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Role model no more

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Stephanie Flanders | 18:31 UK time, Thursday, 3 December 2009

Any Conservatives listening to Ben Bernanke's confirmation hearing in the US Senate will have enjoyed what he has just said about Gordon Brown's tripartite system of financial regulation.

Though the Obama administration would like to beef up the Federal Reserve's regulatory powers, some powerful Senators want to strip the Fed of its power to monitor and supervise US financial institutions. Bernanke, predictably enough, would rather they didn't.

If you want to see why it's dangerous to take that kind of authority away from the central bank, he said, you only need to look at the experience of the UK:

"[O]ver the past few years the government of Britain removed from the Bank of England most of its supervisory authorities. When the crisis hit - for example when the Northern Rock bank came under stress - the Bank of England was completely in the dark and unable to deal effectively with what turned out to be a destructive run and a major problem for the British economy.

So currently the trend in UK and elsewhere is quite the opposite of taking away those authorities - it is to give the central bank the authority and information it needs to know what's going on in the banking system... for financial stability maintenance I think it's very very important for the Fed to have that kind of information and insight into the banking system"

Mervyn King will not take kindly to the idea that he was ever "completely in the dark" - about anything. He might also point out that the Fed didn't do such a great job handling Lehman Brothers. But you get the point.

The senator questioning Bernanke noted that more than half of the G20 economies do not give supervisory authority to their central bank, and some of them had come through the crisis rather better than the US. He also said he thought the fault of the British system had been the FSA's "light-touch" regulation and the lack of more comprehensive deposit insurance (apparently, some US senators take a keen interest in Britain's travails).

Nonetheless, it's striking to hear the world's most important central banker citing the UK as an example of what not to do. Time was when the UK tripartite system of financial regulation was a role model for the world. Not any more.

Comments

  • Comment number 1.

    The FED has been bleeding America dry since the times it was known as First Bank of the United States. Unless America gets rid of it, like president Andrew Jackson did for a short while, they will rather soon go completely bankrupt.

  • Comment number 2.

    The situation in the UK is an example of what happens when you move from a semi-decent regulator (BOE) to a very poor regulator (FSA).

    The situation in the US system shows what happens when you have a corrupt regulator (FED).

    Either way, both countries are in for a seriously rough ride over the next few years due to the monetary policies of Mr Bernanke and Mr King.

  • Comment number 3.

    Ron Paul's bill is to audit the fed, not take away any of its powers. Either you are misinformed or deliberately misleading.

    I am sure Mr Bernanke is extremely worried about the prospect of the American people knowing where trillions of TARP dollars have gone.

    The Fed's tripartate system is Ben, Xerox and Canon.

  • Comment number 4.

    There is the past and there is the recent past. In the past the banks and financial institutions wanted little or no control of their activities, naked captialism. We now have the results of that approach, a grand theft and worldwide financial crisis. We all understand that neither economist nor politicians operate in the relms of reality but it is difficult to avoid the outcomes of those policies. Now that the "public", a term co-opted by politicians, have large ownership in the banking world it would seem appropriate that the centeral banks look out for our investments, as the banks and financial firms clearly failed to do nor did the governments provide any oversight that might have prevented the crisis. This was not some series of events that were out of everyones control but rather a scheme devised by the financial industry that had a predictable outcome and it wasn't good. Funny how in retrospect the economist now see the problems but at the time missed the entire thing. We would all bet on a match if we could place our bet after it is over. Now one argument would be that since the governments and their appointees all failed the people what difference does it make who has what authority. We have a collusion of politics and banking that jointly betrayed the people so without a change in either we can all look forward to a repeat performance. I understand that the financial services firms do not want to be constrained by laws and regulations and ethics, but that doesn't prevent other criminals from plying their trade....only they go to jail when caught...and that is the issue of concern for bankers.

  • Comment number 5.

    I would post more coherently but for the time being I cant stop laughing at the thought of Gordons facial expresion when hearing bens words.

    Think bulldog chewing a wasp.

    Priceless.

    Roll on next PMQ.

