What should the Bank of England and the FSA have done in middle 2000s?

 

            The Bank’s review of its conduct needs to ask could the bubble have been forseen in say 2005? If so what action could they have taken to rein it in before it became damagingly large?

              There were several commentators and the Opposition parties saying in the middle of the last decade that the government was allowing far too much debt to be extended. Meanwhile, the Bank of England cut interest rates sharply in 2001, cut them further in mid 2003, raised them modestly to mid 2006, only to   cut them  a little again. As we advanced in 2007  the Bank belatedly started to take the inflation threat more seriously, and hiked rates to 4.75%, finally reaching 5.75% in 2008, by which time the crunch was obvious to its critics.

                    It is a fair comment to say the Bank did too much too late on interest rates. It by general agreement did too little for much of the gathering boom.  It should have sent a stronger signal against credit and money expansion in the middle 2000s than it did with higher rates, when others were worried. It then raised rates too much and kept them too high in 2008, when the banks were already in serious trouble and the system was deflating.

                    The FSA for its part put forward more and more detailed rules affecting banks, but was lax over the amounts of cash and capital banks had to hold. In the 1980s and early 1990s when I was a financial regulator as a Minister, it was thought prudent to keep a commercial bank balance sheet to less than 20 times its core capital. By the time the Credit Crunch hit well over 30 times was thought normal and acceptable.

                           When I asked regulators in the  2000s why they thought banks could gear themselves so much more than before, I was told that thanks to a wide range of new fianncial products they could carry more risk with the means to offset it through futures, options and derivatives. It did not prove to be like that. Indeed, as some of us feared, the large positions in special instruments often increased the exposure to dangerous markets, and increased the geared impact of a fall in markets.

                        There was no new paradigm which allowed banks to magic more money into the system without extra risk.

                   The Banking regulator and the Competition Authority made the problem worse by allowing or even encouraging mega mergers so large banks emerged with hugely geared balance sheets. Some of us argued against allowing the RBS/ ABN Amro merger. Many more of us opposed the LLoyds/HBOS merger. The authorites allowed these through, ensuring that if  a bank did collapse it would be a very large one. They thought it cut banking risk. Some of us thought it concentrated banking risk, and meant strong banks would be pulled down by weak ones within the new enlarged groups.

 

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55 Comments

  1. lifelogic
    Posted May 28, 2012 at 5:50 am | Permalink

    You wisely asked the regulators in the 2000s “why they thought banks could gear themselves so much more than before” only to be told “thanks to a wide range of new financial products they could carry more risk with the means to offset it through futures, options and derivatives”.

    Well yes perhaps, but actually is was broadly the same banks and financial structures (overall) that were carrying all the risks. The new products clearly just added to complexity and additional costs. Just like a tall tower, lots of wrapping the risk parcel in fancy wrapping paper and passing it about, in the upper stories. But still the tower is all resting on the basic capital and foundations.

    Risk is clearly a case of looking at the full complex structure of the whole bridge (and all its components). You cannot just take one component in isolation and assess it, as any good engineer would have known. We have seen it all before with the Lloyds insurance market and the pass the risk parcel farce.

    The RBS / ABN Amro merger (without even proper due diligence) was absurd – but Barclay’s were close to buying it too. The rescue of RBS and the LLoyds/HBOS merger were handles appallingly and benefited almost no one.

    We are now left with is an even more dis-functional banking system simply not lending and calling money back where ever it can (or hugely overcharging), usually from the good customers who then have to put plans on hold.

    Yet Cameron seem surprised we have no growth – when banking (and his other policies) are clearly, very anti business and anti growth – what does he expect?

    The accounting/auditing rules and regulations are also absurd and do not reflect true risk.
    The relationship is far too close, between the profession, its auditors and the accounting rule setters.

  2. Richard1
    Posted May 28, 2012 at 5:57 am | Permalink

    It was the combination of excessive govt spending, bank leverage and bad monetary policy which was the cause of the bust. Gordon Brown and the Labour Govt are the principal ‘Guilty Men’ (and women). One question though: don’t we need to move to a proper free market model where there is no state authority – neither the BoE nor the Govt – seeking to manipulate the price of money in order to ‘manage’ the economy?

