Month: November 2012

Yesterday the long Leveson report produced different statements from the Prime Minister and from his Deputy. The Liberal Democrats opted for the less liberal option, leaving opinion very divided in the Commons and potential voting tight.

Amidst all the pages filled and ink spilled there was little debate over why people think Statutory regulation would work better. Where is the evidence that it does? The main faults in the press in recent years were crimes – they probably broke the law over eavesdropping and bribery in the worst cases. The answer is to enforce the law properly, and to bring cases to court where there is evidence. How does introducing a heavy handed Statutory Regulator help?

The Statutory Regulators in financial services, introduced in 2000, have not stopped financial crime or deterred it judging by the number of scandals and pending cases that have come out. They also presided over the collapse of large parts of the banking system they were meant to protect.

The irony of this debate on Leveson, ignoring the key question about effectiveness of regulation, is that it comes about at a time when the traditional papers are having the fight of their lives to survive. There is a danger that any Statutory Regulator would add to the cost burdens and the inflexibilities of these organisations just when they need to be cheaper and more flexible to combat the huge competitive challenge of the new media. Regulators tend to regulate the old or the decaying more than the new and the emerging, because they can measure it, talk to it and pin it down.

They just cannot leave it alone. Yesterday morning on Radio 4 the early religious slot was taken by Alison Twaddle. She did an uncritical advert for global warming theory, with of course no balance or questions allowed. She told us that the

latest US great storm was the kind of event you could expect to be more frequent in an age of high CO2 output, and asked us to thank God for the climate change scientists who have revealed this truth. The link to religion was tenuous and attenuated.

This was followed by a patsy interview on Farming Today with a representative of the famous East Anglia University climate change department. There was no mention of errant emails or past controversies. The lady was able to tell us that periods of high rainfall as we have just experienced would become much more common in the years ahead, as would dry hot summers. She stressed she had no idea what the weather might be like for the next few years, but was categoric that the average experience would be both wetter in winter and hotter and drier in summer if you took the long term perspective, looking ahead 30-50 years. She was not asked to produce any evidence, not asked how she could predict the average but not the individual years that make it up, not asked why they have not forecast recent year’s weather with any success and not asked to explain why CO2 rather than water vapour, sun variation, wind and cloud patterns is seen as the crucial sole variable.

Then the Today programme sought to push the EU agenda. All this week they have promised to investigate Germany more. They started with a very unrepresentative German who likes “England” which he muddles up with the UK. His job was to reassure us all that Germany agrees with us over the EU budget and wants the UK (or England) to stay in the EU to make it all lovely. He was not asked why, for example, the UK should want to help pay the bills for Euro failure, why we should wish to continue with the CAP which is bad for taxpayers and food buyers, or why some think Germany would stop selling us her cars if we were no longer in the EU.

We were also treated to a sudden flurry of “news” on efforts by the EU to promote trade agreements around the world, after years of failing to do so. Clearly the message was the EU is heeding the UK at last. The BBC did seek to inject a little criticism into this piece, by exposing the ICT visa issue, but the main thrust was clearly to buttress the EU and show it is “going the UK’s way”, as we are so often told.

It was another very bad morning for the BBC, with sloppy journalism riding favourite hobby horses in a very uncritical way. I am writing to Lord Patten about it.

 

We are all fans of Canada now. The outbreak of cross party support for the appointment of Dr Carney to the Bank of England was based on enthusiasm for the way Canada got through the last boom and bust crisis in much better shape than the UK. There were no failures of major banks, a smaller drop in output and a much quicker recovery. So we need to ask what were the magic ingredients behind this success?

It was not just better Central banking, though that did help. The Central Bank of Canada did make enough liquidity available to banks at a time when the Bank of England was preaching moral hazard and watching banks go bust as a result. Today Canada has an official interest rate of 1%, and an inflation rate below the 2% target. It was also the state of the Canadian public accounts. that helped Canada through the Credit Crunch.

Canada had followed a path of spending and borrowing too much, leading to an earlier crisis. A fundamental review of public spending was undertaken and substantial cuts pushed through. Following this adjustment, the economy started to perform better. The UK Conservatives studied this in oppposition, but have not been able to do something similar in a Coalition government.

In 2011 the figures show that Canada’s public spending as a percentage of GDP was 39.7%, compared to the UK’s 47.3%. Keeping public spending under better control before and during the crisis clearly limited the damage from international events and allowed a swifter recovery.

In 2011 tax revenues amounted to 32.2% of GDP, compared to 38.9% in the UK. Canada’s economy benefitted from lower rates of tax and less tax being raised by fewer taxes. The UK’s level of taxation was 6.7% of GDP higher. Canada’s top rate of federal income tas was just 29%, compared to the UK’s 50%. It comes in when incomes rise above $132,000. Even adding in state income taxes, Canada’s income tax levels provide a top rate of around 40%, not 50%.

Canada has been running a smaller deficit and building up debt less quickly.

The Canadian economy was assisted by sensible Central banking across the crisis,, but performed better for a range of reasons. Lower tax rates, better value for money public spending, and better control of state debt levels were important factors in the success. Can Dr Carney help persuade more UK politicians of the wisdom of such a policy package?

Canada is now generating 7% more output than before the crisis, whilst the UK, Japan and the Euro area are still below 2007 levels. The Canadian economy has grown in every quarter save one since 2010.

 

The Chancellor reported a surprise to Parliament yesterday. He announced that after all, and after the denials, the Head of the Canadian Central Bank, Dr Carney, will be the next Governor. Labour agreed with the appointment

, and the Chairman of the Treasury Select Committee who gets to interview him as well more or less accepted that he will be the next Governnor. I send him my congratulations.

