditional bank deposits dried up throughout much of the world.

    Once these funding sources dried up there was a massive credit crunch.

    A huge part of the reason for the rise of the shadow banking sector were the rise of China as a super creditor. China obtained vast amount of capital in exchange for manufactured goods. This capital had to go somewhere and it depressed government bonds for a long period of time. Savers within these countries were forced to buy more risky investments in order to provide for their retirements.

    Many of these investments ended up in wholesale markets whic provided excess funds to banks at low interest rates, and leveraged the investments very substantially. The result was a developed economy worldwide bubble which was absolutely unprecidented except for the events preceeding the great depressions of 1929 and 1870 both of which were caused by the rise of new economic super powers.

    At its heart, while failure to regulate *the shadow banking* sector was a major cause of the recent problems, the bubble was caused by excess savings in turn caused by a failure to be competative and poor monetary policy.

    I also agree with you, PFI misuse by the Labour party is a hidden scandle that will harm britains prospects for the next fifty years.

    • A Different Simon
      Posted May 27, 2012 at 1:06 pm | Permalink

      The coalition are about to repeat the PFI scandal on a massive scale by guaranteeing nuclear companies a fixed price for the next 40-50 years in return for them funding the building of powerstations and assuming the risk of cost overrun .

      This will make the Powerstations several times more expensive than if they were funded upfront by the taxpayer or govt borrowing .

      Why not finance them with pensions contributions which will otherwise be pumped into the doomed to failure NEST scheme from October 2012 ?

      This generates real wealth in the future , not paper wealth and gives a real return to the pension fund .

      • lojolondon
        Posted May 27, 2012 at 8:11 pm | Permalink

        Because of foolish, ignorant scaremongering by greenies and the media, and because the last government did not care what happens to us after they lose power : (a) the government has no money and (b) all this is happening 20 years too late.
        That is why the current government is being held over a barrel by the private sector to build much needed nuclear power capability. The only good thing in this whole scenario is that the more this pathetic no-brainer decision is delayed, the stronger the drive for shale gas to be exploited ASAP!

        • Mark
          Posted May 27, 2012 at 10:52 pm | Permalink

          I read that government consulted oil companies with no exploration effort in UK shale gas, but considerable interest in LNG around the world to comment on the likely reserves. I suspect they were told to evaluate them on the basis that carbon capture would be required (are we supposed to install that on every domestic boiler and hob?). Given that they had no access to the well logs and seismic data, it is hard to see how they could in any way gainsay the companies who have announced discoveries. On the face of it, there was an opportunity to rubbish the competition in order to protect existing investments and contracts.

      • Mark
        Posted May 27, 2012 at 10:39 pm | Permalink

        If the nuclear stations (or windfarms) are uneconomic the only issue is who will bear the losses, via what route? Dumping that onto pension funds is no better than stacking it onto PFI. The important thing is to invest in viable energy sources, not green pipedreams.

      • stred
        Posted May 28, 2012 at 8:04 pm | Permalink

        Exactly. And open competitive tendering from the rest of the World, instead of trying to negotiate with the French and being screwed like an arms industry deal. Offer all the existing sites, specify the output, safety standards and construction period. Then let real cometitive tenders roll in, from India and China if necessary.

  19. Posted May 27, 2012 at 10:47 am | Permalink

    The problem with rules and regulations is that they are generally written after an event in order to prevent its recurrence. They rarely cover what might happen, and are merely added to after some unforeseen event. The list thus becomes longer as time passes, and obeying the rules becomes the priority rather than thinking about the task in hand.
    I met this problem in engineering before I retired; The list of safety rules became so lengthy, that the predominant aim when running a project was to ensure that they were all obeyed, regardless of their relevance for the job in hand. Common-sense thinking about the job “went out of the window” and accidents still happened, leading to even more rules and tick boxes, with no-one looking at the overall situation.
    I’m sure that this is what happens in finance, everybody is looking at the trivia and no-one is looking at the overall picture.

  20. Alan Wheatley
    Posted May 27, 2012 at 11:09 am | Permalink

    Long before the crisis hit I recall voices being given occasional media space warning that the borrowing trend was unsustainable. Thus the Labour claim that the problem was unforeseen is simply an admission that they did not see that which was there to be seen.