  3. oap
    Posted May 28, 2012 at 6:38 am | Permalink

    I agree with your analysis and conclusions. Many thought that borrowings were growing too large and the savings ratio was becoming too low c2000 on. My advice to my own family was to take every opportunity to cut back on their mortgages as the borrowing binge could not and would not last. They took my advice but missed out on the ultra low interest rates that followed the crisis.

    The risks being run by financial institutions with new financial instruments also became clear to officials in the Bank of England and the FSA a couple of years or so before Lehman – a Bank of England official admitted as much in speech after the crisis. (Sorry cannot provide link from my tablet). The current spectacle of the twists and turns by EZ politicians, and others, to continue to ramp up debt suggests that nothing much has been learned.

  4. Mike Stallard
    Posted May 28, 2012 at 6:40 am | Permalink

    Aren’t you swallowing the camel and ignoring the gnat?

    Mr Brown was extending the government machine unmercifully at the time and running the government and the country into serious debt. For that he, surely, had to insist on very low interest rates?

    Mr Brown pretended to free up the Bank of England, and to introduce the new shiny FSA. Actually, we now learn, the strings went through the Treasury to his office. So presumably all these decisions were really his.

    The end paragraph, though is spot on – far too complicated and far too big! Mr Brown thought he ran Iceland and USA, but, in fact, he didn’t. That was ineptitude, greed and sheer corruption, I think probably.

  5. Pete the Bike
    Posted May 28, 2012 at 6:44 am | Permalink

    The best thing that could happen then or now would be for the Bank of England to cease to exist. It is simply a tool for governments to engineer inflation and enable debt creation. Those are it’s real functions and it is totally inept at every other thing it has attempted. Before central banks appeared market interest rates were set by individual banks on a calculation of risk versus reward which was a far better system. After central banks appeared this risk has been warped and corroded by a mass of regulation encouraging “too big to fail” banks and providing bailouts for the criminally incompetent managements in return for the banks connivance in undermining the currency and buying government bonds. Small is beautiful especially when talking about banks and governments.

  6. Keith McB
    Posted May 28, 2012 at 6:54 am | Permalink

    Why didn’t price indexes include assets such as property?

  7. Gerry Dorrian
    Posted May 28, 2012 at 6:56 am | Permalink

    And to make things worse, there was no saving at Government level during the boom level; indeed, Gordon Brown sold all that gold as quickly as he could at rock bottom prices, as if it were a dirty family secret.

    • Single Acts
      Posted May 29, 2012 at 5:49 am | Permalink

      No problem, he bought Euros with the proceeds…..uh-oh.

  8. Gary
    Posted May 28, 2012 at 7:25 am | Permalink

    If left to the free market instead of these quangos, the Mexican peso crisis would have finished off most of the highly geared American banks, and the Asian crisis would have finished off most of the rest worldwide.

    The remaining banks would have been petrified to lever themselves up.

    That was all that was required.

  9. Brian Tomkinson
    Posted May 28, 2012 at 8:01 am | Permalink

    What should you politicians have done? This just shows how impotent you are. As for what is happening in government today I suggest you read Jeff Randall’s column in today’s Telegraph. http://www.telegraph.co.uk/comment/9294148/No-wonder-so-few-bother-to-vote-any-more.html
    He seems to share the views of most of your contributors regarding the performance of the Conservative part of the coalition. If you don’t make significant changes soon you will be blogging “What should the Conservative Party have done in the middle of the coalition government?” assuming you manage to retain your seat in 2015 and are once again in opposition.

  10. Acorn
    Posted May 28, 2012 at 8:13 am | Permalink

    There is a great piece at Investopedia on how to value a bank, particularly the killer Tier 3 capital scam. Some good links also, particularly “The fuel that fed the sub-prime meltdown”. http://www.investopedia.com/articles/fundamental-analysis/09/assessing-bank-assets.asp#axzz1w99L6u3s . Note the dates they were written.

    A bunch of politicians decide that people who can’t afford houses should be fooled into buying them and easy capital gains. Got to yield guaranteed votes at the next election; what can possibly go wrong?

