Britannia Radio

The Bank of England is clearly not happy - and in paricular not happy 
with Gordon Brown.   The Governor thinks the regulatory system set up 
by Brown is a disaster.  The Bank itself in its quarterly report 
warns of a 'debt deflation trap where "families find themselves
pushed further and further into the red every month "

Not a bright prospect
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TELEGRAPH 18.3.09
King in swipe at FSA and Brown
Gordon Brown's financial regulation system has failed, the Bank of 
England Governor has declared, in an attack on the institutions which 
oversee the City.

By Edmund Conway, Economics Editor

In comments just hours before Lord Turner presents his report on the 
regulatory system, Mervyn King said that all regulatory systems 
around the world, including the UK's light-touch programme, failed to 
"prevent the accumulation of risks that finally produced the crisis."

In a swipe at the Financial Services Authority, which tightened 
regulations on those opening new current and savings accounts but did 
not foresee the collapse of Northern Rock, Mr King added: "A system 
in which it is easier for a large bank to expand and then destroy its 
balance sheet than for an individual to open a bank account has lost 
focus."

And in what may be seen as a further attack on the Prime Minister, Mr 
King also urged him to lay out how the Government planned to pay back 
the mountain of debt it was taking on following its double-headed 
bail-out of the economy and the banking system. The Bank Governor's 
speech to bankers at the Mansion House in London on Tuesday night 
will be taken as another sign that the City must now brace itself for 
a host of new heavy-handed regulations aimed at preventing future 
crises from taking place.

Lord Turner is expected today to recommend a broad-based overhaul of 
financial regulation, imposing tighter rules on companies and 
abandoning the principles-based system championed by Mr Brown.

"Banks are dangerous institutions," said Mr King. "They borrow short 
and lend long. They create liabilities which promise to be liquid and 
hold few liquid assets themselves."

However, regulators failed to devise a system which properly assessed 
the risks posed by the financial system on the wider economy, he added.
"To correct these types of market failure will require a system of 
regulation that effectively marries the 'top down' assessment of the 
risks to the system as a whole to the 'bottom up' supervision of 
individual institutions. The present system has not delivered that."

However, although in favour of tighter regulation, Mr King warned 
that had any regulator attempted to clamp down on bank growth in 
recent years, it would have been lambasted for apparently attacking 
success.

Mr King said the Bank needed to be given an extra tool alongside 
interest rates to monitor and influence the financial system - so-
called counter-cyclical rules on how banks treat their balance 
sheets. However, he did not expand on what these tools would constitute.

Chancellor Alistair Darling indicated at the G20 summit of finance 
ministers at the weekend that he would clamp down more heavily on 
hedge funds and the shadow banking system in the coming years, and 
his fellow ministers pledged to increase regulation throughout the 
developed world. However, