Finding out just why the economy went pop is perhaps the most important question in British politics right now: our understanding of the past will shape the future. Blaming the bankers, while a great national sport, could be a national calamity in the long run. Sure, we can regulate them all the way to Singapore, but it won’t help us if the real cause was a mixture of Bank of England’s basic failure to regulate the supply of money; a wrong-headed faith in inflation targeting; the wrong (as opposed to not enough) banking regulations; and a structural failure of parliament to realise just what the Treasury was up to.
As I say in my column today, this will not be an attempt to blame everything on Gordon Brown. In many ways, Brown was just a particularly enthusiastic cheerleader for a false collective wisdom which a great many Conservative oppositions believed in too. The error of judgment was widely held. We have to identify the mistakes, not the people.
Our first cry for help starts today: what should the remit of our inquiry be?
Here’s my outline: all thoughts gratefully received.
1. Bank of England
a. Was inflation targeting the wrong measure? It worked in the 1990s, but was it rendered unreliable by the deflationary shock of globalisation?
b. Should it have paid attention to M3 or M4 supply of money, as the European Central Bank does? Should its remit have included asset prices?
c. Did globalisation undermine its ability to control the supply of money in the economy – i.e. could banks borrow directly from the mountain of savings in China?
d. It had a very tight remit, and most MPC members are picked by the government. Does the bank need more independence? Would this have helped anything?
e. Did it notice the asset bubble, and why didn’t it want to act?
f. How important was its claim that consumer spending (which sustained the UK economy in the dips) was not the result of the housing bubble?
a. How did its approach to debt, and the accountancy of debt, change after 1997?
b. Was HM Treasury right to incorporate some of the innovations of the City, such as securitisation (e.g. International Finance Facility) and off balance-sheet financing (PFI)?
c. Should it quantify other liabilities, such as public sector pensions?
3. What went wrong in the City
a. Did it have a reputation as the Peckham of the globalised world – i.e. were dirty tricks happening in London that weren’t in New York or Frankfurt?
b. Should the Bank of England have kept its regulatory role, or would it have been better to have a functioning FSA?
c. Was the problem light-touch regulation or wrong-touch regulation?
d. Did the Treasury have an incentive to look the other way, given that it was pocketing 40% of all bonuses?
a. What did the Treasury Select Committee miss? And is this because it is under-resourced, or the inevitable consquence of having government fix its membership?
b. Should we give up on parliamentary scrutiny and use a quango, such as the Office of Budget Responsibility that George Osborne is proposing?
5. Why did personal debt balloon in Britain? Was it a bling culture that needs to change, or just the inevitable consequence of excessively cheap money?