  11. Single Acts
    Posted May 28, 2012 at 8:25 am | Permalink

    This is (as ever) a first rate analysis of the issues surrounding banking in the 2000’s. Might I respectfullly suggest however, that just as the former Soviet Union could not centrally set prices for say food, neither the BoE, the FSA, the government or anyone else can set the”correct” rate for money.

    The implicati0ns of this seem clear, yet I don’t hear even normally sensible financial commentators addressing the issue.

    We don’t expect the government to produce our cars or phone systems anymore, why on earth do we think it sane to let them meddle in the very lifeblood of the economic system?

  12. David
    Posted May 28, 2012 at 8:38 am | Permalink

    Making banks ask for bigger deposits on mortgages would have helped a lot.

    Sadly most people in this country think that house price rises make them richer – it doesn’t unless you want to downsize.

    • Mark
      Posted May 28, 2012 at 5:17 pm | Permalink

      Rising house prices impoverished the country, because mortgage equity withdrawal was used to fund expensive imports and holidays, and the borrowing was conducted in the overseas wholesale banking markets, increasing UK indebtedness and interest payments abroad.

  13. Lindsay McDougall
    Posted May 28, 2012 at 8:55 am | Permalink

    “………….. too much too late …………….”. The story of UK economic management ever since WW2 – and probably before it.

    I’m more worried about the future than the past. To what extend can we force RBS and Lloyds/HBOS to split up in order to create more competition, without destroying shareholder (taxpayer) value? Do we have to wait? Full disclosure of toxic assets would help us to decide.

    Just to cheer you all up, we had better deal with UK and European problems this year and next because by 2014 there will be a significant American recession. US federal debt has reached 95% of GDP and is still rising; US state and local debts add another 30% to that. The US needs to make a big fiscal correction.

    • Conrad Jones (Cheam)
      Posted May 28, 2012 at 12:34 pm | Permalink

      Based on the losses to the tax payer incurred by Northern Rock,
      http://www.guardian.co.uk/money/2011/nov/17/northern-rock-sold-virgin-money

      Banks are an excessively bad investment for the Government.

      Banks already are propped up by Government Deposit Insurance (paid for by tax payers), Loss of seigniorage through allowing Banks to create the money in the system rather than letting the Treasury do it, Housing Subsidies (like Shared equity under Labour) and Housing Benefits pumping money into Housing inflating Mortgage Loans which puts upward pressure on wages. Banks draw money away from Production but the Government gives the impression that it is nothing to do with how Banks decide to make loans.

      Secured Lending against Property is always going to win over unsecured lending for Productive Businesses. That’s why House Prices went up and lending to small businesses has reduced to only 8% of total lending.

      It’s not about deciding on whether a Big Bank should be split into smaller Banks. It’s about deciding to take away the kiddy bike stabilizers away from the Bank Industries Tricycle and letting them fall over. If a Bank succeeds in a Free Market System (with privelge or favour) then let it. If it fails then good riddens. Big Banks have a adavantage over smaller Banks because they need less reserves as many Transactions are carried out between it’s Cutomers which means only internal computer data entry is carried out. It’s only when transations of smaller Banks have to continually send money out to other Banks that requires larger Reserves. A massive single Bank would need no reserves as all transactions would be internal – Game Over.

  14. Jim
    Posted May 28, 2012 at 9:41 am | Permalink

    You have to look back at the mid 00s with a view to how it actually was, not with hindsight. If the Governor of the BoE had tried to take the punchbowl away as the party starts to swing, as is the job of all good Central Bankers, he would have been cut off at the knees by the Labour government. The media firestorm that would have descended upon him would have been awesome in its intensity and ferocity. All orchestrated by the inhabitants of numbers 10 and 11 Downing Street, or their hired henchmen. There is absolutely no way that any public figure could have opposed the Labour government at that time. The actual elected political opposition were completely ineffectual, so to think unelected officials would have had a) the nerve and b) any chance of success would be utterly wrong. Anyone opposing the government would have been committing career suicide, and I don’t blame them for keeping their heads down.

    The people who should have been crying in the wilderness were the Tories, but they were too worried about ‘detoxifying’ themselves to care about the state of the nation. They not only didn’t oppose the Labour Governments economic strategy, they agreed with it. While the responsibility for the economic misjudgement lies with Labour, the Tories did nothing to oppose it.

