On a day when we all await the opening of the markets tomorrow and
when no new policies have been announced at all - merely hinted at -
it seems pointless to rehearse the question of the likelihood of
total collapse this week.
Therefore I thought it might be of interest to rehearse a very
fundamental examination of the origins of the crisis which took place
yesterday on Conservative Home blog. The main contributors were
Richard North and som eone in the financial world calling himself
Rugfish. (precisely what he does is not stated but implied mainly in
his posting at 1804) . I intervened once or twice and I have
included these because my arguments provoked some of the most
striking replies!
Anyway I hope you find it helpful.
xxxxxxxxxxxx cs
Richard North takes it one stage further on his blog in an article
last night “They've known it all along!” on: http://
eureferendum.blogspot.com/
===================
A “DEBATE” on Conservative Home Blog 11.10.08 - The origins of the
crisis”
==========================
excerpts from noon!
Posted by: christina Speight | October 11, 2008 at 12:12
We are in a worse situation than anybody but Iceland and we'll find
it more difficult to get out of the chaos than anyone else because we
are grossly over-borrowed and ALL because Blair-Brown lost control of
credit.
This blame must be pinned on them otherwise they -and the country -
will never learn.
Of course individual policies especially global ones can be supported
but the lessons have got to be learned or it will be the guilty ones
who prosper - and I don't mean the banks - they operated in the
political economic climate Brown had set.
As for the Global element. London was the leading (or no 2!)
financial centre of the world. Global crises like this must, by
definition, have a British element and that British element is Brown.
.
------------------------------------------
Posted by: Richard North | October 11, 2008 at 12:47
Actually, if you look for it, both David Cameron and George Osborne
talk a lot of sense about the financial crisis. (look for Cameron's
detailed references to "capital adequacy" is his speech linked - it
is impressive.)
Their problem is that, when they do, no one - and especially the Tory
blogs - reports them. Unsuprisingly, they have learned that, if they
want to get publicity, they have to go for the low-grade "reality TV"
stuff.
It is ironic that we then hear complaints that they do not address
the serious subjects. They do - too few want to listen.
--------------------------------------
Just a correction here.
Brown didn't LOSE control, he gave away control of the banks by the
Bank of England which allowed banks to "invest" UK deposits in U.S.
sub-prime mortgages which would/could/should have otherwise at the
least been glanced at by Eddie George and Mervyn King before they got
in to it.
The fact the FSA didn't know what they were doing and obviously the
Bank of England itself couldn't actually understand the instruments
( nor could the bankers ), was all we need to know.
Brown's interference in banking regulation was clearly responsible
for that.
I can't imagine Ken Clarke, Lawson, or Lamont allowing UK deposits of
this magnitude being sent out of the country without asking where
they were going ?
Prudent judgement went out the UK window the day Brown stepped into
office so you can only imagine how much 11 years of these
"investments" add up to.
I won't recite the spending and the giving away of rebates, the gold
reserve sale etc as this should all add up to Brown's incompetence
log for PMQ's.
Maybe someone needs to actually ask some questions about all these
things in that place to make the point clearer ?
Additionally, it could help if Brown's "global plans" to right it,
were not paraded as an excuse for his own actions too, because saying
we ALL made the same mistake doesn't mean some could not have avoided
it IF they'd had good sound prudent financial judgement and the
regulation in place at the central banks.
If central banks do not regulate the high street banks to which they
loan money, then my cat could tell you there'd be a problem.
For me, I'd like to know what the banks were doing with taxpayers
money if I'd been Chancellor for 11 years and in that job on a wave
of support for my judgement. I'd be thinking I'd made a drastic
mistake now if I was him but of course I have a Phd in hindsight like
everyone else I guess.
------------------------------------
Posted by: Richard North | October 11, 2008 at 13:41
Rugfish - It wasn't "Brown's interference in banking regulation ..."
.
Read what your own leader David Cameron has to say on this.
Quite righly, in a long, intelligent passage on the Basel Accord
(spool down to his section on "Capital Adequacy"), he points up the
damage done to the system with this agreement, with its "pro-
cyclical" effects on liquidity.
You and many others need to get to grips with the fact that there has
been a slow, quiet revolution in banking regulation, triggered by
Basel II and implemented in the UK by EU law.
