The Prime Minister is strutting the world stage again. It is time to check your bank account.
He wishes to be the architect of a new Bretton Woods, a new set of institutions, regulations and government structures to ensure we never have a credit bubble again.
The sound of stable doors slamming after all the horses have gone resonates in our ears.
The trouble with this approach is obvious to anyone with any sense. We cannot yet know what parts of the pre 2007 system will still function. It appears that highly leveraged Investment banks on the US model have disappeared. It looks likely that there will be far fewer Credit default swaps and other derivatives. It seems likely the 125% mortgage and the highly borrowed hedge fund and private equity deals will be scaled back. We do not yet know how much more damage is going to be done, by Regulators and Central Banks reining in long after the bubble has burst. The authorities have not yet completed a proper analysis of what they and market participants got wrong in recent years.
It is foolhardy to seek to put in place new structures before you know why the old ones failed, or which ones have failed. It is asking for trouble to talk about how there will not be mistakes in the future, when you have not yet sorted out the mess created by recent regulatory and market errors.
All the attentions of the authorities should be concentrated on doing “whatever it takes” to limit the downturn and salvage what can and should be salvaged from the financial system of 2007. It is dangerous for governments to think they can plan a brighter tomorrow with better regulation, when they still have a massive task ahead in trying to get some normality back to money and banking markets. Banks still lend little to each other at rates well above the recommended rates. There is a dearth of lending on the High Street and to companies. In the UK, the US, Spain and other countries property prices are still falling, undermining security for more loans. Many more people are going to lose their jobs, factories will close, and much capital spending will be halted.
Creating a neat new architecture for global financial supervision is not going to change this. Appointing more expensive regulators will not make it any easier for the financial businesses they are regulating to raise the extra capital they need, or cut their costs to bring them back into line with the revenues they can now hope to earn on reduced business.
The Prime Minister should return home and do some detailed work with his Treasury team on the UK government budgets. In these hostile conditions the UK needs to show world markets that it has prudent government, recognising the need to keep its spending and borrowing under some control. We have seen how badly run countries soon face dramatic falls in their currencies, difficulty in borrowing for state purposes, trips to the IMF, emergency packages of cuts and higher interest rates to stem to outflow. The UK needs to show by taking strong and disciplined action that is well away from such a predicament. Thinking the state can take on all the bad debts and difficulties of the large banks that congregate in London is unrealistic. Support through providing liquidity, and ample funds through the Bank as lender of last resort is important. Everyone must understand there is no doubt that depositors will be paid out when they wish. Buying the equity is altogether more dangerous, as that means the state underwriting all the costs and obligations of the bank on top