    • norman
      Posted May 28, 2012 at 12:46 pm | Permalink

      Spot on.

      George Osborne talking up Gordon Brown’s economic miracle at the height of the boom and promising he’d follow the Brownian path by matching his spending makes all John Redwood has to say on the subject superfluous (apart from on an academic level). The Conservative Party are just as guilty as Gordon Brown, no point pretending otherwise.

      How’s that sharing the proceeds of growth coming along for everyone else? I can’t say I’m too pleased with my share of the proceeds so far (£20k+ of debt per person makes my families amount scarily close to £100k) but all that ‘investment’ has to come good sooner or later, eh?

  15. Barry Oblivion
    Posted May 28, 2012 at 9:41 am | Permalink

    Is the investigation going to look at Gordon Brown *sudden* and subtle inflation target shift from RPI to the lower CPI. Certainly helped the BoE lower interest rates in 2003 and 2006.

    • Mark
      Posted May 28, 2012 at 5:25 pm | Permalink

      The use of CPI as an indexation base is needed in order to cut benefits by the back door. CPI under-measures inflation through the use of geometric averaging and hedonic regression. Essentially, it assumes you will eat computers if they get cheaper while food becomes more expensive.

      The use of CPI rather than RPI on pension indexation could halve the real value of a pension between retirement and the average age of death.

  16. waramess
    Posted May 28, 2012 at 10:32 am | Permalink

    What did the FSA and the BofE do wrong? I guess the answer is that they tried to regulate and they got it badly wrong.

    The more they regulate the more effort the banks will make to get around the regulations and the more risks they will encounter.

    The system is badly broken and no regulation at all would mark a great improvment on the present system.

    Allow the markets that provide the banks with their deposits to determine at what level of borrowing they feel comfortable with and one major hurdle will have been overcome.

  17. Conrad Jones (Cheam)
    Posted May 28, 2012 at 10:40 am | Permalink

    Mr Redwood,

    You were absolutely right to oppose the merger of Banks into bigger Banks.

    “There was no new paradigm which allowed banks to magic more money into the system without extra risk.”

    At last, a leading Politician acknowledging that Banks do create money.

    Thank you.

    Whether the Bank of England rasied interest rates too soon or didn’t lower them fast enough is not the question we should be asking, is this method of Central Control over Interest Rates the best method we have and what alternatives are there? Should Bank Deposits be guaranteed by the Government ?

    Can you please discuss the alternatives to the System we currently have?

    As you know, over the last 45 years, the percentage of Bank Created Money has expanded from 80% to over 97% of our money supply. Is this not part of the problem too?

  18. Bernard Otway
    Posted May 28, 2012 at 10:50 am | Permalink

    And all the while Brown saw a cake growing bigger and bigger,and a source of taxation that
    he thought would CEMENT in place a voting block that would ensure Labour,s HEGEMONY
    FOR EVER,meanwhile house prices rose like “THE SHARD” to a price earnings multiple
    of 10,end result is around us in the ongoing wreckage.IMHO this MESS is going to take at least 10 years to FIX with the CAVEAT ‘IT MUST BE DONE RIGHT OR HEAVEN CANNOT EVEN HELP US”. I am glad I am 67 and won,t have to watch for much longer.
    How many people are out there like JR who can say “I TOLD YOU SO” they should all be shouting from the rooftops

  19. Leslie Singleton
    Posted May 28, 2012 at 10:52 am | Permalink

    I see no reason for economy-threatening huge banks unless maybe they have tons of capital. Banks should be smaller and certainly banks engaging in the away-with-the-fairies types of extended derivatives should not be allowed to take deposits, even more certainly not from individuals. As regards loans, the answer to allowing smaller banks a share of the action and to the masters-of-the-universe type banks’ saying that they need to be able to compete for larger loans with foreign banks, is to make it illegal for any single entity to borrow more than a stated maximum amount (£100 million as a suggestion) in the UK from any single bank. I assume syndicated lending still goes on preferably in the form of small manageable “club deals”. We’d all sleep nights on this basis.