  • Comment number 6.

    Maybe the words of Ben Bernanke are worth reporting because of a combibation of his honesty, foresight and all round credibility. The following serves to demonstrate:

    http://www.youtube.com/watch?v=INmqvibv4UU

    http://globaleconomicanalysis.blogspot.com/2009/11/ben-bernanke-pleads-for-his-job-my.html

  • Comment number 7.

    Banks need supervising not regulating. If any more evidence is needed just look at the ease with which the publicly owned RBS is confronting the government on bonuses. As important if the BoE is to supervise the banks is that economic policy making is removed from the BoE and given to where it should be - the elected government. Handing responsibility for economic management to the BoE/MPC with its one dimensional monetarist view will be seen eventually as an apocalyptic mistake.

  • Comment number 8.

    Reading the House of Lords Economic Affairs report on Financial Regulation you get the impression that : the Tripartite Committee was a useless talking shop and not fit for purpose; the FSA had its head buried in micro-institutional issues, conduct-of-business stuff and didnt know the bigger picture; the BoE, although supposed to be looking at the bigger picture, didnt have the micro-institutional information to see the bigger picture....classic UK Establishment humbug. If you read Sir John Gieve's Financial Stability Report ( BoE)of July 2006 the warnings are all there in technicolor. No-one reading this report would conclude that the BoE were in blissful ignorance of the exploding balance sheets/CDOs etc. But Sir John told Bob Peston that he ran up the red flag. There needs to be a public inquiry into this massive failure of public regulation, rather than some little-known and publicised committee of House of Lords grandees.

  • Comment number 9.

    Audit the FED petition - http://www.auditthefed.com

  • Comment number 10.

    If only the British commercial banks hadn't been permitted to borrow on the wholesale money markets from 2001 onwards, things would have been very different.

    But no-one could have seen the bubble coming. I mean, unlimited access to cheap wholesale funds, lax capital requirements, and no lending controls to speak of, couldn't be considered at all risky, could it? I ask you.

    Even PG Wodehouse couldn't have thought up a story line like that:
    "...It was all disguised by CDOs Jeeves, dash it!! A rum affair if ever there was one."
    "My thoughts exactly, sir...."

    If only things had been different, if only....

    Too late now, of course.

  • Comment number 11.

    The route of the problem was not regulation, but excess liquidity.

    You can have whatever system of regulation you like, but when there is too much cash (in the form of Asian countries savings and middle eastern sovereign oil wealth) floating about then you are going to have the problems that all countries experienced.

  • Comment number 12.

    Re 8 above Stephanie

    The reports and minutes of the Tripartite Standing Committee are covered by a statutory exemption from the Freedom of Information Act - this national emergency ( cos that's what it is) requires that these minutes should be published for public examination.

    Can you get them Stephanie?

  • Comment number 13.

    The Labour Chancellor at the time decided that it would be unwise to give the BOE an extra power, in this case that of setting interest rates, without balancing the situation by stripping one away, hence the creation of the FSA. As always with this man, no thought of the consequences, it's just about politics. For 2009, read the quangocrat in the EU Foreign Office hotseat instead of Blair in the Presidency, only this time it is Zcarcosy picking up the juicy titbits rather than the Hedge Funds. Nice one Gordon.

  • Comment number 14.

    "I say Jeeves! Aren't commercial banks safe places to deposit one's hard earned crust? I mean, they're not investment banks are they? They won't go out and borrow £600bn+ from some foreign lender or other, and then over-lend it to risky enterprises, will they? Commercial banks are only funded by the deposits they take, and then the BoE simply insists on a big helping of those deposits being kept as capital for the purpose of public safety. That's how it works, eh Jeeves?"

    "I fear that's how it was meant to work, sir. However, things changed somewhat from 2001 onwards."

    "Blimey, if that's the case, who exactly is/was/is looking after the country's financial stability?"

    "A very good question, sir."
    "I fear the free markets were asked to kindly take care of matters."

    "Ah, the Invisible Hand, eh?
    "Didn't have too tight a grasp on public safety did it?"

