An Orwellian episode
Shortly after Labour's 2005 election win I was summoned to a speech by Tony Blair, hosted by the IPPR. It was entitled Risk and the State and naturally induced as much anticipation as a crown green bowling telethon.
However, halfway through I realised Blair had said something that sounded calculatedly outrageous: that the Financial Services Authority was "seen as hugely inhibiting of efficient business by perfectly respectable companies that have never defrauded anyone".
The implication was that finance was over-regulated, the FSA over-heavy, and that it should be essentially a policeman dealing with criminality, not a surveillance body dealing with systemic risk.
This is the same FSA that has, implicitly, been drubbed by its new boss, Adair Turner, for its failure to adequately monitor the financial system as it careered out of control in the first half of this decade.
At the time, the then boss of the FSA wrote a furious letter to Blair, accusing him of undermining the FSA's role. Had not the FSA been at the forefront of the drive for light-touch regulation in Europe, McCarthy complained, and now it was being dissed as heavy handed.
We don't know how the spat ended because Tony Blair's reply to this letter has been suppressed under the Freedom of Information laws. What we do know is that the FSA was under political pressure from the Labour government to be even more hands-off than it already was.
If this sounds a bit Orwellian then the whole current episode has the air of that famous moment in Nineteen Eighty Four where the enemy suddenly switches from Eastasia to Eurasia, without anybody daring to comment.
Let me quote extensively from Lord Turner's lecture (which I recommend you to read in full as its analysis is trenchant and heavily influenced by those economists who locate the savings glut in the malformed structure of the global economy):
"The FSA has been more open than I think any institution involved in this crisis in admitting that it made mistakes in the institution specific supervision of Northern Rock. But I think the best judgement is that better institution specific supervision of Northern Rock, would have made only a very small difference to the shape and impact of this global crisis.
"The far bigger failure - shared by bankers, regulators, central banks, finance ministers and academics across the world - was the failure to identify that the whole system was fraught with market wide, systemic risk. The key problem was not that the supervision of Northern Rock was insufficient, but that we failed to piece together the jigsaw puzzle of a large UK current account deficit, rapid credit extension and house price rises, the purchase of UK mortgage backed securities by institutions in the U.S. performing a new form of maturity transformation, and the potential for irrational exuberance in the market price of credit. We failed to realize that there was an increase in total system risk to which financial regulators overall - authorities, and central banks and in fiscal authorities - needed to respond."
Now, who is "we" in this "wea culpa"? Clearly Lord Turner's predecessors at the FSA, Calum McCarthy and John Tiner. In addition, Mervyn King the governor of the Bank of England. Also the people who designed the tri-partite regulatory system: Gordon Brown, Ed Balls and Gus O'Donnell. Once you put names to this "we" it reads as a very strong criticism of the Labour government and its chosen regulators.
Both the Bank of England and the FSA have the statutory responsibility to maintain financial stability. They failed. The statutory responsibility was conferred on them by the Treasury. It, by implication failed.
There is a legitimate question: why? I will answer it with another question. Is it because the whole world of banking regulation and supervision is in fact a closed club populated by former bankers? Is it because the politicians were too starry eyed about the bankers? After all the rise of global finance delivered seemingly endless growth, and lots of tax revenue to plough back into the lower reaches of society in the form of tax credits and benefits. Was this apparently win-win situation allowed to cloud the judgement of the politicians and regulators?
If, now we are in sackcloth and ashes phase, you came across a politician who made a speech saying the banking system was at the beginning of a "golden age", just months before the collapse, you would want that politician to answer some questions raised by Lord Turner's lecture. Not just for the sake of drawing a balance sheet but to make sure they had got the message that the whole deregulationist philosophy is over. The "golden age" epithet was, of course, uttered by Gordon Brown in his 2007 Mansion House speech.
I will leave you with the quote in full.
"So I congratulate you Lord Mayor and the City of London on these remarkable achievements, an era that history will record as the beginning of a new golden age for the City of London....And I believe it will be said of this age, the first decades of the 21st century, that out of the greatest restructuring of the global economy, perhaps even greater than the industrial revolution, a new world order was created."
And another question: the government has just been hammered in the courts over the Equitable Life case, on the technicality that, for a few short months, it was the regulator (during the transition to the FSA). In the case of our financial meltdown, if it is now "official" that the regulatory authorities failed in their duties, both in detail over Northern Rock and systemically, does anybody who lost money have a legal redress?
Just a thought.