Further, the fact is that - as far as the UK and the other EU member
states go, banking regulation is now an exclusive competence of the
EU. It is no longer "Brown's" regulation but EU law, brought to you
by the same organisation with gave us the Common Fisheries Policy -
with similar devastating effects.
------------------------------------
| October 11, 2008 at 14:21
Rugfish your post @ 13.07 should get a wider audience! If the 'man in
the street' could read something composed as straightforwardly and
with as short paragraphs as your blog, it would educate them
mightily! And it would do everybody good if the man in the street DID
understand a bit more about finance and banking! even if only
superficially.
Gordon Brown is a political activist first and foremost and probably
has been since University, he is also a Tax specialist --- a
specialist in devising taxes! And I would say that his knowledge of
banking, finance and the free market would be influenced by his
political preferences!
----------------------------------
Posted by: Rugfish | October 11, 2008 at 14:44
Thanks for that Richard North | October 11, 2008 at 13:41 and I agree
with what you say in regards Basel, but my understanding is that
capital resources were simply replaced by the facility made available
to sell on debt within financial instruments.....thus turning
liabilities into asset resources ( capital ), which could then be
utilised on another loan (s).
If I'm wrong here then I stand corrected.
But if I'm right then of course 'someone' should have been informed
that was occuring, looked at it, weighed up the risk and the
consequences if the debt risk ratios were not evaluated correctly or
if their value depreciated in the event of a falling or incorrect value.
That would surely mean, given that the Bank of England had nothing to
do with it and the FSA didn't know such things things existed until
the backside fell out of it, that someone in the treasury was
responsible too otherwise why do we have government.
I can see Basel would certainly have given the impression great minds
had worked it all out, but clearly the flaw in the system wasn't
spotted by anyone and now we have the benfit of hindsight. Even so,
it may be forgiven but I don't think it should be excused as a
'global problem' especially.
If for instance Britain's BofE had not been taken out of the
equation, then surely it could have been asking questions about these
instruments even though Basel had agreed the actual liquidity ?
What happened was more the case of creative business and accounting
rather than the liquidity agreements under Basel I feel, and that
'should / could' have been down to 'inspection' and scrutiny by
competent prudent bankers with experience rather than 'no one' don't
you think ?
--------------------------------------
October 11, 2008 at 14:52
Just before lunch I spoke to a senior executive in a leading American
bank and his "take" on regulators was devastatingly harsh. He says he
despairs of ever being able to deal with A regulator, they
continually change and so no cooperation is possible. He attributes
this to low pay.
Now - and here I have a quibble with Richard North - Brown hived off
the FSA from the BoE and left a gaping hole through which the 'wide
boys' galloped. The EU is certainly the ultimate regulator but ikt is
the national regulators that do the donkey day-to-day work so one
can't just dismiss the whole shambles as being all the EU's fault
because it isn't. The EU appears to have far less comprehension of
what's going on than any of the major national governments.
Brown presided over - and gloried in - London being the world's prime
financial centre. So this makes London a prime cause of the "Global"
chaos.
It's Brown, Brown all the way as a cause of the GLOBAL crisis and why
on earth can't Cameron and his useless poodle say so for heaven's sake?
--------------------------------
Posted by: Rugfish | October 11, 2008 at 14:53
Oh, as for the EU sticking its nose in to our business I don't think
it helps.
Firstly, they fell prey to the same problem and they can't see their
own way out of it. More bureaucratic claptrappers in the UK we do not
need.
All we need is one guy with some commonsense, some experience and the
back up to do the job, and that man is sat in the Bank of England.
However it IS a global problem of course and that will take some
global agreement to put it right, but if Brown gets his way, we'll
have EU stamped on every bank note here and the Bank of England as
Europe's central bank and him the head of it all.
Actually, the first bit sounds quite good until you put him in charge
then it all turns to crap.
I think I'd at the moment I'd just like someone in there who can
actually stand and hold his hands up and say "I made a mistake and
I'm resigning unless someone has a revolver".
--------------------------------------
. Posted by: Richard North | October 11, 2008 at 15:22
Rugfish - I wish it was true when you say that "the flaw in the
system wasn't spotted by anyone and now we have the benfit of
hindsight."
It was spotted well in advance. David Cameron's speech was in March.
Through March and April, the Bank of England monetary committee was
warning of the impending disaster, on precisely the grounds set out
by DC, and others in the pages of the Financial Times were saying the
same thing.
