A very British arrangement
| 14:38 UK time, Wednesday, 8 July 2009
If you are feeling underwhelmed by the Banking White Paper, produced today, you are not alone. Her Majesty's opposition has described it as a "white flag not a white paper"; the Libdem Treasury Spokesman Vince Cable called it "a living will" for the government.
What I take away from it, at first reading, is the limited scope the UK government sees for itself in the prevention of future crises and re-design of the global financial system.
The underlying philosophy of this White Paper can be paraphrased thus: the banking crisis was created by banks, there is only so much governments can do through regulation; here is our best shot - and a lot of it will rely on having an effective and enthusiastic regulator instead of the one we had before - but much of the detail is so international, and so long-term, we can't really decide much now.
Concretely the government is trying to resolve/bury the row over who should police the systemic risks by creating a new Financial Stability Council, with Alistair Darling in the chair, and "minutes" to ensure transparency. If you have ever read the minutes of the Monetary Policy Committee you will understand why financial journalists are unenthused by the prospect of more minutes.
There are two proposed economic measures the government intends to use to prevent banks driving themselves to the brink of collapse.
It will in future let the FSA force individual banks to hold larger amounts of capital, above the 4% minimum set by the FSA. This will be done bank by bank, as a kind of tax on overwieldy size, or risk taking or bonuses deemed to high. But there is no system or public criteria or sliding scale of capital quotas laid out.
It is a very British arrangement. One member of the great and good will meet another, in the shape of a bank CEO, and say "your risks are too high"; what then will the bank do in response? They will lobby. Not a single episode of lobbying or the numerous private meetings and social engagements will be publicized. What we will know, at the end of it, is the amount of capital bank X is required to hold.
It is more concrete when it comes to "leverage".
The White Paper recognises that, despite there being a capital adequacy regime, banks were able to fund themselves by overborrowing. So the Treasury has opted to support a "leverage ratio" - so banks can only borrow a certain amount compared to their capital. This will be set in Europe later on, so there is no way of knowing what it will be.
How would the typical British taxpayer, currently exposed to 680bn worth of toxic debts from banks that were over-leveraged and had to be nationalized, influence what that ratio should be. Answers on a postcard please to the unelected president of the European Commission.
Three concrete ways of preventing a future crisis have been rejected. Breaking up complex banks so that their "casino" part and their "piggy bank" part are separate, as in America in the 1930s, is ruled out.
Doesn't work, says Alistair Darling. Breaking up banks that are too big to fail, as implicitly called for by Mervyn King, also ruled out.
Finally, the idea of using interest rates to lean against the wind in an asset bubble is ruled out on the basis of the "Bank of England's successful record of interest rate setting over 12 years".
This, remember, is the Bank that raised interest rates during what we now know were the first two quarters of recession.
Of all the measures ruled out today, I think this is the most significant, because it basically says monetary policy should not be used for "macro-prudential" - ie crisis busting - ends, only to target inflation.
The problem is we already know that any recovery is going to be highly inflationary; no regulations are in place to stop speculators piling into oil and commodities once again and therefore, long before the Basel Committee and the European Commission get around to telling us about new capital ratios and leverage requirements, the Central Banks will be facing another "scissors crisis" where the inflation graph is rising and the growth graph not, or falling.
Leaving aside the party political differences I could not help noticing how sparsely attended the White Paper announcement was in the Commons. Even senior Labour ministers outside the tight circle of finance and business policymaking are said to be nonplussed by the economic crisis.
Clearly the majority of MPs could not be bothered to come and hear the government announce its first comprehensive answer to the financial meltdown - or take part in the debate. The 23 backbenchers who tried to question Alistair Darling were from that school of professional finance watchers that has struggled to inject heterodoxy into the political debate. They struggled again today.
I feel a horrible gloom descending on the process of decision-making in the face of this crisis. The Conservatives signaled they will rip up more or less every measure proposed today, should it make it to the statute books before the election (and there is not much of that).
A lot of work and discussion went into the White Paper, and you can feel the hand of civil servants and economy wonks in large parts of it. But so many of the key decisions will be taken in Brussels or Washington, or in the bank boardrooms, there was a sense of politics being overwhelmed by economics today. It had the sense of being the start of a "long goodbye" from the government.
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