  20. Sally C.
    Posted May 28, 2012 at 10:56 am | Permalink

    The problem we have is that the Bank of England was not alone in creating the housing/credit bubble of the 2000s.
    As you noted in a previous article, the Bank was not acting independently of the government. The Treasury was really at the centre of our financial system at that time (and still is). The major banks had offices at the Treasury, so we can be sure that Gordon and then Alistair knew exactly what was going on.
    They, with the help of Mervyn, had created a money making machine, where the B of E kept interest rates artificially low via their open market operations and the banks extended credit to anyone who wanted some. This created massive amounts of new money in the system and is shown in the M4 figures of the time. At one stage M4 was growing at 18% a year!!!
    The Bank clearly knew this but did nothing to rein in the massive credit expansion -because it suited the government. Tony, Gordon and Alistair must have been overjoyed at the sight of their tax revenues skyrocketing with the boom in the housing market. There was no way that they were going to let this stop.
    They blew up our economy. They are responsible for the mess we are now in. Yet they walk away with no sign of any guilt and no demands for their accountability. The only thing they are being held to account over is their relationship with Rupert Murdoch – nothing with regard to the unbelievable financial damage that they have done to this country!!!
    It really is beyond belief.
    JR – Your government risks repeating these mistakes all over again. The banks are being encouraged to be irresponsible all over again.
    This is a recent warning from Patrick Hosking at The Times : (cites an article re large banks and current gearing)

  21. Derek Emery
    Posted May 28, 2012 at 11:20 am | Permalink

    I was told that thanks to a wide range of new financial products they could carry more risk with the means to offset it through futures, options and derivatives. It did not prove to be like that. Indeed, as some of us feared, the large positions in special instruments often increased the exposure to dangerous markets, and increased the geared impact of a fall in markets.

    I thought the way derivatives are used to reduce risk is to buy options (calls or puts) to offset not increase a possible increase or decrease in share value without the costs of buying or selling the shares.

    For banks to cover themselves for losses of house values they have loaned money against they would need a derivative that increased in value as the price of houses dropped.
    The complex financial product they bought was based on the value of a mixture of low risk and high risk home loans. If there was a problem the value of the derivative could only ever drop i.e. move in the same way as the value of their own home loans.
    A derivative product whose value increased as home prices fell as and as people fell behind their mortgages would have been of more use.

    • Mark
      Posted May 28, 2012 at 5:35 pm | Permalink

      There were several such derivatives, ranging from house price index CFDs through taking the short side on CDOs and other more complicated schemes. They were used to burn investors who were bearish on the way up. Few got on the right side of the market at the right time, although there have been accusations of sale of securities by prominent firms that were designed to fall in price despite being marketed as hot prospects.

      Markets can remain irrational longer than you can remain solvent.

  22. MajorFrustration
    Posted May 28, 2012 at 11:56 am | Permalink

    Nothing wrong to look back and learn – if only to stop making the same mistakes again, But like any Government review it will emphasise new measures since brought in -yeah right. And of course nobody will take the blame. Whats more important now surely is what the BoE and Treasury are doing to blunt any impack of Euro failure. Will we have to wait four yrs to understand their continuing incompetence.

  23. lojolondon
    Posted May 28, 2012 at 12:04 pm | Permalink

    Actually, John, I think on investigation that G.Brown forced Lloyds / HBOS merger against their better instincts, believing that it would save the government from having to step in. Misjudged, like everything else!

    • APL
      Posted May 29, 2012 at 7:20 am | Permalink

      lojolondon: “G.Brown forced Lloyds / HBOS merger ”

      And now where is he?

      Swanning around (words left out)Certanly NOT representing his consitutents – you know, what he is actually paid to do!

      Rotten Parliamentarians, Rotten Parliament. You people should do something about that man

      Reply:Mr Brown does represent his constituents, and will have his commitment to them judged by them

      • APL
        Posted May 29, 2012 at 9:41 pm | Permalink

        JR: “Mr Brown does represent his constituents, ”

        Since the election, how many times has he attended the Commons?

        But it is interesting to see the Political class sticking together.