As it turns out - and I am working on this now, for a post on my own
blog - the EU commission also knew about the problem well in advance
and agreed. Right now, it is now rushing through "emergency"
legislation to correct the problem.
Their problem though is that the EU legislative system is so
cumbersome that it has taken the commission nearly a year to re-write
the legislation and it will take 8-10 months to get it approved and
into force. Yet we can't change the law. We have to wait for the EU
to act.
Christina - the FSA is based on an EU model and, for reasons we
explain here, had to take over the regulatory functions from the BoE
after the latter had been made independent, in order to conform with
EU law.
There are separate strands to this issue - yes, the Treasury wanted
to emasculate the BoE, but it used EU law to achieve that (that is
often the case in modern government ... the officials play Brussels
off against Ministers - and vice versa - in order to get their way).
Brown's complicity helped. The sad fact is though, that the FSA is a
necessary and inescapable consequence of EU law.
--------------------------------
October 11, 2008 at 15:45
I;m sorry, but all this talk simultaneously about the "EU legislative
system is so cumbersome that it has taken the commission nearly a
year to re-write the legislation" combined with we can't do anything
because the EU rules say we can't seems ludicruous.
Any government of mettle (and opposition for that matter) would have
said "THIS is a question of the survival of our nation and since the
EU is incapable (being split between the Commission and the ECB) we
have to act unilaterally (followed of course by humbug phrases of
regret - blah, blah) " Every other player of significance does that
anyway.
What Richard is saying is rather like the Chamberlain government in
1940 saying " we can't fight Hitler because we have a peace pact with
him."
If we'd taken that attitude in 1940 we'd not be here to argue the
toss now.
-----------------------------
Posted by: Richard North | October 11, 2008 at 18:02
If you have read some of the threads on this blog alone, I've had to
battle to get some people even to accept that the EU is involved at all.
For sure, we could tell the EU to get stuffed, but, at the moment,
our political classes seem to be afflicted with selective blindness,
a trait shared by the media.
-------------------------
Posted by: Rugfish | October 11, 2008 at 18:04
Richard, I'm sorry if I sound like a pain in the neck on this but
it's as well to get these things straight. David Cameron may well
have made a speech about the cause in March 2008 but the event
actually happened in September 2007. I know because I was on the
sharp end of Libor rates drying up and hiked lender arrangement fees
coming from all lenders in order to attempt to make up their then
little known loss.
Libor lenders pulled out of the market completely then. Lender like
GMAC, Kensington, SALT, and many more, all dried up and couldn't lend
because the mortgage portfolio's couldn't be sold. Plus they were
having to buy some back. Kensington for instance lost £10 million in
12 weeks and had to sell. Southern Pacific ( Lehman Bros ) were just
starting to use Northern Rock as brokers with a new suite of offices
in the pipe and 2500 new staff. They couldn't do all that and the
market started on a downward spiral in September 2007.
David Cameron was able to talk about this in March this year and the
issue hadn't really become public knowledge then.
High lender fees are still applied to a lot of mortgages and that's
really the only way someone can get a half decent rate but the loan
to value ratio is so reduced it is almost impossible to arrange a
remortgage now because values have tumbled and new buyers need
massive deposits.
The thing is in a complete mess and the cause is down to selling on
financial instruments which included mortgage products which were
overrated. That once released capital to the markets and gave
products for investment purposes, hence the banks leaked depositors
funds away like sieves for 11 years and were not watched or prevented
because the Bank of England's remit was changed and the FSA were/are
clueless. ( The FSA CEO resigned over it ) but Gordon Brown blamed
the world.
-----------------------------------
Posted by: Richard North | October 11, 2008 at 18:14
Rugfish - you are quite right ... but Cameron has picked it up and
was aware it could happen again... it was already happening. Inter-
bank lending then was already beginning to seize up. And this was not
the only time Cameron mentioned it. He even tried it out on the Marr
show.
The EU commission actually picked it up the problem in October 2007 -
almost exactly a year ago, when it was raised at Ecofin. That set off
the process of revising the legislation.
Prof. Peter Spencer was warning about it last December and even Tim
Congdon wrote about it in April of this year - see here.
The problem has been well known and well understood for some time.
But it isn't just lending that has frozen – the regulatory system has
as well.