    "Rest assured that this will be the bubble that ends all bubbles, sir......"

    "I'll drink to that Jeeves; mix me a whisky and soda......."

    "Very good, sir"

  • Comment number 15.

    3. truths33k3r

    Ron Paul has also called for the Federal Reserve to be abolished.

    It is one of the reasons for his audit bill,because they are accountable to no one.

  • Comment number 16.

    'Any Conservatives listening to Ben Bernanke's confirmation hearing in the US Senate will have enjoyed what he has just said about Gordon Brown's tripartite system of financial regulation.'

    Do you really believe that mainstream politicians would actually waste valuable time that could be spent fiddling their expenses listening to Ben Bernanke.

    My goodness whatever next.

  • Comment number 17.

    It will be interesting to watch how the political commentators view this comment. This government has done a fine job smearing the banks when much of the resposnibilty for the scale of recession lies in the hands of the regulators. It is a harder,but far more honest,point to get across to the public but the media should hang their heads in shame for attacking the easy target up to now.

  • Comment number 18.

    Congressman Charles August Lindbergh said this about the FED.

    "This Act establishes the most gigantic trust on Earth. When the President signs this bill, the invisible government by the Monetary Power will be legalized, the people may not know it immediately but the day of reckoning is only a few years removed.... The worst legislative crime of the ages is perpetrated by this banking bill."

    And also

    To cause high prices, all the Federal Reserve Board will do will be to lower the rediscount rate..., producing an expansion of credit and a rising stock market; then when ... business men are adjusted to these conditions, it can check ... prosperity in mid career by arbitrarily raising the rate of interest. It can cause the pendulum of a rising and falling market to swing gently back and forth by slight changes in the discount rate, or cause violent fluctuations by a greater rate variation and in either case it will possess inside information as to financial conditions and advance knowledge of the coming change, either up or down. This is the strangest, most dangerous advantage ever placed in the hands of a special privilege class by any Government that ever existed. The system is private, conducted for the sole purpose of obtaining the greatest possible profits from the use of other people's money. They know in advance when to create panics to their advantage, They also know when to stop panic. Inflation and deflation work equally well for them when they control finance."

    http://en.wikipedia.org/wiki/Charles_August_Lindbergh

  • Comment number 19.

    ''Mervyn King will not take kindly to the idea that he was ever "completely in the dark" - about anything.''

    Fair enough, but he has only got gobby recently. Just letting HMG crusie along on auto did not work did. The BoE needs to be more gobby, needs to put out more warning shots.

  • Comment number 20.

    I don't care about the paper pushers one jot.

    We need manufacturing industry...that's all I have to say!

    BankSlickerminustheR

  • Comment number 21.

    The big problem is the Treasury...... It needs completely reforming and turned into an advisory organisation not one that pulls every other dept's strings.

  • Comment number 22.

    the tri partite system of regulation was nothing but a mask.

    brown wanted to tell the markets that he had made the bank of england independant, but didnt want them to be independant - so he removed the powers from the BofE, giving them to the FSA, who of course he could influence and dictate actions via the back door.

    it does not matter one jot where in the world the recession/depression started, the simple fact is that brown created the climate for the UK with his own version of regulation, brown's system was wrong, how anyone could run a country's financial base by removing the rules and governance, that prevents any bank from financing their own borrowing is complete lunacy!

    it demonstrates perfectly that brown as chancellor, and now brown as PM, is incompetant at best and without doubt, negligent!

  • Comment number 23.

    TRIPE AAARTITE REGULATION

    It was just that and for the conmen good

  • Comment number 24.

    This is of course interesting but the most crucial question is who is the best leader to implement a UK recovery from this financial disaster. A process amazingly not yet started. More than £800 billions of Government debt, a £23,000 burden of debt for each and every Britain.
    Please will you and your colleagues endeavour to ensure that the candidates are rigorously scrutinised and understand that Britains' deserve and expect exceptional leadership from here on.

  • Comment number 25.