  21. Steven Whitfield
    Posted May 27, 2012 at 11:16 am | Permalink

    The regulation issue is just a smokescreen.. the big question the politicians need to ask is what was so bad about 1997 or even 2005 public spnding levels that makes it so difficult to return to them ?. What has the extra spending done for us – are we happier, healthier, better educated ?…..or have just a few vested interests benefitted ?.

    If John Redwood could be bold and unshackle himself from the corpse that is the 2012 Conservative Party he could really make a difference. History favours the brave.

  22. Stewart Knight
    Posted May 27, 2012 at 11:24 am | Permalink

    light touch Anglos Saxon regulation

    But you’re vastly over simplifying and generalising what happened by describing the changes in banking regulation, in particular, like this, and also discounting some of the effects which took almost a decade to become apparent.

    Brown didn’t just introduce light touch regulation, but incompetent regulation, and this had the effect of making the recession far worse and the Eurozone crisis was only the catalyst.

    You’ve over generalised and partly trivialised what Brown did by describing it as mere light touch Anglos Saxon regulation, which in its true form is good.

    It might also be worth pointing out that any light touch Anglos Saxon regulation is fraught with dangers that need constant monitoring, but Brown basically didn’t care, didn’t monitor, or perhaps was too stupid to notice in his rush to collect all that lovely loot in taxes from increased credit spending and the massively inflated housing boom.

    You shouldn’t trivialise Brown and Labours culpability.

  23. Steven Whitfield
    Posted May 27, 2012 at 11:38 am | Permalink

    I want to see Mr Redwood come out fighting, gloves on, and take Osborne and the rest of the reality deniers on. Show the nation that they’re policies are just a hollow shambles. He can win and win well and shift the axis of political debate for the better – the mighty Redwood was in front line politics when Gideon was still in short trousers. Come on Mr Redwood your country needs you NOW!

  24. Sue Doughty
    Posted May 27, 2012 at 2:00 pm | Permalink

    So, Mr Redwood, what can a coalition government tat includes Lib Dems do to get us out of this mess?

  25. john w
    Posted May 27, 2012 at 2:38 pm | Permalink

    John,thanks for signing the peoples pledge.

  26. Posted May 27, 2012 at 3:19 pm | Permalink

    The “Anglo-Saxon conspiracy” strikes again! If only. We could use a Cecil Rhoades to extract England from the sad idiots on the continent. The oPen conspiracy to force the dying UK into the Euro is what JR ought to narrate. That one almost worked!

  27. AJAX
    Posted May 27, 2012 at 4:35 pm | Permalink

    The cause of the crisis?

    Big Bang in the Square Mile in 1986 & the abolition of the Glass-Steagall Act in the Street in the 80s/90s

    Once these cooling ponds were emptied these financial nuclear reactors went into predictable meltdown again as they had done before when allowed to run amok with unsecured speculative frenzy, reminding us why the ponds were built in the 1st place

    The idea that hot-wiring 2 gigantic casinos on either side of the Atlantic was an economic alternative to the loss of Anglosphere’s manufacturing base via off-shoring to the Orient thru free-tradist dogma was always a desperate one grasping at straws, & it died finally in 2008 (some people still don’t quite get what Lehman’s implosion signalled the end of).

    The storm we’re now in is the outcome.

  28. Electro-Kevin
    Posted May 27, 2012 at 5:15 pm | Permalink

    The cause of the crisis ?

    Bill Clinton declared that loans had to be extended for reasons of equality.

    How did that affect us ?

    Well. We already had a property oriented economy. Ordinary people owning their own houses, some of them council properties. Nothing wrong in that. At least there shouldn’t be anything wrong in that…

    …except that your average person is a dick!

    So we had the majority owning their own houses. A shortage of development. Mass immigration. Properties rising in value …

    Clinton’s idea of free lending and then, just as we’re about to have an adjustment to curtail over borrowing on the notional values of property (with an interest rate increase due)…

    Bin Laden demolishes the World Trade Centre WORLD TRADE CENTRE no less …

    Interest rates are kept artificially low to avert an implosion of the Western economies.