------------------------------
Posted by: Richard North | October 11, 2008 at 18:21
BTW - I'm not saying the legislation caused the problem. Its effect,
by being "pro-cyclical", has been to magnify the problems inherent in
the system and, because of the inflexibility, has hampered attempts
to deal with the problem.
-----------------------
Posted by: christina Speight | October 11, 2008 at 18:25
Richard - I accept that on paper the EU IS involved. N obody that
reads your blog can be in any doubt of that. BUT that's not the
question.
The question is twofold 'Since the EU stops our freedom of action are
we to go down bemoaning that fact or blithely act unilaterally and
sort out the mess afterwards (after all you and I will shed no tears
if our action wrecks the grandiose pretensions of the EU).
The second part of the question - and here I sense we will disagree -
is whether our own inadequacies in the brief given to the FSA. its
lines of communication and responsibility to the BoE and the
remuneration of its staff (see what one of the World's biggest banks
told me today ... somewhere above @1452)
The EU constructed its rules based on the ECB and its necessary
separation from any regulator and I cannot believe that some de facto
- if not de jure - tweaking on our part would have caused any upset
in Brussels. The point is our politicians have no stomach for the
fight to save the country
--------------------------
Posted by: Rugfish | October 11, 2008 at 18:44
We are both right then.
I wrote quite a sizeable sized email on the subject to DC last year
as I felt he would be able to get the message out to warn people. Vis
a vis the Libor problem and what it would entail for the industry and
the country in terms of lack of mortgages.
My imagination didn't stretch to other forms of credit and I didn't
know that British banks were wrapped up in the sub-prime market
either Except I knew HSBC laid off 800 of its U.S. staff last year so
I should have known too.
All I'm saying is that Brown actually took away the oversight of the
BofE.....( my guess ) is that it 'could' have spotted it earlier and
stemmed the problem as well as the size of losses had he not done
that, but who's to say whether it would !?
Also last year I think it could have been Paul Mason did a report or
perhaps some other, and spoke with a top ex-city financier/banker,
who said he had discussed the financial instruments with the BofE and
they looked completely vague and unaware of what he was talking about
because they didn't know what instruments were wrapped together.
( Out of touch ).
It comes back to Brown but I hear what you're saying of the Basel
agreement and you're right on that. I just think that agreement gave
a false sense of security that everything would be alright and Brown
( because he knew better ), would not know how banks operated. Thus
he would also be clueless when he went into office and concentrated
on taking the 'glory' and hiking taxes.....Hence, "I have eradicated
boom and bust forever".........
-,-,-,-,-,-,-,-,-,-,-,-,-
God my spelling is bad tonight !
-----------------------------------
Posted by: Richard North | October 11, 2008 at 18:59
Christina - you are right, and so am I! What we have seen is a
cultural thing, driven by the different regulatory ethos of European
countries, imported here via the EU.
I am not going to wax lyrical about the "old days", but as a former
enforcement officer, I saw the old and the new.
The "old" system was based on trust, experience and respect for
authority, exercised wisely and firmly. A great deal of reliance was
placed on the expertise, judgement and professionalism of the
regulator, who worked often to very loose guidlines and had a great
deal of latitude.
In the "new", they took the "trust" out of the system and replaced it
with "procedures". You stopped having to prove you were trustworthy.
As long as you could fill the right tick-boxes, you could get away
with anything.
Then they replaced judgement with "compliance officers" and changed
the ethos, ignoring the spririt of the law and working to the letter.
If it isn't "illegal", according to clever and expensive lawyers, it
became "permissible".
This is a complex and interesting issue. I've taken a sideways look
at it here, and there is much more to say about it.
Basically, across all walks of life, we've changed the regulatory
paradigm – from slaughterhouses to banks. It is a foreign import and
one that does not work for our culture.
---------------------------
Posted by: Richard North | October 11, 2008 at 19:12
Rugfish:
"... who ... had discussed the financial instruments with the BofE
and they looked completely vague and unaware of what he was talking
about because they didn't know what instruments were wrapped
together. ( Out of touch )."
Of course they were "out of touch". The BoE was no longer responsible
for enforcement Plus they had lost two thirds of their staff, shifted
to the FSA, so they neither had the means nor the need to keep "in
touch".
Osborne/Cameron are right when they say that authority must be
returned to the Bank, but that is easier said than done. First, we
have to put two fingers up to the EU and, before we do that, we have
to get wider recognition that the EU is a problem - not the only
problem, but a major part of it.
when no new policies have been announced at all - merely hinted at -
it seems pointless to rehearse the question of the likelihood of
total collapse this week.
