The media are suddenly interested in the blame game, after remarks by various prominent actors trying to lay the blame on someone else.
The government has three villains in its storytelling. There are the Conservatives of the 1980s for deregulating (lie); the bankers (they didn’t do it on their own); and the world (apparently the UK government has no power to make things better here).
The Conservatives did not deregulate the supervision of banking capital and liquidity. In our day in government banks were far more constrained in the amounts they could lend than they became under Labour, and their balance sheets were much smaller.In 1997 UK banks had liabilities around 23 times their core capital. Labour allowed this to expand to a massive 34 times by 2008. I was calling for tougher regulation of capital and liquidity in the Conservative’s Policy Review in Opposition. The regulatory system was changed in a major way by Gordon Brown in 1997. It was this system which failed to supervise the banks properly.
Yes, the bankers made large errors, overextending their loan books, helping fuel an unsustainable property and share boom, and building ever larger investment banking arms that took on too much risk. Now the UK government owns a couple of banks, why isn’t it changing the business model and sorting out these obvious mistakes? Why doesn’t it say no-one at RBS will be paid more than a Cabinet Minister, until the bank returns to sustainable profitability? If people don’t like that, let them leave. Why doesn’t it run off and run down the trading activities in futures, options and other financial instruments, to cut the risks?
It is true that there are downturns in many countries around the world, and true that the US, Iceland, Ireland, the UK and some other countries have banking problems of a greater or lesser degree of difficulty. This does not mean that the UK government and regulatory authorities did well, and that our problems were imported. Northern Rock was a British business under British regulation lending British money to British borrowers. It needlessly went under thanks to bad management and bad regulatory supervision. The British and European authorities allowed RBS to acquire ABN Amro without seeing the potential competitive and capital adequacy issues the acquisition posed. More recently the UK authorities have strangely allowed LLoyds to acquire HBOS, a move which has weakened LLoyds and reduced comeptition in the market. The British downturn is a nasty one, and owes a lot to the misconduct of UK monetary policy by the Bank over the last few years.
So let’s summarise the ten worst mistakes of the UK authorities so far:
1. The government was wrong to take powers of daily bank supervision and the duty to raise money for the government away from the Bank of England. This made it difficult for the Bank to conduct a sensible monetary policy.
2. The government was wrong to change the inflation target at the end of 2003, leading to lower interest rates than were safe.
3. The government was wrong not to chair decisive meetings in August 2007 with the Bank and FSA to make the markets more liquid to prevent the run on the Rock.
4. The government was wrong not to find a banking solution to the problems of the Rock, relying instead on an expensive and damaging nationalisation.
5. The authorities were wrong to scupper a private sector deal for the Rock, partly owing to their interpretation of EU rules
6. The authorities were wrong to keep interest rates relatively high for as long as they did
7. The authorities were wrong to tighten capital requirements last autumn and to propose tightening liquidity requirements at the turn of the year when the crunch was well advanced
8 The authorities were wrong to put equity capital into banks towards the end of 2008, without doing proper due diligence and without demanding prior write downs of bad and doubtful debts
9 The government was wrong to cut VAT, adding needlessly to the government deficit
10 The government was wrong to follow a policy of benign neglect of sterling, and to make the last cut in interest rates.