Today’s Treasury Select Committee report is a breath of fresh air when all around is muddle, compromise and insouciance. The Committee is right to conclude that the Government is rushing to endorse the current regulatory system (which of course was set in place by Gordon Brown in 1997), with insignificant adjustments, rather than taking as its main goal exploring the fundamental reforms necessary to prevent any return to reckless dealmaking and uncontrolled use of toxic derivatives. But the Committee is wrong to presume that the Government ever intended any such radical reforms. The evidence to the contrary stares it in the face. The Government (alias Gordon Brown) sought every conceivable device for six months to avoid having to nationalise Northern Rock. It pushed Lloydes and HBOS into an ill-fated merger precisely again to avoid having to take HBOS into public ownership, even to the extent of nearly wrecking prospects for Lloyds. When Northern Rock, Bradford and Bingley, Lloyds Group, and RBS all finally ended up, despite all the Government’s efforts, in the hands of the State, the Government made it crystal clear that, so far from using the opportunity to reform the banks, its sole objective was to return them to the private sector ASAP. It is not a story of missed opportunities. It is a story of rescuing the banks on their terms, at humongous cost, unconditionally. Not only has the State not taken over the banks in any meaningful sense, the banks have in reality taken over the State.

New Labour’s policy on bank regulation has been to call for higher capital requirements, but to rule out any other reforms such as putting a cap on bankers’ pay or bonuses (which President Obama has done), breaking up the City’s biggest institutions, separating off the riskier elements in investment banking, and either banning or strictly controlling the toxic credit derivatives which were at the heart of the crisis. There are three flaws with this approach. First, it all depends exactly what revised capital ratios are chosen. Adair Turner, the new chair of FSA, has referred to making banks hold “3 or 5 or 6 times” as much capital to support their trading operations, which suggests the authorities have no idea what the appropriate level should be. It needs to be very high so that the capital safety net can withstand any imaginable fall – Barclays for example, launching its BarCap subsidiary, expects its capital deficit at the end of next year to be £12.8bn, so for Barclays it should be at least £13bn. Second, it is a big mistake to play financial golf with just one club, especially when the effectiveness of that club is so uncertain. And third the insouciant dismissal of all other regulatory instruments is crazy when the costs of getting it wrong next time could again be, like this time, £1.5 trillion – equal to Britain’s entire GDP.
The Tories’ bank regulation policy is no better, probably even feebler. Earlier Osborne talked about breaking up banks that were too big to fail. Now his so-called White Paper says this issue will merely be subject to review, which at this stage in the electoral cycle means it will almost certainly be kicked into the long grass if the Tories win. The only issue the Tories have made an enormous fuss about is switching the FSA’s powers to the Bank of England, when what of course matters is not who has the powers, but what exactly thos powers, or any new powers, are.
So after nearly bringing the whole house down, both parties are doing next to nothing to punish the banks or to make the world safer in future. Even the fundamental condition on which bail-out was based – that they would maintain lending to businesses and home-owners – has been allowed to lapse. RBS and Lloyds Banking Group were forced to commit to lend £25bn and £14bn respectively in order to offload £585bn of their toxic assets into the taxpayer-funded asset protection scheme, yet they have reneged with impunity. This category of lending (M4 money supply) which had an annual rate of growth in February 2007 (before the crunch) of 19.8% is now virtually flat at 0.2% in May this year (the latest figure). The policy never was to save the real economy, it was to save the banks and thus neo-liberal capitalism on which New Labour’s State depended.

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