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Friday, 26 June 2009

Spitting dummies

Three days ago the executive haircut (c. Dilbert) in charge of the FSA warned Mervyn King, Governor of the Bank of England, that his proposals for the Bank to take charge of financial supervision could damage stability and lead to pointless turf wars.

At the time I nearly commented that the FSA has no track record and no experience, so why should anyone listen to Adair Turner, but my instincts told me this was just a an opening round of salvoes in the turf war.

The next day, Mr King spoke to the Treasury Select Committee. As well as dire warnings on the state of public finances. He told the Committee that the Bank of England was being asked to assume responsibility for maintaining the viability of the banking system, but without being given any regulatory powers.

The blow me, somebody in the governemnt got riled, because today we hear that Alistair Darling is planning a new Banking Act this year that will strengthen the role of the Financial Services Authority. So no draft legislation for a while but we can sense the hand of 10 Downing Street. After all, the governor had only recently said that he had had consulations from the Chancellor, albeit brief.

But to add insult to injury, the reason given for this unexpected move was that the Bank of England failed to warn adequately of the banking crisis. Excuse me. Not only did the Bank of England warn about the problems in the economy, particularly through their biannual Financial Stability review, but so did the IMF:

December 2003 IMF gives Brown borrowing warning
September 2005 IMF report Warning over £1 trillion mountain of debt
September 2005 Brown besieged over growth and borrowing plans
December 2005 IMF fires new warning over Britain's finances
December 2005 BOE FSR: ‘search for yield’ fuels highly leveraged and illiquid products
September 2006 IMF warns over UK property crash
December 2006 BOE FSR: A sharp turn in the credit cycle
October 2007 IMF report UK house market is 'heading for crash'
April 2008 IMF: UK vulnerable to US-style housing slump

The problem was that the Treasury (prop. G. Brown) wasn't listening. Now he has taken offence to the fact that the Conservatives have said they will put the Bank of England back in charge of the banking system. The Bank after all, has long dealt with the banks through the markets as well as a regulatory basis, and understands what is going on in the banking system. The FSA lacks the BoE's experience, hands on dealing in the bank funding market, international network via the BIS and its economic expertise. In fact the FSA has no background in economic policy, merely in market compliance. But Brown thinks King has got into bed with the Tories and is punishing him for doing so.

Putting the FSA in charge of systemic bank regulation is like installing your compliance officer as head of trading, or apointing the head of an NHS trust as a consultant surgeon. Only a fool would think it was a good idea. But unfortunately, we have a fool (and a spiteful one) running the country. This will run and run until we have a sensible government.

Last autumn, the Chancellor told the Governor of the Bank that he suspected him of passing on details of a plan to recapitalise the banks to George Osborne and David Cameron, who called publicly for such a move before the Government announced it. The Tories denied that they were briefed on the plan. Osborne meets King regularly. No one is playing politics. Labour is upset because King's criticism's are the same as the Conservatives, which are the same as those of any right thinking person.

1 comment:

Demetrius said...

I have never, ever, talked or contacted either King or Osborne, yet in 2003, 2005, 2006, and 2008 I was wittering on about the same kind of issues. Not just me, but a few better qualified to comment were saying much the same thing. If King and Osborne's views seem to be similar, perhaps it is entirely my fault.