  24. RDM
    Posted May 28, 2012 at 12:19 pm | Permalink

    Hi JR,
    Here is some interesting articles on the subject, on Zombie (Banks). Especially his prognosis; The three things, he says, we must accept (within the first). I think people are starting to listen to you, this is what you’ve been saying for some time?

    http://www.investmentandbusinessnews.co.uk/headline/the-zombies-are-coming/
    http://www.investmentandbusinessnews.co.uk/austerity-economics/uks-problems-are-its-banks-and-zombies/

    Regards,

    RDM.

  25. Terry
    Posted May 28, 2012 at 1:20 pm | Permalink

    Why is it when modern leaders move into Number 10 they seem to lose their common sense? The past 3 PMs have displayed an arrogance and an ignorance I have not seen before. If they only listened to the real “Experts” instead of their closed circle of sycophants this country would have never been caught in its current dire situation. And the cure for our problem? More of the same that got us into the mess in the first place.

    I have never studied economics but I have learned from the University of Life that I cannot borrow myself out of debt. And I know that throwing money at my business is not the answer to more growth. To grow, I need more customers and to buy, they need more money. Where do they get ift from when they no longer have it? Why our leaders think the country can absorb more debt and grow at the same time, is a complete mystery, to me. Isn’t it about time that the relevant expert Backbenchers created their own Plan for growth and put it into the newspapers so we can all read it.

    • norman
      Posted May 28, 2012 at 10:00 pm | Permalink

      in their opinion they are listening to the real experts. read the financial time or minutes of mpc committee. to them these are the experts and right wingers, even though history is invariably on their side, fruitcake dinosaurs living in a halcyon past of warm beer, church services on a Sunday and cricket on the village green on a Saturday.

      and the focus groups tell them this is all nonsense in a modern vibrant UK

      • Terry
        Posted May 30, 2012 at 3:36 pm | Permalink

        Right Wingers? From the MPC and the FT? Those who follow the preachings of Keynes, who believed more Government control was the way forward? You have a strange idea of a Right Winger.

  26. Bert Young
    Posted May 28, 2012 at 2:08 pm | Permalink

    Vickers has rightly pointed out that the mixing of Domestic banking and Investment banking is inherently a mistake . Banks drifted into the situation that they could not properly control what they were doing and began an acquisition scenario to overcome this problem ; this dimension has to be added into your analysis .

  27. Atlas
    Posted May 28, 2012 at 3:34 pm | Permalink

    What about the impact of external events?

    Two come to mind:

    1) The Chinese keeping the value of their currency deliberately low;

    2) The Federal Reserve keeping its interest rates low after the dot com bust.

    Surely these fuelled the UK problems you discuss?

  28. Christopher Ekstrom
    Posted May 28, 2012 at 4:12 pm | Permalink

    Mr. Brown had gone beyond Boom & Bust; like Col. Kurtz he “got off the boat”. But unlike the Colonel, Mr. Brown was unwilling to realize that the “jungle wanted him dead”. And when Willard/SamCam volunteered to end his suffering another difference occurred. After slaying Brown, SamCam decided to stay on in the jungle & continue the dystopia. Unfortunately “Almighty” has not seen fit to blow the entire system to smithereens.

  29. Nationalist
    Posted May 28, 2012 at 4:42 pm | Permalink

    Please reread this Daily Telegraph article:

    http://www.telegraph.co.uk/news/uknews/1397231/House-prices-heading-for-sudden-fall-warns-Bank.html

    and take note of its date: it was written in 2002! They knew back then that the debt was running out of control.

  30. lojolondon
    Posted May 28, 2012 at 5:32 pm | Permalink

    John, I thought you would like to see Blair explain in less than two minutes the crucial value of the Biased BBC’s total, unquestioning support to Liebour – and why the BBC’s one-sided perspective is so devastatingly bad for the Conservative party.

    http://www.telegraph.co.uk/news/uknews/leveson-inquiry/9294635/Leveson-Inquiry-Tony-Blairs-gesticulations-explained.html

    • norman
      Posted May 28, 2012 at 10:06 pm | Permalink

      why the sudden interest in what Blair says? if the man has taught me anything (and I’m only speaking for myself) its that he’s a consummate liar. I wouldn’t even waste two minutes of my time on any utterances he makes

    • APL
      Posted May 29, 2012 at 7:25 am | Permalink

      Lojo, you should have included a public health warning before posting that link. To think I Haven’t missed (that man – ed)one bit since he sunk from the airwaves.