    It's futile citing examples of alleged good or bad economic practice when the obvious truth is that NOBODY on either side of the Atlantic knows what they're doing. Caledonian Comment

  • Comment number 26.

    24 stmewan

    The problem is much worse than your figure in terms of repayment. Wealth is only generated in the private sector. Whatever multipler effects occur in the public sector, that is just the recirculation and velocity effects.

    So by the time - the economically inactive, and the public sector, and those working in the private sector but contributing little in taxation, etc are all taken out of the popluation figure the size of the problem is chilling.

    It is difficult to see inflation disposing of the problem, although it could mitigate some of it - or taxation, because taxation levels would have to rise to very high levels harming international competitiveness and stunting economic growth. So the principle tool will be cuts in the public sector as it is cheaper to keep a percentage on benefit from public funds than salaried on public funds. But there is a stunning silence on the subject from all quarters, and any pointing to the problem is met with hostility. Sooner or later the matter has to be dealt with.

  • Comment number 27.

    Once upon a time, when the only people who were called bankers had actually taken (and passed) the banking exams, Britain was the envy of the world. We were held up as bastions of best practice the world over. Speculation was a dirty word. One invested in the stock market for income, never capital growth.

    Now we have moved to a collection of grossly over-paid croupiers and punters. Those in charge threw the guard dog out and told him he wasn't wanted anymore. Is it any wonder that we are in the current situation?

  • Comment number 28.

    26 Riverside

    You have your finger on the nub of the problem. We need to save money now and fast. Until drastic cuts in public spending are brought in (cancel the NHS IT programme, cancel the aircraft carriers, bring the Armed Forces home immediately from Iraq, Afganistan et al, massively reduce the scope of service of the NHS, cancel all new road builds, stop all local councils from spending on any capital projects, consider handing all local authority reserves back to Central Government and those are just the things that first spring to mind) the country is merely playing at this. We now have a financial problem directly comparable to the situation immediately after the 2nd World War and have to deal with it in a similar way: we must cut our cloth to fit our purse. Any politician suggesting anything else is either ignorant, practicing a callous deception, or mentally ill (deluded).

    As an aside, my examples above are not based on any particular political leaning, they are merely examples of expenditure that this country can no longer afford.

    An important question that must also be asked is: can any government other than a Government of National Unity actually deliver this?

  • Comment number 29.

    Dear Stephanie, You may find it striking, from a Conservative point of view,"to hear the world's most important central banker citing the UK as an example of what not to do", but your readers should be aware that Mr Bernanke's reputation for discharging regulatory responsibilities has been built on shifting sands and does not do him great credit or bear close examination.

    Mr Bernanke's behaviour to date has been hard to distinguish from that of the UK authorities. He failed to break away from the strategies of his predecessor, Alan Greenspan, until the house was quite literally falling down. He was led, rather than leading, in what followed by Geitner, who - as the president of the New York 'outpost' of the Federal Reserve, was and remains - in his current role as US Treasury Secretary - far too close to the big Wall Street players for comfort, particularly (I'd suggest) the comfort of President Obama and, most important, the 90+ percent of US citizens who are far removed from the money making of the charmed circles of high finance but not the consequences of their pursuit of lucre.

    Those who manage the UK regulatory authorities should be asked the same questions that Simon Johnson advised members of the US Senate Banking Committee to put to Mr Bernanke. They go to the heart of financial regulation around the world and they have much much less to do with the institutional details of regulation than you (and many others) appear to believe.

    a. Are public authorities willing to break the vicious circle in which the financial sector booms, by out foxing regulators, and then extracts a rescue in the bust that inevitably follows exuberant and irresponsible money making?

    b. Will public authorities design and introduce new forms of insurance (and ways of paying for that insurance), to which the financial sector will be required to contribute, in order to drastically reduce the moral hazard that now pervades financial systems?

    c. Do public authorities accept that they can only provide positive answers to questions a. and b. if they are prepared to separate utility banking from casino banking, break up the biggest finance businesses and ensure that there are regulated markets in all of the riskier financial products?

