Last night I travelled to Hatfield to speak at a dinner. The roads were eerily emptier on a Friday night – a sign of things to come. I am grateful to the audience – and to all of you bloggers – for your thoughts on the crisis. I would like to comment on some of the most common responses.
“Too much deregulation caused this mess” – showing the eternal power of Labour spin. The extreme version blames Margaret Thatcher for this “crisis of capitalism”!
The great difficulties in banking have occured in the most regulated of industries. Regulation of banks and other financial institutions has expanded greatly in recent years. This is a failure of regulation as well as a failure of banking. It is not that we had too little regulation – we had the wrong type of regulation regulating the wrong things, allied to weak regulation of what matters, capital and liquidity.
“People like you called for deregulation, so you caused the problem”!
This is the fatuous BBC line. It ignores the fact that I issued warnings about the dangers of the Bank of England have too little power to regulate banks and other financial institutions. It also is a muddled proposal in its own terms, as an Opposition MP calling for something does not mean that something happens! I thought Labour was in government and calling the shots on how much regulation we needed.
“Banks should not be allowed to lend more than they get in deposits, so they would be stable.”
The run on the Rock which brought the Rock down shows that deposits are not a stable source of cash if confidence goes. There is a lot to be said for a model where a bank draws its money from a wide range of sources, to reduce risk.
“Banks should not borrow short and lend long”
Borrowing short and lending long is a normal banking approach to making money and helping the economy. Done in moderation it makes sense. The interest rate is usually higher for longer term loans than for short terms. Intelligent exploitation of this difference can earn a return for bank shareholders. Of course, taking it to extremes can jeopardise confidence. The problem in the summer of 2007 was the Central banks, especially the Bank of England, left markets so short of short term funds a crisis was likely.
“It’s not fair of you to call for lower interest rates – this means savers will be hit”
In this crisis we are all going to be hit. Savers can only enjoy high rates of interest if people and companies can afford to pay even higher rates of interest to borrow the money. If rates are too high too little money is borrowed, and too high a proportion of exisitng borrowings are not repaid. Savers and borrowers depend on each other. At the moment it is too difficult for borrowers, so the savings rates have to come down to prevent the system breaking down completely. I would have thought the experience in the Icelandic banks might start to show savers the dangers of wanting too high a rate of interest for current conditions.
“We should limit people to borrowing just 3 times their income again, as they used to do, when taking on a mortgage”
I agree banks and Regulators need to look again at how much they are prepared to lend against any individual property, and how big a multiple of income they will allow. Today, however, the problem is not limiting the amount banks will lend, but getting them to lend enough. This is a something for the future when banks do want to lend more. Many of us were warning against the extreme deals we saw being advertised in 2006-7 before the crunch.
“Nationalising the banks would sort all this out – why don’t they just do it?”
Transferring problems from the shareholders to the taxpayers sorts out nothing. The day after you still have the same underperforming loans and the same need for extra cash and capital. The banking sector is too big as a whole for the UK state to take on. Why should the UK taxpayer have to pick up the losses, when we did not enjoy the bumper years for banking profits and bonuses?