Therefore I thought it might be of interest to rehearse a very
fundamental examination of the origins of the crisis which took place
yesterday on Conservative Home blog. The main contributors were
Richard North and som eone in the financial world calling himself
Rugfish. (precisely what he does is not stated but implied mainly in
his posting at 1804) . I intervened once or twice and I have
included these because my arguments provoked some of the most
striking replies!
Anyway I hope you find it helpful.
xxxxxxxxxxxx cs
Richard North takes it one stage further on his blog in an article
last night “They've known it all along!” on: http://
eureferendum.blogspot.com/
===================
A “DEBATE” on Conservative Home Blog 11.10.08 - The origins of the
crisis”
==========================
excerpts from noon!
Posted by: christina Speight | October 11, 2008 at 12:12
We are in a worse situation than anybody but Iceland and we'll find
it more difficult to get out of the chaos than anyone else because we
are grossly over-borrowed and ALL because Blair-Brown lost control of
credit.
This blame must be pinned on them otherwise they -and the country -
will never learn.
Of course individual policies especially global ones can be supported
but the lessons have got to be learned or it will be the guilty ones
who prosper - and I don't mean the banks - they operated in the
political economic climate Brown had set.
As for the Global element. London was the leading (or no 2!)
financial centre of the world. Global crises like this must, by
definition, have a British element and that British element is Brown.
.
------------------------------------------
Posted by: Richard North | October 11, 2008 at 12:47
Actually, if you look for it, both David Cameron and George Osborne
talk a lot of sense about the financial crisis. (look for Cameron's
detailed references to "capital adequacy" is his speech linked - it
is impressive.)
Their problem is that, when they do, no one - and especially the Tory
blogs - reports them. Unsuprisingly, they have learned that, if they
want to get publicity, they have to go for the low-grade "reality TV"
stuff.
It is ironic that we then hear complaints that they do not address
the serious subjects. They do - too few want to listen.
--------------------------------------
Just a correction here.
Brown didn't LOSE control, he gave away control of the banks by the
Bank of England which allowed banks to "invest" UK deposits in U.S.
sub-prime mortgages which would/could/should have otherwise at the
least been glanced at by Eddie George and Mervyn King before they got
in to it.
The fact the FSA didn't know what they were doing and obviously the
Bank of England itself couldn't actually understand the instruments
( nor could the bankers ), was all we need to know.
Brown's interference in banking regulation was clearly responsible
for that.
I can't imagine Ken Clarke, Lawson, or Lamont allowing UK deposits of
this magnitude being sent out of the country without asking where
they were going ?
Prudent judgement went out the UK window the day Brown stepped into
office so you can only imagine how much 11 years of these
"investments" add up to.
I won't recite the spending and the giving away of rebates, the gold
reserve sale etc as this should all add up to Brown's incompetence
log for PMQ's.
Maybe someone needs to actually ask some questions about all these
things in that place to make the point clearer ?
Additionally, it could help if Brown's "global plans" to right it,
were not paraded as an excuse for his own actions too, because saying
we ALL made the same mistake doesn't mean some could not have avoided
it IF they'd had good sound prudent financial judgement and the
regulation in place at the central banks.
If central banks do not regulate the high street banks to which they
loan money, then my cat could tell you there'd be a problem.
For me, I'd like to know what the banks were doing with taxpayers
money if I'd been Chancellor for 11 years and in that job on a wave
of support for my judgement. I'd be thinking I'd made a drastic
mistake now if I was him but of course I have a Phd in hindsight like
everyone else I guess.
------------------------------------
Posted by: Richard North | October 11, 2008 at 13:41
Rugfish - It wasn't "Brown's interference in banking regulation ..."
.
Read what your own leader David Cameron has to say on this.
Quite righly, in a long, intelligent passage on the Basel Accord
(spool down to his section on "Capital Adequacy"), he points up the
damage done to the system with this agreement, with its "pro-
cyclical" effects on liquidity.
You and many others need to get to grips with the fact that there has
been a slow, quiet revolution in banking regulation, triggered by
Basel II and implemented in the UK by EU law.
