The Economy

In his Mansion house speech in June 2007, the Prime Minister actually congratulated the City on its global pre-eminence and looked ahead to furthering the objective of light-touch regulation. Today we can look at the wreckage of the failed tripartite regulatory system, the deterioration of our international competitiveness and a massive increase in the involvement of the state. The pound sterling was then riding high. Today the world has made a judgment on us via the performance of our currency, and it is damning. We have a chronic trade imbalance, and a recession that is severe and likely to endure for longer than in any other industrialised country. Of course, to a greater or lesser extent, no country is unaffected by the world downturn. We see in this crisis how globally interdependent we are. There was an unspoken mutual interest in the United States purchasing Chinese goods in exchange for China's accumulation of massive dollar reserves, but clearly that is now ending. It may be that as a result of the G20 meeting, there will be more agreement to share in the monitoring of financial activity internationally, and an enhancement of the funds available to the International Monetary Fund, but the fact that the Chinese floated the notion of a new international currency mechanism, which was not rejected out of hand by the US Treasury Secretary, suggests that the total dominance of the dollar since world war two is destined to end. We may be witnessing, in this credit crisis, the beginning of a hugely significant shift in the world order. Whatever the final communiqué of the G20 spells out, it will still leave this country in the midst of a terrible hangover of excessive public and private debt, which will cripple us for years to come. The Prime Minister, then Chancellor of the Exchequer, gave the Bank of England a core remit of keeping inflation low. In 2003, under the guise of trying to achieve pan-European measurement comparability, house prices were excluded from the measurement of inflation. That was a tragic error, because on the back of a substantial rise in money supply, interest rates were kept too low for the credit free-for-all that ensued and the huge resulting increase in private debt. Northern Rock could offer 125 per cent. mortgages. With cheap Asian goods flooding the country, inflation, as measured by the Bank of England, looked unrealistically low. That is something that the Governor of the Bank of England now regrets. Given the importance of home ownership in this country, and our traditional investment focus on residential and commercial property, it should now be a matter of the utmost importance that the Bank of England reviews how housing costs can be assessed for inflation target purposes, and that the macro-prudential role of the Bank of England incorporates consideration of asset prices. Never ever again can we suffer a repeat performance of the policy that led to an asset bubble being effectively excluded from interest rate policy. The transfer of banking supervision to the Financial Services Authority was quite simply wrong. Individuals of the highest calibre in the Bank of England had monitored banks' activities for generations. Of course, no regulatory system has been or ever will be perfect, but I have often heard how much that accumulated wisdom and experience was valued, giving the Bank of England a credibility in the world that is now much diminished. We are entitled to look at how our tripartite system failed us, and so compounded the problems that arose from unfettered credit and asset expansion across the world. That has been well spelled out in the Turner review. We know that officials in the Treasury, the FSA and the Bank of England were aware of growing imbalances, but none took responsive action. There was a clear failure to recognise the extent of the systemic nature of the unfolding failure. The inability to act was a fundamental flaw in the system—a system that was of the Prime Minister's creation. We understand that, incredibly, the three principals hardly ever met formally; that is woefully characteristic. To announce a policy, but to then be incapable of dealing with its implementation, is a hallmark of the functional incompetence of this Government. We need carefully to consider how, in future, macro-prudential regulation is to be managed. Looking ahead, I believe that we have to revive the central role of the Bank of England. What the public rightly demand is that this terrible crisis is not repeated and that at the very heart of our regulatory system of financial services is a clear pre-emptive remit. Its ability to assess and dissect the continuing pattern of change which invariably arises in the financial sector, to ensure financial stability and to understand and interpret the market place is for the avoidance of both systemic and excessive individual corporate risk. We need a 21st century version of the Governor's eyebrow—a focus and influence that the FSA will simply never be able to achieve. Undoubtedly the individual actions of senior bankers have been frankly disgraceful, whether at Lehman Brothers, Merrill Lynch—I worked at both—or RBS. I think that some clearer sanctions should be in place to deal with such individuals. If somebody is guilty of medical malpractice they are struck off by the BMA; indeed, the same approach applies to other professions. In theory, the FSA has the power to apply financial, civil and criminal sanctions, but I am not convinced that it is the right body to do so. There is a danger that in the current atmosphere either a lynch mob mentality descends or ultimately that new and counterproductive regulations seek to satisfy public outrage. To pre-empt those outcomes, I suggest that a new body be created with the express purpose of dealing with such individuals, so that next time some master of the universe decides to agree to market a new product that he cannot understand, he might first pause to consider the consequences. We have seen a whole series of bank mergers in this country over the years, hastened by a number of dramatic shotgun weddings of late. Vast banks are difficult to regulate and their importance means that we have seen what is often described as moral hazard, including the nationalisation of risk. Of course we are where we are, and our most important challenge is to re-liquify our banking system and return it to profitability and to the private sector, but if there is one lesson we need to learn about this, it is the need to open up banks to effective competition. If that means breaking up in due course some of these mammoth institutions, so be it. The present structure is both oligopolistic and unhealthy. The G20 working group has quite rightly advocated convergence towards a single set of high quality accounting standards. It is truly astonishing that credit agencies have been able to triple A ratings in the most cavalier fashion, perhaps in part due to conflicts of commercial interest, with all the consequences for investors in Icelandic and other banks. Also, if we are going to have more common accounting standards, we are entitled to ask for improved accounting methods among the practitioners, who—to put it mildly—have not challenged some outlandish valuations. We have seen an almost neurotic flow of Treasury announcements and misjudgments such as the VAT cut. The decline in our competitiveness has led the people of this country to a view of the future that is not optimistic. For everything that the Prime Minister is doing is about political survival; it is compounding the strength of the recession into which his catastrophic economic mismanagement has led us. The G20 will not save this Government and neither will the Budget. Frankly, the only thing that will save this country now is the return of a Conservative Government to do what Conservative Governments have had to do time and time again throughout history—unpick the very shambles they have inherited.