Britannia Radio

This sorry tale is a tale of inadequacy, indecision, incompetence and 
bemused detachment.   The Bank of England knew what was going on, 
wrote about it as an observer might do, but did nothing.

The structure of Bank-Financial Services Authority-Treasury had been 
created by Gordon Brown and he was very proud of it.  But it totally 
failed and was taken by surprise with Northern Rock.  Even that 
catastrophe did not wake them up, for there was a further year of 
inaction before the main financial tsunami swept in.

Even now there seems little inclination for an overhaul of this 
failed machinery.  His structure has been tested and found wanting so 
why can't the self-proclaimed world saviour DO something to fix it ?

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TELEGRAPH     23.12.08
1. Bank of England failed to act on 'crazy borrowing', deputy admits
The Bank of England knew "crazy borrowing" was taking place during 
the boom years but did not understand the severity of the problem 
before it led to the financial crisis, its deputy governor has admitted.

By Jon Swaine

Sir John Gieve said the Bank's policy-makers were well aware that 
dramatic rises in the price of houses and other assets were 
unsustainable, but still underestimated the danger this posed to the 
long-term health of the economy.

In a television interview Sir John, who sits on the interest rate-
setting Monetary Policy Committee, said that rate changes were a 
"blunt instrument" and admitted that the Bank's power to alter them 
was not enough to control the economy.
"We need to develop some new instruments, which sit somewhere between 
interest rates, which affect the whole economy... and individual 
supervision and regulation of individual banks," he told BBC Panorama.

He suggested the Bank could take on powers enjoyed by other central 
banks, which allow them to set aside money and reduce lending during 
good years on the assumption that boom times will eventually make way 
for a downturn.
"We need to develop something which bridges that gap and directly 
addresses the financial cycle and prevents the financial cycle and 
the credit cycle getting out of hand," he said.

The Conservatives have promised that they would create a new "debt 
responsibility mechanism" if they win the next election.

Under the Tory plans, the Bank would take a broader responsibility 
for debt and would have to write a write a regular open letter to the 
Financial Services Authority assessing risk in the market.

Sir John, who is charged with ensuring financial stability and was 
heavily criticised last year by the Treasury Select Committee for 
apparently failing to control the Northern Rock crisis, admitted that 
taxpayers may not get all their money back from the bail-out of the 
bank and other institutions.
He said: "There are some books - Northern Rock, Bradford & Bingley - 
which the taxpayer's now holding, which clearly have a level of 
defaults in them, [I'm] not quite sure how that will balance out 
against the residual of the capital.
"As for the more mainstream banks, yes I think they've got a 
commercial future and I'm sure that in time they will ... revive and 
start building and growing as commercial entities again."
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2. The Bank was only half-asleep at the job
Posted By: Edmund Conway

There is something remarkable about Sir John Gieve's acknowledgement 
that the Bank of England did not fully appreciate the scale or 
severity of the economic problems facing the economy for a number of 
reasons.

First, it is the first time either a UK policymaker, or indeed a 
central banker from Europe or the G7, has made such a frank 
admission. Indeed, the mistakes made by the Bank of England were 
mirrored throughout the rich world, so the Federal Reserve and 
European Central Bank are just as guilty as the UK policymakers.

Second is Sir John's acknowledgement that both Northern Rock and 
Bradford and Bingley will end up costing the taxpayer money. The 
promise at the time when they were nationalised was that they would 
most likely earn the Government a tidy profit - in other words, that 
their problems were purely temporary, and they merely needed some 
government help to bide them over. This was clearly not the case - 
though it seems more likely in the cases of Royal Bank of Scotland, 
HBOS and Lloyds TSB.

Third is the claim made by Sir John that interest rates would not 
have been the right tool to have dealt with the build-up of debt 
which fuelled the crisis. He is right that another tool is needed to 
prevent banks lending out too much to dodgy borrowers when times are 
good - what financial experts call a counter-cyclical regulatory 
policy. However, rates could and should have been lifted at various 
points over the past three or four years. This would have prevented 
the debt bubble from blowing up to such disproportionate levels in 
the first place. For instance, had the Monetary Policy Committee not 
have cut rates in August 2005 (remember, this is when Mervyn King was 
outvoted for the first time), the housing boom might not have taken 
off again in the following couple of years.