Further, the fact is that - as far as the UK and the other EU member
states go, banking regulation is now an exclusive competence of the
EU. It is no longer "Brown's" regulation but EU law, brought to you
by the same organisation with gave us the Common Fisheries Policy -
with similar devastating effects.
------------------------------------
| October 11, 2008 at 14:21
Rugfish your post @ 13.07 should get a wider audience! If the 'man in
the street' could read something composed as straightforwardly and
with as short paragraphs as your blog, it would educate them
mightily! And it would do everybody good if the man in the street DID
understand a bit more about finance and banking! even if only
superficially.
Gordon Brown is a political activist first and foremost and probably
has been since University, he is also a Tax specialist --- a
specialist in devising taxes! And I would say that his knowledge of
banking, finance and the free market would be influenced by his
political preferences!
----------------------------------
Posted by: Rugfish | October 11, 2008 at 14:44
Thanks for that Richard North | October 11, 2008 at 13:41 and I agree
with what you say in regards Basel, but my understanding is that
capital resources were simply replaced by the facility made available
to sell on debt within financial instruments.....thus turning
liabilities into asset resources ( capital ), which could then be
utilised on another loan (s).
If I'm wrong here then I stand corrected.
But if I'm right then of course 'someone' should have been informed
that was occuring, looked at it, weighed up the risk and the
consequences if the debt risk ratios were not evaluated correctly or
if their value depreciated in the event of a falling or incorrect value.
That would surely mean, given that the Bank of England had nothing to
do with it and the FSA didn't know such things things existed until
the backside fell out of it, that someone in the treasury was
responsible too otherwise why do we have government.
I can see Basel would certainly have given the impression great minds
had worked it all out, but clearly the flaw in the system wasn't
spotted by anyone and now we have the benfit of hindsight. Even so,
it may be forgiven but I don't think it should be excused as a
'global problem' especially.
If for instance Britain's BofE had not been taken out of the
equation, then surely it could have been asking questions about these
instruments even though Basel had agreed the actual liquidity ?
What happened was more the case of creative business and accounting
rather than the liquidity agreements under Basel I feel, and that
'should / could' have been down to 'inspection' and scrutiny by
competent prudent bankers with experience rather than 'no one' don't
you think ?
--------------------------------------
October 11, 2008 at 14:52
Just before lunch I spoke to a senior executive in a leading American
bank and his "take" on regulators was devastatingly harsh. He says he
despairs of ever being able to deal with A regulator, they
continually change and so no cooperation is possible. He attributes
this to low pay.
Now - and here I have a quibble with Richard North - Brown hived off
the FSA from the BoE and left a gaping hole through which the 'wide
boys' galloped. The EU is certainly the ultimate regulator but ikt is
the national regulators that do the donkey day-to-day work so one
can't just dismiss the whole shambles as being all the EU's fault
because it isn't. The EU appears to have far less comprehension of
what's going on than any of the major national governments.
Brown presided over - and gloried in - London being the world's prime
financial centre. So this makes London a prime cause of the "Global"
chaos.
It's Brown, Brown all the way as a cause of the GLOBAL crisis and why
on earth can't Cameron and his useless poodle say so for heaven's sake?
--------------------------------
Posted by: Rugfish | October 11, 2008 at 14:53
Oh, as for the EU sticking its nose in to our business I don't think
it helps.
Firstly, they fell prey to the same problem and they can't see their
own way out of it. More bureaucratic claptrappers in the UK we do not
need.
All we need is one guy with some commonsense, some experience and the
back up to do the job, and that man is sat in the Bank of England.
However it IS a global problem of course and that will take some
global agreement to put it right, but if Brown gets his way, we'll
have EU stamped on every bank note here and the Bank of England as
Europe's central bank and him the head of it all.
Actually, the first bit sounds quite good until you put him in charge
then it all turns to crap.
I think I'd at the moment I'd just like someone in there who can
actually stand and hold his hands up and say "I made a mistake and
I'm resigning unless someone has a revolver".
--------------------------------------
. Posted by: Richard North | October 11, 2008 at 15:22
Rugfish - I wish it was true when you say that "the flaw in the
system wasn't spotted by anyone and now we have the benfit of
hindsight."
It was spotted well in advance. David Cameron's speech was in March.
Through March and April, the Bank of England monetary committee was
warning of the impending disaster, on precisely the grounds set out
by DC, and others in the pages of the Financial Times were saying the
same thing.