      Ugh! But I suppose you have performed a public service in that I had forgotten too, (etc ed)

  31. lojolondon
    Posted May 28, 2012 at 5:37 pm | Permalink

    John, to bring it into perspective, Gordon Brown gave the BOE just one single target – to ensure inflation stayed below the magic number he gave them, then below a slightly higher number he gave them.
    But ever since the ‘credit crunch’, the BOE focused only on printing money/QE and never hit their inflation target once in the last 3 (or more) years. Every quarter King predicted ‘stagflation’ , ‘deflation’ and other looming crises, which never occurred, but borrowing and printing money helped Labour to claim the financial crisis was over as we lurched into ‘growth’ weeks before the election.
    So much for making the BOE independent!!!

    Give them hell, John!!

  32. Stewart Knight
    Posted May 28, 2012 at 6:21 pm | Permalink

    You’re surprising me John with this petty navel gazing again. The first question should have been were the BoE and Treasury truly independent, and if not, what could they have done?

    They were incompetent or working to an agenda set for them, now which do you really think it is? Why do you shirk, like Cameron, from voicing the truth?

  33. Rebecca Hanson
    Posted May 28, 2012 at 7:14 pm | Permalink

    There were a lot of people very loudly saying that nothing was wrong and banks needed more freedom and few standing up to say what was actually going on. We need to look at how that situation came about and how it could have been otherwise.

    • Lindsay McDougall
      Posted May 29, 2012 at 10:57 am | Permalink

      What few people said – although it is manifestly true – was that targetting a measure of inflation that excluded asset prices (particularly house prices) was a dumb thing to do and led to an extremely lax monetary policy between 2001 and 2007. Ultimately, the trail leads back to Gordon Brown and Mervyn King. If there is too much money sloshing around, you can be fairly sure that someone somewhere will find daft things to spend it on.

      • Mark
        Posted May 30, 2012 at 11:36 am | Permalink

        It was Kate Barker and Stephen Nickell who argued that house prices didn’t matter. They were of course Brown appointees. The Barker Housing Review even suggested that house prices might rise to 20 times income in the future – quite barking!

  34. Jonathan Tee
    Posted May 28, 2012 at 7:41 pm | Permalink

    This and yesterday’s article put me in mind of J K Galbraith’s account of the Great Depression for some reason. JR – you should write a homage, maybe “The Great Hubris, 2008”.

    Closer analogy: 1929 – the bubble in common stock was preceded by the bursting of a property price bubble; 2008 the bubble in property prices was preceded by the bursting of a bubble in common stock.

    After the tech bubble collapsed 2000-2002 could authorities have better monitored where capital was flowing to, and ensure that regulation was not likely to magnify the impact of the second bubble burst? In other words put the market where capital was fleeing to under a microscope?

    • Lindsay McDougall
      Posted May 29, 2012 at 11:04 am | Permalink

      Milton Friedman reckoned that the cause of the great crash of 1929 was that the American authorities allowed the money supply to CONTRACT by 25%. I think that he was a much better economist than JK Galbraith.

  35. Iain Gill
    Posted May 28, 2012 at 8:54 pm | Permalink

    thank goodness the silly pasty tax has been rolled back, stupid stupid politics that one

    quite how these things get past the common sense filter is beyond me

    now if only they could get onto actually delivering on their immigration promises including stopping widespread ICT visa abuse I may actually consider voting for them again

  36. David B
    Posted May 28, 2012 at 9:15 pm | Permalink

    It is a shame the government did not have the courage to let RBS fail. For a fraction of the cost of bailout they could have protected the depositors. The mess would have been bad but short lived. Look at how Iceland has recovered.

    Why did the government not let that happen? I believe it is simple, they saw a picture of Norman Lomont on the steps of the treasury announcing sterlings exit from the ERM. This was the right thing for the economy but the political consequences for the government where dire. I don’t think the last government where prepared to allow that to happen. After all most of them are looking to get back in

  37. IAN PENNELL
    Posted May 28, 2012 at 9:44 pm | Permalink

    Mr Redwood,

    Another excellent analysis of the causes of the Financial Crash and ensuing recession. It was not light-touch regulation per-se but the wrong sort of regulation, and Gordon Brown himself had a vested interest in soaring property prices based on debt.