    Property speculation sky rockets. Equity release sky rockets too. A UK housing bubble.

    Socialist politics which combines overweening supervision of our population (barriatric surgery and ambulances for instance, in total alignment with the zeroing of interest rates to assist the credit-incontinent over the good of the prudent.)

    You want an answer to this question ? OK. I’ll give you one.

    The politicians have EVERYTHING completely ARSE about FACE.

    • Electro-Kevin
      Posted May 27, 2012 at 5:46 pm | Permalink

      The key problem in Britain ?

      The upper middle class (the ruling elite) loathes the aspirant working class.

      Dumbing down (for reasons of ‘equality’) is yet another excuse to do down the aspirant working class. This is being done to the detriment of our nation.

      • Electro-Kevin
        Posted May 27, 2012 at 7:06 pm | Permalink

        The proof ?

        The Tories will defend to the hilt private education (selection by wealth) over grammar schools (selection by inteligence)

        Is it any wonder our country is doomed ?

  29. Bruce, UK
    Posted May 27, 2012 at 5:55 pm | Permalink

    Venal bankers and even more venal politicians. With Brown the most (to blame ed) of all aided by Balls, Cooper and Milliband. Not that I hold any brief for Osborne and Alexander who seem unable to comprehend the scale of change of mental attitude required in government to engage with the crisis. When, and it is a when, the Euro collapses who can fail to be extremely worried that we have elected such creatures to exercise power? But then, where was the choice to be made between the major parties?

  30. Bert Young
    Posted May 27, 2012 at 6:18 pm | Permalink

    Of course one should make the present transparent to the past ; history has a lot to offer . One must also look at the effect short termism has on long term issues – you cannot run a capital intensive enterprise in the same way as a retail business . Governments deal with the matters in hand as part of their manifesto agenda without too much concerrn about what happens after 5 years . Business in this country is mainly driven by a ” Return on Investment ” basis ; in Germany it is based on “Return on Capital ” – result , Germany has a sophisticated and internationally effective manufacturing base and we have a sophisticated and internationally effective service sector . Why don’t you take these matters into your line of enquiry Dr. JR ? I once challenged Nigel Lawson on this approach at a meeting of the “Open Dining Club” ( I Chaired this meeting ground of the Civil Service , Industry and the City for many years ) , his response was ” I don’t get the point of your question “. Good luck with your endeavour .

  31. Andrew Johnson
    Posted May 27, 2012 at 8:04 pm | Permalink

    During the times you write about, my daughter was working for an international bank helping to prepare bids for investors capital. Very large sums of money were involved. Part of her duties was to ensure that all bids met with the appropriate FSA and EU legislation and also to liaise with these regulators. If you were to talk to her and many others in the City, you might discover that far from their being a “light touch” the financial institutions were groaning under the very heavy burden of completely unnecessary and ineffective micro legislation at every level. The real problem was at the macro level where senior Labour politicians and their advisors engaged in a wink wink, nudge nudge approval of ever increasing financial imprudence, or as some call it – gross incompetence. The silence from the Bank of England was deafening. For goodness sake what kind of profit do you expect to make by lending someone 110% of the collateral they offer? As for the twenty somethings who appear to have been given access to huge sums of investors money to gamble with without even the most basic of financial controls and reporting to seniors in place – words fail me.
    I think the full extent of the damage Tony Blair, Gordon Brown and their cabal have done to this country’s finances just hasn’t dawned on the British public. The Conservative and Lib Dems have failed and are failing to explain this in understandeable terms to the electorate. That is the measure of their incompetence, underlined by the fact that with notable exceptions, no one was prepared to speak up publicly about the financial disaster these ruinous policies would bring.
    Light, medium or heavy touch regulation mean nothing, if blind eyes are turned to the overall policy individual banks and financial institutions are pursuing.
    We hear much about the losses but nothing about the forensic accountants investigating how these losses came about, where the money went to and who has benefited from the lost billions. The forensic accountants are investigating on behalf of the hard done by shareholders and taxpayers aren’t they? If only they were, some important people might be having some very sleepless nights. In the meantime, our government is still spending far more than we earn, and the omnipresent Mr Balls, bless his expensive socks, is muttering, even shouting, that we ought to spend even more. And you know what, quite a lot of people think he’s right, that’s how bad things are.