As it turns out - and I am working on this now, for a post on my own
blog - the EU commission also knew about the problem well in advance
and agreed. Right now, it is now rushing through "emergency"
legislation to correct the problem.
Their problem though is that the EU legislative system is so
cumbersome that it has taken the commission nearly a year to re-write
the legislation and it will take 8-10 months to get it approved and
into force. Yet we can't change the law. We have to wait for the EU
to act.
Christina - the FSA is based on an EU model and, for reasons we
explain here, had to take over the regulatory functions from the BoE
after the latter had been made independent, in order to conform with
EU law.
There are separate strands to this issue - yes, the Treasury wanted
to emasculate the BoE, but it used EU law to achieve that (that is
often the case in modern government ... the officials play Brussels
off against Ministers - and vice versa - in order to get their way).
Brown's complicity helped. The sad fact is though, that the FSA is a
necessary and inescapable consequence of EU law.
--------------------------------
October 11, 2008 at 15:45
I;m sorry, but all this talk simultaneously about the "EU legislative
system is so cumbersome that it has taken the commission nearly a
year to re-write the legislation" combined with we can't do anything
because the EU rules say we can't seems ludicruous.
Any government of mettle (and opposition for that matter) would have
said "THIS is a question of the survival of our nation and since the
EU is incapable (being split between the Commission and the ECB) we
have to act unilaterally (followed of course by humbug phrases of
regret - blah, blah) " Every other player of significance does that
anyway.
What Richard is saying is rather like the Chamberlain government in
1940 saying " we can't fight Hitler because we have a peace pact with
him."
If we'd taken that attitude in 1940 we'd not be here to argue the
toss now.
-----------------------------
Posted by: Richard North | October 11, 2008 at 18:02
If you have read some of the threads on this blog alone, I've had to
battle to get some people even to accept that the EU is involved at all.
For sure, we could tell the EU to get stuffed, but, at the moment,
our political classes seem to be afflicted with selective blindness,
a trait shared by the media.
-------------------------
Posted by: Rugfish | October 11, 2008 at 18:04
Richard, I'm sorry if I sound like a pain in the neck on this but
it's as well to get these things straight. David Cameron may well
have made a speech about the cause in March 2008 but the event
actually happened in September 2007. I know because I was on the
sharp end of Libor rates drying up and hiked lender arrangement fees
coming from all lenders in order to attempt to make up their then
little known loss.
Libor lenders pulled out of the market completely then. Lender like
GMAC, Kensington, SALT, and many more, all dried up and couldn't lend
because the mortgage portfolio's couldn't be sold. Plus they were
having to buy some back. Kensington for instance lost £10 million in
12 weeks and had to sell. Southern Pacific ( Lehman Bros ) were just
starting to use Northern Rock as brokers with a new suite of offices
in the pipe and 2500 new staff. They couldn't do all that and the
market started on a downward spiral in September 2007.
David Cameron was able to talk about this in March this year and the
issue hadn't really become public knowledge then.
High lender fees are still applied to a lot of mortgages and that's
really the only way someone can get a half decent rate but the loan
to value ratio is so reduced it is almost impossible to arrange a
remortgage now because values have tumbled and new buyers need
massive deposits.
The thing is in a complete mess and the cause is down to selling on
financial instruments which included mortgage products which were
overrated. That once released capital to the markets and gave
products for investment purposes, hence the banks leaked depositors
funds away like sieves for 11 years and were not watched or prevented
because the Bank of England's remit was changed and the FSA were/are
clueless. ( The FSA CEO resigned over it ) but Gordon Brown blamed
the world.
-----------------------------------
Posted by: Richard North | October 11, 2008 at 18:14
Rugfish - you are quite right ... but Cameron has picked it up and
was aware it could happen again... it was already happening. Inter-
bank lending then was already beginning to seize up. And this was not
the only time Cameron mentioned it. He even tried it out on the Marr
show.
The EU commission actually picked it up the problem in October 2007 -
almost exactly a year ago, when it was raised at Ecofin. That set off
the process of revising the legislation.
Prof. Peter Spencer was warning about it last December and even Tim
Congdon wrote about it in April of this year - see here.
The problem has been well known and well understood for some time.
But it isn't just lending that has frozen – the regulatory system has
as well.
