First published in the Telegraph on 22 October 2009
We are letting this crisis go to waste. This is not a new sentiment, but when coming from the lips of the Governor of the Bank of England, it carries a certain added weight. If Mervyn King didn’t put it quite as starkly in his speech on Tuesday night, it was only because, as a central banker, he is duty bound to talk as gnomically and elliptically as possible. But the undercurrent ran through his words like red ink in water.
Mr King raised two issues: first, we are missing an opportunity to overhaul the structure of the banking system; second, we have yet to work out how we will run our economy in the future. It is the former point – which involved a demand that Britain’s biggest banks should be split up – that has dominated the headlines. Arguably, though, it is the latter that is the more compelling and important. Of this, more later.
The Governor has once before addressed the size of our financial institutions. This summer, he called for a break-up of the largest banks, warning that those which were “too big to fail” were, by extension, too big. The essence of his argument is as follows: banks provide an important utility function for an economy – helping families and businesses prepare for the future by lending them money and giving them a place to save. However, they also get up to rather more risky activities, taking major positions in everything from currencies to – in the case of the most recent bubble – property-related assets, gambles which can occasionally explode.
So, the argument goes, casino and utility should be separated. That this is a problem, and that something needs to be done about it, is hardly new. Such was the idea that underpinned America’s Glass-Steagall Act of 1933, which split investment banks from their main street counterparts, until it was repealed during the Clinton administration. It was one of the key issues raised in a report written for Gordon Brown by the industry expert Don Cruickshank, back in 2000 – and conveniently ignored.
But – and this may come as a surprise – most of the people who matter have also bought into it: Alistair Darling, the Chancellor, and Lord Turner, chairman of the Financial Services Authority, to name but two. The difference is in the way they intend to bring about the separation.
A friend tells me that if you are determined to break up with your girlfriend, there is only one way to do it. Rather than simply taking her aside and explaining that “it isn’t you, it’s me”, you deploy a more underhand technique. You stop returning calls; you stop treating her or giving her gifts; you act surly. In short, you make yourself as unpleasant as possible. All being well, she will soon take it upon herself to do the breaking up.
Whereas Mervyn King appears to believe in an honest, upfront approach, the Treasury seems to favour the manipulative method. Its White Paper on financial reform, produced this year, may not endorse an immediate break-up of banks, but it attempts to do everything possible – in terms of draconian rules on capital and leverage requirements – to encourage them to undertake the dismemberment themselves.
This lacks intellectual honesty. And, indeed, it is impossible to know whether it will succeed – just as, for some girls, a boyfriend’s new hard-to-get attitude may prove irresistible. But, in the eyes of the Treasury, it is seen as the least worst option.
Which side you take depends mostly on whether you believe the warnings that an instant split-up of the banks would spark another crisis. That is what the industry itself is warning, but then that’s what you would expect.
Such questions, important as they are, pale in comparison with the more profound point at the end of Mr King’s speech: that in future, the way economies are managed will be almost unrecognisable from today’s model. In modern Britain, it is easy to find out what the central bank is up to in its running of the economy – you just look at where inflation is and where interest rates sit. The future, the Governor implied, will be far more opaque: the Bank will use not just interest rates, but a diverse range of levers to control the economy and the behaviour of the financial system.
Shifts in the nature of monetary policy happen very rarely: one occurred in the 1970s, when we moved from Keynesian to monetarist policies; another in 1992, when Black Wednesday forced us to start targeting inflation rather than exchange rates. It is happening again today.
As yet, though, we haven’t worked out either the thing we’re supposed to be targeting (rather than simple inflation), or indeed the tools with which to do it (although the Bank is due to publish a paper on this today or tomorrow). This is what I find rather more disturbing.
In the case of the bankers, most of us are agreed on the direction of travel, if not the speed. In the case of the wider economy, it is not merely that we are up the creek without a paddle; we are also blindfolded with no map.