    The correct policies at the time would have involved proper controls on leveraging and on the banks lending vast amounts of money to people in the form of 110% mortgages. But that was not likely to happen circa 2004-5 because Gordon Brown had discovered a way to get people to borrow vast sums of money against their homes, and he fuelled a property boom based on debt by encouraging banks to lend freely- so that there was an illusion of economic growth (and increased tax revenues to pay for all that spending!).

    I remember going to London in 2004 for a business seminar, and having a discussion with the taxi-driver about London house prices that were soaring from £250,000 the year before to £350,000: “What was it all based on?” I enquired, “Oh its the banks going on a massive lending spree, that’s driving the house prices up” replied my chauffeur.

    I knew then that there was a big problem a few years down the line: “It’s not going to last, when people can’t repay all their debts there will be trouble” I replied. My chauffeur agreed. And now we see it has all come true, with devastating consequences.

    We also need government to spend less, much less and to borrow less and also tax businesses less. We need banks to lend responsibly and for people to be encouraged to save. This is still not happening because the present Conservative coalition is as frightened of the bloc Socialist Vote- the unemployed, the Quangocrats, the Immigrants, the Single Never-Married Mums and the Yobs- as is Labour. We need a new direction- check out my blog .

    Ian

  38. manicbeancounter
    Posted May 28, 2012 at 10:47 pm | Permalink

    It is a good analysis, but missing a couple of points.
    The political angle was a projected belief that there was no systemic risks, with the prolonged boom due to wise management. As growth into the distant future was near certain, it was possible to discard the normal rules of economic about the risks of structural deficits. It happened in Southern Europe and in Britain as well. So we had the redefinition of deficits on the GOLDEN RULE.

  39. Conrad Jones (Cheam)
    Posted May 29, 2012 at 11:20 am | Permalink

    “The Bank’s review of its conduct needs to ask could the bubble have been forseen in say 2005? ”

    There sere several Books on the Subject in 2005, one was titled “Boom Bust house Prices, Banking and the Depression of 2010”.

    Peter Schiff appeared several times on American Television and was laughed at by main stream media who said the Economy was fine, months before Banks asked for Bailouts. Professor Steve Keen was also ignored as his theory that Debt Accumulation would cause a collapse was seen as irrelevant by neo-classical economists, Banks and Politicians didn’t understand his arguments because they were advised by their own Lobyists.

    “If so what action could they have taken to rein it in before it became damagingly large?”

    1. Got out of the IMF
    2. Rebalanced the amount of Bank of England created money to reduce the percentage of Commercial Bank Money (the money we pay for things with)
    3. Restricted Banks (while subsidised) of merging with other Banks and Building Societies.
    4. Prevented Deposit Account Banks from investing in Derivatives
    5. Made it illegal for a Bank to sell Mortgage Debt on, thereby forcing more responsible lending.
    6. Made it illegal for Investment Banks to operate as Commercial Banks, thereby making them not able to claim for a bailout.
    7. Investigated the City of London for Fraud rather than just let them get away with it.
    8. Make Self certified Mortgages illegal.
    9. Ban all CDOs and CDSs as they are used to gamble that a Business or Nation will not be able to pay it’s debts even though the investor will not lose as they can buy them despite not being the original lender.
    (It’s like all your neighbours insuring your House incase your House burns down, they all stand to gain when you lose everything).

    • Conrad Jones (Cheam)
      Posted June 1, 2012 at 12:30 pm | Permalink

      In addition to the list above

      Item 10:
      Investigated the amount of funding in the form of donations, from City of London Lobbyists.

      It is widely believed that approximately 50% of Political Funding originates from the Financial Sector – especially from the City of London Corporation.

      “the City of London Corporation, which is essentially a huge lobbying organisation attached to the local authority for the “Square Mile,” London’s prime financial district.”

      The Bank of England shouldn’t have done anything unless our elected Politicians told them to. Our Elected Politicians are influenced by by a virtual bottomless pit of financial resources from the City of London Corporation

  • 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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