Interesting also (no pun intended) about the different ways in which 
interest rates are being positioned as yesterday's economic tool - 
not just Sir John's reference to a new, more financially-focused 
economic tool, but the fact that with rates at zero central banks are 
seeking out new ways to influence the economy. Rates will be back, of 
course, and will reassert themselves as the most important tool at 
policymakers' disposal, but not for a year or more.

One thing that might be missed, however, is the nuances of what Sir 
John is saying. Given that Sir John came in for much flak back in 
2007 for being on holiday at the time that the Northern Rock funding 
crisis emerged (in fact one week of that time off was for his 
mother's funeral) he might be lambasted for being asleep on the job. 
This is unfair.

He is not saying the Bank missed the seeds of the financial crisis - 
indeed, I can personally testify to that extent. The Bank's Financial 
Stability Report - its biannual examination of the financial system 
was warning around three years ago that a major gap was developing 
between what the banks were lending out in mortgages and the amount 
of deposits they had in store. This "funding gap" was what led to the 
eventual collapse of Northern Rock, the crippling of the UK banking 
system and, in short, the credit crunch.

The real problem was not that the Bank had missed something, but that 
it had missed the severity, the scale of the consequences, and the 
likelihood of this funding gap becoming a major economic - as opposed 
to a pure financial - crisis.

Had it identified just how important this issue would prove, it would 
no doubt have made more of it. Instead, it relegated talk of this 
funding gap to the appendices and the small-print of its FSR. The 
point here is not that the Bank, or indeed anyone else in the 
mainstream British financial institutions were unaware of the types 
risks that were building up. It is that they did not take account of 
the knock-on effects those risks would have on the wider economic 
system.

Quite what caused this complacency across the international economic 
policymaking institutions is not an easy question to answer, but, in 
the years to come, it is the one which will most occupy us, as we 
revisit how we monitor and assess the risks facing the economy
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3. Leading Article
Bank regulation is broken - so fix it

It is 15 months since the collapse of Northern Rock started the 
dominoes falling and they are still clattering down. Yesterday, a man 
with a ringside seat at that and subsequent banking crises, Sir John 
Gieve, the deputy governor of the Bank of England, offered his 
assessment of what caused the train wreck.

His remarks, in a BBC interview, were remarkably candid, but far from 
encouraging. The abiding impression left by Sir John was that the 
Bank, along with the other regulatory bodies - the Financial Services 
Authority (FSA) and the Treasury - were little more than bemused 
onlookers at the biggest financial crash in memory which has, in 
turn, spawned the deepest economic recession in a generation.

Sir John said the Bank was aware that "crazy borrowing" was taking 
place and that house and other asset prices were rising unsustainably 
as a consequence. The problem, according to the deputy governor, was 
that the Bank did not appreciate the sheer scale of the problem or 
the impact it would have. That really is not good enough. The Bank's 
own Financial Stability Report warned two years before the crisis 
broke that a dangerous funding gap was opening between what the banks 
were lending in mortgages and what they held on deposit from savers. 
It was this gap that brought Northern Rock down and subsequently led 
to the near-collapse of the entire banking sector. So why didn't the 
Bank act on the warning it had sounded? Why did the FSA, which is 
supposed to keep a close eye on day-to-day banking activity, not see 
the danger signs? Why wasn't the Treasury knocking their heads 
together? We have had no satisfactory answer to any of these 
questions, either from Sir John or anyone else.

It is now clear that the tripartite regulatory regime for British 
banks, created by Gordon Brown in 1997, has failed catastrophically 
at its first real test. Yet the structure is still in place, as are, 
to a great extent, the people. They may have behaved like rabbits in 
the headlamps, yet that does not, it seems, preclude them from 
remaining in charge. We have already argued for a new regulatory 
structure that is both quicker on its feet and carries more authority 
than the current cumbersome arrangement, which simply has too many 
hands on the wheel - as illustrated by the orgy of buck-passing.

Sir John calls for more sophisticated tools of economic management 
than the "blunt instrument" of interest rates. That makes sense - so 
why isn't it happening? It is bad enough that our financial 
regulators have shown themselves to be powerless to control events. 
That they appear in no hurry to take remedial action to ensure this 
cannot happen again is unacceptable