I am pleased the Chancellor did not appoint one of the figures who has been responsible for the Bank and the FSA’s conduct in recent years, as it is difficult to make the case that they have done a good job. Let us hope that Dr Carney will bring new thinking and greater purpose with him from the new world. He is Central Bank Governor to a smaller country that has its own currency whilst trading substantially with a much larger neighbour. He has never, along with the Canadian establishment. suggested Canada should join the US dollar, nor proposed a pooling of sovereignty as part of their single market arrangements with the USA.

More importantly, Canada got through the last few years without major banking disasters. Canada lost less output and recovered more quickly. We have things to learn from Canada’s relative success.

My only worry at the moment about this appointment is the timing. Dr Carney remains Canada’s Bank Governor until May 2013. He takes up post here in July 2013, and may not start taking decisions or making major contributions until the autumn of next year. I think we need new thoughts and new policy now from our central bank.

On his agenda should be the following questions:

1. How do we restore the commercial banks to health more quickly, so they play a role in economic recovery?

2. How much more, if any QE is advisable?

3. How long should interest rates penalise savers, and damage pension fund liability calculations?

4. How does the Uk get a grip on inflation?

5. How does the Bank work to promote low inflationary growth?

Readers will know my answers to these questions. I look forward to hearing Dr Carney’s answers when he appears before Parliament, when I will give you an update.

 

As we approach the publication of the Leveson enquiry findings, the spin doctors have already set up a partial debate. We are told that Statutory regulation would be good if we wish to stop malpractice and law breaking by journali

sts trying to get big stories. We are warned that it could get in the way of press freedom and allow some malefactors to get away with it without press disclosure of their ill deeds. I doubt if either part of this proposition about Statutory regulation is true.

I approach this problem as one who thinks press freedom is important to a democracy, but freedom is not the same as licence. There should be – and is – a law of libel to protect reputations from lies and malice. There should be a more limited right of the state to block publication of matters which could harm us collectively, by exposing the plans of our army in the field or revealing security secrets that put at risk our protectors for example. There is always a danger that this right is abused by those in office, hushing up matters which should be exposed. It needs limiting, with safeguards against abuse.

I also have experience of the press publishing lies about my private life, seeking to tackle and misrepresent me rather than reporting criticially the ideas and people I represent, and listening in to my private conversations. None of this has made me want to regulate them because of it, or seek to curb their freedom of enquiry into others who may have guilty secrets to reveal, hurtful though it has been at times.

We have good experience of what happens when a major activity shifts from self regulation to Statutory regulation. This has happened to the financial industry over the last twenty years. Over this period we have shifted from a world where no major bank went bust, to a world where several major banks have been driven into state hands and public subsidy. We have moved from a world of limited financial crime, to a world where many major institutions face enquiries into abuse of markets and queries over their corporate conduct. We have moved from a world of lower cost of doing business to higher cost of doing business. People have to pay more to cover the cost of regulation, or end up with no professional advice at all. In the City we have moved from a world where the mainstream decent companies applied moral and upright standards to their own conduct, to a world where the main players ask lawyers and compliance officers what they can get away with and are often tempted to push the many rules as far as they can. Rules compliance has all too often replaced a sense of decency in conduct.

Spin doctors and sloppy journalists have conspired together to characterise the noughties as the era of “light touch regulation” or even of “deregulation ” in financial markets. Anyone who weighs the Statute book, examines the volumes of rules, guidance and compliance materials will know that the noughties saw a large increase in the volume of regulation. The Financial Services and Markets Act 2000 put in place a comprehensive system of Statutory regulation for the first time in the UK. This was changed and reinforced by the Financial Services Act 2010. It was also complemented by the EU financial services plan, including wide ranging legislation like MIFID. Never had the UK been so regulated, and never before had things gone so badly.

Unfortunately the Statutory system saw major errors of judgement by the regulators over safe levels of cash and capital for credit creating institutions, which then threatened the whole system. The noughties were not an era of light regulation or self regulation. They were an era of bigger Statutory regulation both at home and in the EU. This new regulatory system defined by Mr Brown’s big changes to the architecture and by the comperehensive financial law introduced, failed both to keep our system safe, and failed to prevent crime. It has been a notable failure of the free press to expose the true nature of the last financial crisis, or even to report sensibly the current state of public finance. I can’t see how a Statutory regulator for the press would help tackle this problem. Ironically some in the press will now find it harder to make the case against Statutory regulation, because they have so failed to explain its manifest massive failures in the case of the City.

Why do people think Statutory regulation of the press would be any more successful or better judged than the financial regulation was? How would it actually stop journalists eaves dropping, twisting replies, failing to read the basic materials, making snide comments about people and causes or getting the wrong end of the stick? Wouldn’t it mean more managers , compliance officers and box ticking, which would slow down stories and draw out mistakes, rather than abolishing them?

Nor would it necessarily prevent newspapers exposing folly and mischief in high places. If a government tried to use its leverage over the Statutory regulator to close down a story or an outlet, that in itself would be a fine story which would probably get out and do more damage to the government than if they had not bothered.

I remain a sceptic about the powers and wisdom of Statutory regulation. There is a lot to be said for having a clear and well enforced criminal law to prevent extreme conduct, and leaving the rest to competition, choice, public opinion and the free play of ideas and views. Now we have such a lively and often unruly medium in the web, if you regulate mainstream media too much it simply will not be able to compete with the new ways of voicing criticism of the powerful.