Witch hunting was always an overrated and unpleasant pastime. It is popular today. We will receive another instalment in the battle of the regulators, as the Lords concludes that the FSA were most at fault in the run up to the Credit Crunch. There will be further pressure to shift powers to the Bank of England.
The whole Tripartite system of regulation failed . Not one single senior person in the Treasury, Bank or FSA thought the banks were lending too much. Not one tried to blow the whistle on the most extraordinary credit binge we have ever seen.
They did not lack powers to stop it if they wished. They did not lack information. You could see it just by reading the published balance sheets of the top banks. The rules allowed excess and no-one making or enforcing the rules did anything about it.
The important issue today is not who was most to blame. It is why are we still operating with the same system? How can we be sure the regulators are now getting it right. They need to answer some serious questions about the current situation:
1. What is their view of bank support? When will they force the state banks to cut costs, improve business, sell assets so the taxpayer can be repaid?
2. Do the regulators agree our banks are too big to bail and too big to fail? When will they start to split them up to create a more competitive and more manageable industry?
3. Do they now understand that hiring more regulators to make more people tick more boxes did not keep the system safe? Why do they want to do more of the same?
4. Why do they want more and better paid people? How will they find the one or two senior people they need with overall judgement – and courage – to do what it takes to keep the system stable?
5. Why is the MPC happy with the current level of government deficit? Why doesn’t it warn the government that the size of bond issues needed threatens market stability and sensible interest rate policy?
6. How does the MPC plan to get out of quantitative easing? Is it worried about the big devaluation last year, and surge in commodity prices this year?
7. Is any regulator concerned about the bond bubble that seems to have built up?
My view throughout the last fifteen years has been that the Bank of England is best placed to regulate the banks, set interest rates and manage the money markets, subject to the overall political responsibiltiy of the Chancellor. I am not proposing more powers to the Bank because they had a good credit crunch, or following a witch hunt of the FSA. It just makes sense to put together all the levers you need to control to run orderly money markets and to keep credit within sensible limits.