    As Simon Johnson points out there is an extraordinary agreement between Mervyn King, Paul Volcker and Alan Greenspan about what needs to be done. Greenspan admitted before a Congressional committee not so long ago that his ideological commitment to the efficient market hypothesis had been shattered. King didn't share the same faith but he has clearly be chastened and has become more vocal after a period of ill-advised silence on financial risk and excess. Paul Volcker has appreciated the vulnerabilities of modern financial systems for longer than almost anyone alive.

    I pray that policy-makers around the world, and particularly in the US and UK, are prepared to listen to what all three have been saying, draw the right conclusions and act upon them.

  • Comment number 30.

    9. At 8:48pm on 03 Dec 2009, plamski wrote:

    Audit the FED petition - http://www.auditthefed.com

    Most of can't we aint American.

  • Comment number 31.

    # 19 riverside

    spot on, not only was Mervyn King out of touch with Northern Rock he was out of touch with every other bank too. Lets not forget Mervyn King's had the biggest part in turning the Northern Rock problem into the nightmare it became to the markets, originally refusing mortgage lending as collateral, forcing the whole issue of Northern Rock going to the bank of england as lender of last resort and his "moral" campaign of wanting to punish the banks rather than wanting to find the best solution for us all.

    Did Northern Rock start the problem?, well short term borrowing to lend long term mortgages was a stupid stratergy, most of us saw this that's why Northern Rock was the most short sold share on the stock market, but the crisis in the markets was caused by Mervyn King's.

    Today,yes Mervyn King is quite adapt at getting gobby

    Why should conservatives be happy when it was the Bank of England wanting to palm off regulation as they already had enough on their plate. In fairnes very few of the conservative bloggers have wanted to get on the bandwaggon on this Non regulation of the market was also very much a Margaret Thatcher thing.

  • Comment number 32.

    Thatcherism, Reaganomics.

    Conclusively debunked I think. How about a return to good old One Nation Conservatism?

  • Comment number 33.

    A Darling states that RBS Directors and Senior Managers " oughta show restraint on bonuses"

    OUGHTA why not MUST bearing in mind it is 84% owned by the Taxpayer after throwing £56B into it.
    In fact, why not throw another £8B of confetti and call it 100% nationalised.
    Then sack all those at the top of the organisation. Employ new managers at no more than £250K. Rename it the "State Bank ".

  • Comment number 34.

    "Bernanke, predictably enough, would rather they didn't."

    Now tell the other side of the story Steph. That the Fed. is actually a privately owned company and, that there is a grass roots campaign across the U.S. - never mind Republican senators - to remove any and all political influence that the edifice has. It has been haemoraging the wealth of the U.S. for decades now.
    No surprise that Bernanke is a turkey who won't vote for Thanksgiving!

  • Comment number 35.

    truths33k3sr: Ron Paul's bill is indeed about auditing the Fed, but there is another bill, from Chris Dodd, the powerful chairman of the Senate banking committee.

    In the words of the FT: "the Dodd bill would remove the Fed's bank supervision and consumer protection roles and transfer them to two new agencies. But the 1,100-page text, being scrutinised in offices across Washington yesterday, goes even further - it would bar Wall Street banks from nominating New York Fed directors and restrict the bank's emergency lending powers."

    I was referring to this bill in my remarks.

  • Comment number 36.

    Good to see Stephanie actually coming down to reply to posters. Can you make a habit of it?

    I would be greatly surprised if the FED does get audited though as if it does, let's hope, it would be the end of it! FINGERS CROSSED.

  • Comment number 37.

    All of my contact with the FSA has been typified by bureaucratic incompetence with an amazing attention to trivial detail but a total lack of commonsense on the isues. Transfer this onto a large scale and it horrifies me that this organisation has been charged with the administration of our economy in preference to the Bank of England. It appears that the FSA was set up as much as to provide another tool for the Treasury to have political control over events on behalf of their Chancellor (GB at the time) instead of clear rational logic. The desire to control presentation seems to have obscured the need to manage our economy over the last decade.

 

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