  32. sjb
    Posted May 27, 2012 at 8:26 pm | Permalink

    The US Senate spent two years investigating the financial crisis. They found four causative factors:

    1. High Risk Lending – e.g. “because higher risk loans and mortgage backed securities could be sold for higher prices on Wall Street”

    2. Regulatory Failure – e.g. “relied on bank management to correct identified problems with minimal regulatory intervention”

    3. Inflated Credit Ratings – e.g. “over 90% of the AAA ratings given to subprime RMBS [residential mortgage backed securities] originated in 2006 and 2007 were later downgraded by the credit rating agencies to junk status.”

    4. Investment Bank Abuses – e.g. “sold CDOs [collateralised debt obligations] in ways that created conflicts of interest with the firm’s clients and at times led to the banks profiting from the same products that caused substantial losses for its clients.”

    Wall Street and The Financial Crisis: Anatomy of a Financial Collapse

  33. Conrad Jones (Cheam)
    Posted May 28, 2012 at 12:20 am | Permalink

    “We will look tomorrow at could all this be predicted?”

    Yes – it was
    The Bank of England reported that something was going to happen and warned that it could be triggered by CDOs and Sub Prime Mortgages. It also predicted that Interest Rates might have to go up to curb expanding Credit Creation by Lenders.
    (Well, they almost got it right)
    http://www.bankofengland.co.uk/publications/Documents/fsr/2006/fsr20sec1.pdf

    “Did the authorities have the powers to rein it in?”

    Did they understand what Commercial Bank Money is and that it is what we mosstly use as “Money”? The Expansion of Commercial Bank money was helped by Tax Payer Subsidies. Labour was heavily influenced by Financial Institutions and some Labour Government Ministers – in power before and during the Crisis, now have Jobs with Banks.

    The Government has the power to issue Money and prevent Banks from issuing money, they chose not to act. Their advisers did not understand or chose to ignore the building debt problem in the economy and make it worse with schemes such as “Shared Equity” to further pump more debt into the Housing Bubble.

    The “authorities” had the power to seize control of the money supply and allow Banks to operate like businesses instead of a heavily subsidised branch of the Treasury. Regulating a Bank for counterfeiting our Money is not what we need. It’s like Regulating and Taxing Burglars. They are still benefitting from money that they have taken from us, so all they need do is take a bit more to cover their addtional costs.

    Credit Expansion was the cause of Higher House Prices, not a reduction in Housing Stock to Population. This triggered speculation encouraged by successsive Government’s who not only Insure Banks against their own foolish lending, but allow them to create our money for free and then charge us interest on it. If Banks could only lend money that already existed – created by the Treasury, then there would be no need for regulation, so long as fraud was investigated properly.

    Mervyn King has questioned the “Fractional Reserve Lending” system, but even the theory of Fractional Reserve Lending is out of date as Banks do not need Deposits before they can lend. They use a form of Accountancy known as Double Entry Book keeping.

    “There is no evidence that either the monetary base or M1 leads the cycle… ”
    Suggesting that Lending leads M0 and M1 proving that the money multiplier model (Fractional Reserve Banking) no longer exists.

  34. Keith McB
    Posted May 28, 2012 at 6:06 am | Permalink

    John,

    Further to 27 May’s AJAX at 4:35pm, Andrew Johnson at 8:04pm and sjb at 8:26pm among others >

    Dragged down in the wake of the financial capitalism’s tsunami, productive capitalism itself is in danger of drowning.

    “ Was light touch regulation the cause of the crisis? “

    Not as to root cause. For that we are disastrously indebted to neoliberalism’s exploitation of globalisation and the concomitant legislative and regulatory failures of financial “casino” capitalism.

    As to when here, one need go no further back than Big Bang (and the ERM fiasco) to find the culpably negligent if they knew what they were doing and negligent if they did not.

