The new regulatory framework – Two cheers

One cheer for the decision to get rid of the FSA. Another cheer for putting all regulation of the banks together at the Bank of England. These are both things I have argued for ever since Gordon Brown foolishly split banking regulation in 1997. We warned that Brown’s bodged regulatory structure was likely to be bad in a crisis, and warned of the excess credit and monetary looseness in the Economic Policy Review in 2006-7.

I am not awarding the third cheer that is conventional on good news for one very simple reason. The Monetary Policy Committee remains unchanged, yet the MPC as readers of this site will know has had a dreadful five years of misjudgements. The Governor last night said it was the job of the MPC to take the punch bowl away when the party gets into a swing. That is exactly what they failed to do in 2005-7, when they stubbornly against external advice kept interest rates too low for too long and allowed excessive credit.

It should also be the job of the MPC to avoid excessive collapses of credit. In 2008-9 the MPC helped engineer the most dangerous and precipitate decline of credit. Again some of us were going hoarse warning them of the dangers. Even one of their own members saw the problem, but the MPC ignored commonsense. It had lurched from money being too easy to money being too tight. How can we trust this group of people going forward? Inflation remains way over target whilst activity is weak. They have helped get us into a nightmare situation.Their money printing flooded the public sector with cheap money and inflationary tendencies whilst banking regulation starved the private sector of funds.

Which brings me to the new Financial Policy Committee. Their job we are told by the Governor is to turn down the music when the dancing gets too wild. By the same token I hope it is also their job to turn up the music when the dance floor is empty. In case the Governor hasn’t noticed, the dance floor has not been too popular with the private sector for the last couple of years, largely because they cannot afford the entry tickets whilst the regulatory bouncer on the door is keeping many of them out. The first task of the FPC should be to restore some balance to the UK economy, and take the action that needs taking to allow sensible levels of lending to enterprise and growing business so we can have a decent private sector led recovery.

The Governor’s language is appropriate to the conditions of 2005-6 which he misread at the time. It is not what is needed in 2010.


  1. TomS
    June 17, 2010

    John, what ten things would you do to improve private sector access to borrowing? Can we have a hitlist?

  2. Iain
    June 17, 2010

    I believe Osborne has made a mistake getting rid of the FSA, Yes its bureaucratic, yes its a box ticker, but that has a role in base line regulation. Osborne should have kept the FSA in place but given the Bank of England an oversight regulatory role in major banks and financial institutions.

    1. Lola
      June 17, 2010

      Nope. The FSA is utterly dysfunctional and run and staffed by(unsuited people-ed)I have ever seen. It still has two years to wreak havoc in the retail FS marketplace (ex the banks, who quite frankly deserve all the approbrium they are getting). The FSA is currently engaged in a whole raft of market destroying initiatives and actions that it will now try and rush through. These, including a bizarre thing called the 'retail distribution review' need to be halted now. At the same time the proposed 'Consumer Protection and Markets Agency' FSA replacement sounds very dangerous to me. Clearly Georgie boy (prodded by the Lib Dems) still doesn't get how markets work. The CPMA will be as equally as bureaucratic and Statist and ultimately as destructive as the bizarrly bureaucratic FSA. Its about bloody time that sensible politicians made an effort to make it clear the the FSA's rules and bureaucracy were in large part a driver of the banking nonsense and that doing more of the same bureaucracy is not the answer. It never is.

    2. nonny mouse
      June 17, 2010

      As I understand it, the FSA still exists but reports to the BOE.

  3. Geoff not Hoon
    June 17, 2010

    Mr.Redwood, How can we have real inflation at 5% and interest rates at 0.5%? If you explain it maybe I will understand as for sure I do not from everything our leaders say.

  4. lola
    June 17, 2010

    1. I flatly have no faith in any 'money price and supply committee'. The last word tells you all you need to know as to why it will always fail. Since the State has accreted the monopoly of money to itself the key responsibility it has to us poor bloody citizens is to make sure that the monopoly money keeps its value. Messing about with the supply to try and 'run the economy' will always fail.

  5. Sally C.
    June 17, 2010

    In order to claw back some credibility we need a new Governor of the B of E. What about Stephen Roach? He was Chief Economist at Morgan Stanley for 16 years before becoming Chairman of Morgan Stanley Asia in 2007. He has very good connections with the Chinese government and has recently moved back to the States. He is still with Morgan Stanley but he also lectures at the Yale School of Management. He might be open to the idea of helping the new government sort out the mess we are in. Just a thought, but worth considering.

  6. Javelin
    June 17, 2010

    Quite a few things to say.

    I guess what most people care about is adding house prices into the inflation figures. I think it's wise to point out that house prices are 10% off the peak of a bubble and if cuts aren't made nor interest rates rise they will according to the new Office for Prediction rise to peak in a few years. So in summary either the BofE reduces house prices by 25% or house prices will run at bubble bursting levels in the forseeable future.

    On top of that, as predicted by myself and others on this site inflation will be imported and rise. As I have said China is a country of only (selfish) children and 1/3 more men therefore inherently unstable. As such wage inflation, as predicted, is rising. As we come out of recession one would expect inflation to rise. So therefore interest rates will rise.

    Having said that Im not so sure either the household or soverign debt in the UK is strong enough to stand even the smallest rises in interest rates.

    This is the important point DEBT is the opposite of INFLATION – in terms of impact. When inflation is low, interest is low and debt becomes high. It is possible to have STUBBORN debt just like it is possible to have stubborn inflation. Both high debt and inflation damage the economy.

    So I think economists will start to see interest rates as not just controlling inflation but controlling debt. I think there is an "S" shaped graph between interest rates and health – and debt and inflation sit at the top and bottom of this graph.

    Bottom line – to return to health interest rates must rise and house prices must fall. Unless that happens house prices will remain at bursting levels and the way the BofE will manage house prices will be to sustain them at maximum levels – which is my view shows they have failed because they leave the economy open to a house price crash and banks asset ratios crashing and another crisis.

    June 17, 2010

    Superb analogies that hit home the point to City regulators and mums (like us) alike.

    Thanks from afar!

  8. Mike Fowle
    June 17, 2010

    The advantage of the Bank over the FSA is that it is less overtly political.

    John, you are not being wise after the event – I remember reading your warnings years ago. I do wish you had a higher profile in government – they need your wisdom.

  9. Mark
    June 17, 2010

    The main problem remains: namely, how to unwind the property bubble. At the moment those who made bad decisions to overpay for property (both residential and commercial), and overlend or overborrow against those purchases are being unjustly bailed out. We need to restrain lending on property: money lent to inflate property prices is unproductive. At the same time, we need to increase lending for productive businesses, particularly those that help improve our trade balance via exports or import substitution.

    1. Colin
      June 18, 2010

      I think unwinding the property bubble is essential. House prices are under excessive inflation and for some reason the media always paints it a positive ( which it only is for second home owners or those who are planning to buy a smaller house in the future ).

      We need something to prevent those in negative equity from being ruined or prevented from moving, but similarly we don't want to unjustly bail them out. The only thing I can think is something like Tax relief on Capital Loss from the sale of a primary residence. I think this would take the edge off those who would need or want to move for work. I can't think of an equivalent for commercial property.

      Something needs to be done to prevent or restrict residential property speculation too. I don't know what.

  10. christina sarginson
    June 20, 2010

    Good metaphor I have always really enjoyed dancing and look forward to seeing what music the budget brings this week. I do hope it will be the sort we can all enjoy and not the old style with the same old rhythm. We need fresh new and innovative harmonies not too difficult for the most vulnerable to sing or dance too.

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