It suits a great many people to blame the banks for the financial crisis. It gets everyone else off the hook. How, asks Gordon Brown, was a mere Prime Minister to know that banks were doing such fiendishly complicated things? How, asks George Osborne, was an opposition expected to detect what the government could not? How, asks Mervyn King, was the Bank of England governor supposed to know that these bankers had been so wicked? For all of them, the bankers have been the perfect scapegoat.
In truth, all of them failed to spot the massive asset bubble that had deformed the British economy by 2007, a bubble blown by dangerously underpriced debt. Yet even now there is a worrying reluctance to admit that a bubble ever existed. The decision to blame the banks is not just lazy, but dangerous — because it means that the profound errors of the Labour years are neither diagnosed nor corrected. And so the factors which led us to the crash the first time around remain in place, uncorrected and primed to explode a second time around.
In a nation where banker-bashing is becoming a national sport, it was reassuring to see the Independent Commission on Banking this week refrain from taking a pickaxe to the sector. Its proposals are sensible, and go some way towards creating what Britain should have had in the first place: competent regulation. If this crisis was global, why do Sweden, Canada and Australia not have any collapsed banks? Because they had their banking blow-up 20 years ago, and responded with proper regulation. They set limits on how much banks could borrow in relation to their assets. Under George Osborne, Britain finally looks ready to join the club of countries with properly regulated banks.
But this has not fixed the problem. Yes, bankers behaved abominably — like teenagers at an unsupervised party with free alcohol. But when a responsible adult comes home to find the place wrecked, the questions are simple: who organised the party? Who supplied the booze? The answer, in the case of the British economy, is simple: Mervyn King and the Monetary Policy Committee.
When Gordon Brown redrew Britain’s financial regulatory architecture in 1997, he not only wrecked banking regulation but rigged the system for setting interest rates. King would be granted independence, in theory, but asked to set rates by taking a vote from a committee, most of whom were chosen by the Treasury. They went on to pump the British economy with the steroid of cheap debt.
The Queen’s famous question — why did no one see it coming? — has a clear answer. Because everyone was looking in the wrong place. They were fixated with keeping consumer inflation in check, and didn’t notice the signs of a debt bubble. Savings had collapsed, the prices of assets— from fine wine to penthouses — were soaring. Yet all this was described as stability and prosperity because inflation stayed around the 2 per cent level. Common sense was supplanted with a statistical fixation, and the results were calamitous.
This matters because this same failed system remains in place. The difference is that King and his committee are now presiding over a new type of instability.
Britain has the worst inflation in western Europe, and the cost of living is not only making life miserable but slowing the recovery. King speaks with an academic’s detachment about rampant inflation, as if it were just another statistic. Those on low wages will know that inflation is, as Reagan once put it, ‘as violent as a mugger, as frightening as an armed robber and as deadly as a hit man’. It shows how things are in Britain when news that inflation has fallen back to 4 per cent — twice the target level — is celebrated.
This is not stability. The people who brought you the credit bubble will now create Greek-style inflation. Osborne cannot simply shrug and blame King. When the standard of living falls, governments follow. Osborne gives the Bank its orders, and will take the blame at the ballot box. Sooner or later, he will have to recognise that the Monetary Policy Committee, like so much Brown set up, is dysfunctional and needs to be replaced.
Brown’s economic failure was total, and extends far beyond bad banking regulation. Of the new jobs created over the Labour years, 99 per cent can be accounted for by extra immigration — mainly because Britain’s welfare state paid so many millions not to work. Welfare is at last being reformed. But many of Brown’s other disastrous policies remain in place. The notion that tax cuts are unaffordable remains hardwired into the Treasury’s thinking. But look at Sweden, which cut payroll taxes to stimulate its economy during recession and is now celebrating the strongest growth in Europe.
Moneylenders have always been an easy target. Osborne has played to the gallery, making sharp attacks on banking profits and defending other Brownite policies such as the 50p tax on high-earners. He would argue that being seen to hit the rich and the bankers is necessary; it’s the sugar that makes the fiscal medicine go down. Maybe so, but it carries a greater risk. Every voter who blames banks for the financial mess is a voter who is not blaming Gordon Brown’s government and is more relaxed about Labour’s return. For Osborne and for the country, this is the far greater danger.
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