The MT Diary

George Osborne's too-clever team; Lib Dems for the squeeze; regulators take the rap.

by Howard Davies
Last Updated: 31 Aug 2010

An old Simon and Garfunkel song, Slip Slidin' Away, has often come to mind this summer, as the UK economy began to run out of steam. Though the Bank of England won't yet use the 'r' word, it's on everyone's mind. The last time we were in recession was from 1989 to '92, when one could still refer to Simon and Garfunkel without seeming hopelessly vieux jeu.

Not many politicians on today's active service list were around then. Gordon Brown was shadow secretary for Trade & Industry in the last downturn, so has seen the closure of a factory or two. Alastair Darling was shadowing the Home Office, though - while John Hutton was not even an MP. Not much experience there of building bridges over troubled water.

On the Conservative side, David Cameron was a new recruit in the Conservative research department. George Osborne was still at Magdalen, reading history and editing Isis, not noted as a home of hard-hitting economic journalism. Alan Duncan, who, I can exclusively reveal, shadows John Hutton, was a self-employed consultant in the oil industry - a better job to have at the moment, one might think.

These are all people who have grown up in Mervyn King's 'Nice' decade. Nice, in this context, stands for non-inflationary and consistently expansionary. A useful acronym but one that confirms that Mervyn King is better off as a central banker than as an advertising copywriter.

Does this lack of experience matter? It does. The atmosphere becomes more febrile, and the search for wizard wheezes becomes intense. The Conservatives were quick off the mark with stamp duty ideas. On recent form, if you want to know what the Treasury is planning, Tory policy proposals are the first place to look.

Yet I wonder how wise Osborne's team has been. I can see that he might well be looking for a repeat of his inheritance tax and non-doms triumphs of last year, when he set the government careering off down some dangerous dark alleys. But he seems to be on the safest ground when he is kicking Gordon Brown around town, without offering too many hostages to fortune in the form of worked-out policy proposals of his own. His highly talented team need to be careful not to overreach themselves.

The Liberal Democrats, meanwhile, are out to an extended lunch. It's impossible to criticise Saint Vincent Cable these days, after his 'Stalin to Mr Bean' quip, but I struggle to discern an economic strategy. The party talks airily of tax cuts of £20bn, to be financed by cutting wasteful public expenditure - unspecified, of course. That is the last refuge of a politician clean out of ideas.

Will anyone buy this stuff? The Lib Dems' market seems to be falling away as rapidly as house prices. They now usually score around 17% in the polls. Given Nick Clegg's early form, with an odd stunt in parliament on the European referendum and boasts about his (up to 30) sexual conquests, they'll not be much missed in the election campaign, when they'll be badly squeezed.

Meanwhile, the credit crunch juggernaut rolls on, crushing balance sheets and profit-and-loss accounts in its way. Normally, extracting money from Scotsmen is in the 'blood out of a stone' category, but red ink pours out of the proud banks of Scotland, regal and common. There have been write-offs on a Wall Street scale, and no higher praise can be imagined.

But if we compare and contrast Wall Street, Lombard Street and the Royal Mile, there's one big difference over there. On the other side of the Atlantic, there have been many high-profile casualties among the top banks. The CEOs of Citibank, Merrill Lynch and Wachovia have all gone, as have many senior folk in Lehman Brothers and Morgan Stanley. Here, by contrast, the most high-profile casualties of the market turmoil have been in the Bank of England and the Financial Services Authority.

Do we really think the public authorities dreamt up these exciting new ways to lose money, and that the folk in charge of the banks had nothing to do with it? It's reminiscent of those cases in the US where drunks who crash cars sue the barmen who served them, or the police for failing to stop them in time. Perhaps we secretly yearn for the days when the Bank of England was mother hen to the City, and clearing bankers did not get up in the morning before checking with the Governor that the coast was clear.

In the long run, if we want to keep the style of regulation that we have - which has been conducive to the development of London as a wholesale market - the corollary must be the acceptance of personal responsibility when things go wrong. That's the way it works in New York.

In 2005 and 2006, when the crisis was cooking, risk was most mispriced and the worst imprudent deals were done, the Centre for the Study of Financial Innovation (a useful little think tank) asked bankers what their biggest worries were. The top concern in both years was 'too much regulation' - which is, in retrospect, about as daft an answer as could be imagined. (It seemed pretty silly to me at the time, too.) Maybe, if there is a silver lining to the dark clouds looming over us, it's that we may have a more sensible debate on regulation in the future.

Adair Turner, the new FSA chairman, has the weight needed to kick it off well.

- Howard Davies is the director of the London School of Economics.

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