    That then puts the neoliberal Conservative governments and the central bank alongside the City in the frame and thereafter with the neoliberal New Labour governments who made matters much worse by distancing themselves from responsibility via the rightly now defunct FSA. But there is no doubt the ConLibDem coalition “inherited” a NuLab mess of Con making in the first place.

    Nor does the fact that the financial contagion of the credit crunch and banking crisis was not confined to the UK absolve the UK authorities of their responsibilities in the UK.

    Further to 27 May’s Norman at 9:42am >

    Nor am i buying the northern England or Scottish banks as scapegoats. Big Bang led to the privatisation of mutuals and created the conditions in which badly led banks like RBS took on too much they knew little about. BoS was swallowed by salesman led ex-mutual Halifax and (as HBOS) taken over in turn by Lloyds following suit. The other big Banks like Barclays and HSBC were not immune either. Nor were a number of the remaining smaller mutuals that their bigger brethren were able to absorb. The credit crunch and banking crisis was UK wide.

    Finally, i don’t doubt tight fiscal and regulatory control is essential. Nor that your own analysis and endeavours to help sort matters out are well intentioned and knowledgeable. Proscribing parasitic predatory financial capitalism and promoting productive capitalism with legislation should be common ground all round for the fail-safe socially conservative.

  35. Kevin Warsh
    Posted May 28, 2012 at 8:54 am | Permalink

    Bad mistake in 3, although one popular with the English right wing. Freddie Mac (and Fannie Mae), private firms established by Congress, did not offer subprime mortgages. Indeed the mortgages they purchased and bundled (so-called conforming mortgages) constituted the effective definition of a prime mortgage. If one seeks to answer what happened in the financial crisis of 2008, one of the first issues should be the collapse in the price of Freddie Mac (A grade) bonds. From trading at 30 points above Treasuries, yields soared to 300 points in August 2008. US banks did not hold many bonds backed by nonprime (subprime and Alt-A) mortgages, but they did (and still do) hold a lot of bonds backed by prime mortgages. This was a key problem for the US banking industry in 2008 and why the Fed currently has $1.8tr of such bonds on its balance sheet.

  36. Terry
    Posted May 28, 2012 at 1:01 pm | Permalink

    Well, I do not know about the internal affairs of Germany but I do know, for a fact, that Spain did, indeed, adopt the Anglo-Saxon’s lack of financial regulation. Their banks were using the ultra low interest rates of the EZ to loan out money to just about anyone who asked for it, to purchase a property down there. So, with the low rate and easy credit available, they were bound to end up the same way as ourselves. Now they have around 1 million empty homes for sale, most of them newly built and many never likely to sell in a buyers market at any price. This debt has already killed off our old Bank, the CAM and I suspect there will be more to follow. We were fortunate to have sold up in 2007 and escape this crash-waiting-to happen. The writing was on the wall in 2005 but not seen by the many folk wrapped up in the euphoria of owning a home in Spain. I suspect it is a similar story for France but on a smaller scale as they did not blight the coastal landscape with as much concrete.

  37. Matthew
    Posted May 28, 2012 at 7:20 pm | Permalink

    New Labour’s idea of regulation was to get everybody to fill in forms. Forms over Substance in fact characterised their approach to many areas of government

  38. Sue
    Posted June 4, 2012 at 5:48 pm | Permalink

    Look at the rumours now…..

    ZEROHEDGE: Is the UK About to Engage in a Stealth Default?

    “If there was ever an article that should spark every British citizen to immediately shift their savings into physical gold this is it. Basically, proposals are on the table to change the way inflation is calculated for bonds that payout based on the rate of change in prices. Unsurprisingly, they are purposely attempting to use an alternative measure of inflation that allows substitution (so when people can no longer buy a steak and must spend the same amount of money on spam this shows up as no inflation)! If this goes through, it is blatant theft. This is why owning TIPS in the U.S. is a total fool’s game. They will mark inflation to whatever level they want at the end of the day. To whatever is most convenient at the moment. You know, just like the banks mark their balance sheets. But don’t take my word for it…”

  • About John Redwood

    John Redwood has been the Member of Parliament for Wokingham since 1987. First attending Kent College, Canterbury, he graduated from Magdalen College, and has a DPhil from All Souls, Oxford. 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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