------------------------------
Posted by: Richard North | October 11, 2008 at 18:21
BTW - I'm not saying the legislation caused the problem. Its effect,
by being "pro-cyclical", has been to magnify the problems inherent in
the system and, because of the inflexibility, has hampered attempts
to deal with the problem.
-----------------------
Posted by: christina Speight | October 11, 2008 at 18:25
Richard - I accept that on paper the EU IS involved. N obody that
reads your blog can be in any doubt of that. BUT that's not the
question.
The question is twofold 'Since the EU stops our freedom of action are
we to go down bemoaning that fact or blithely act unilaterally and
sort out the mess afterwards (after all you and I will shed no tears
if our action wrecks the grandiose pretensions of the EU).
The second part of the question - and here I sense we will disagree -
is whether our own inadequacies in the brief given to the FSA. its
lines of communication and responsibility to the BoE and the
remuneration of its staff (see what one of the World's biggest banks
told me today ... somewhere above @1452)
The EU constructed its rules based on the ECB and its necessary
separation from any regulator and I cannot believe that some de facto
- if not de jure - tweaking on our part would have caused any upset
in Brussels. The point is our politicians have no stomach for the
fight to save the country
--------------------------
Posted by: Rugfish | October 11, 2008 at 18:44
We are both right then.
I wrote quite a sizeable sized email on the subject to DC last year
as I felt he would be able to get the message out to warn people. Vis
a vis the Libor problem and what it would entail for the industry and
the country in terms of lack of mortgages.
My imagination didn't stretch to other forms of credit and I didn't
know that British banks were wrapped up in the sub-prime market
either Except I knew HSBC laid off 800 of its U.S. staff last year so
I should have known too.
All I'm saying is that Brown actually took away the oversight of the
BofE.....( my guess ) is that it 'could' have spotted it earlier and
stemmed the problem as well as the size of losses had he not done
that, but who's to say whether it would !?
Also last year I think it could have been Paul Mason did a report or
perhaps some other, and spoke with a top ex-city financier/banker,
who said he had discussed the financial instruments with the BofE and
they looked completely vague and unaware of what he was talking about
because they didn't know what instruments were wrapped together.
( Out of touch ).
It comes back to Brown but I hear what you're saying of the Basel
agreement and you're right on that. I just think that agreement gave
a false sense of security that everything would be alright and Brown
( because he knew better ), would not know how banks operated. Thus
he would also be clueless when he went into office and concentrated
on taking the 'glory' and hiking taxes.....Hence, "I have eradicated
boom and bust forever".........
-,-,-,-,-,-,-,-,-,-,-,-,-
God my spelling is bad tonight !
-----------------------------------
Posted by: Richard North | October 11, 2008 at 18:59
Christina - you are right, and so am I! What we have seen is a
cultural thing, driven by the different regulatory ethos of European
countries, imported here via the EU.
I am not going to wax lyrical about the "old days", but as a former
enforcement officer, I saw the old and the new.
The "old" system was based on trust, experience and respect for
authority, exercised wisely and firmly. A great deal of reliance was
placed on the expertise, judgement and professionalism of the
regulator, who worked often to very loose guidlines and had a great
deal of latitude.
In the "new", they took the "trust" out of the system and replaced it
with "procedures". You stopped having to prove you were trustworthy.
As long as you could fill the right tick-boxes, you could get away
with anything.
Then they replaced judgement with "compliance officers" and changed
the ethos, ignoring the spririt of the law and working to the letter.
If it isn't "illegal", according to clever and expensive lawyers, it
became "permissible".
This is a complex and interesting issue. I've taken a sideways look
at it here, and there is much more to say about it.
Basically, across all walks of life, we've changed the regulatory
paradigm – from slaughterhouses to banks. It is a foreign import and
one that does not work for our culture.
---------------------------
Posted by: Richard North | October 11, 2008 at 19:12
Rugfish:
"... who ... had discussed the financial instruments with the BofE
and they looked completely vague and unaware of what he was talking
about because they didn't know what instruments were wrapped
together. ( Out of touch )."
Of course they were "out of touch". The BoE was no longer responsible
for enforcement Plus they had lost two thirds of their staff, shifted
to the FSA, so they neither had the means nor the need to keep "in
touch".
Osborne/Cameron are right when they say that authority must be
returned to the Bank, but that is easier said than done. First, we
have to put two fingers up to the EU and, before we do that, we have
to get wider recognition that the EU is a problem - not the only
problem, but a major part of it.
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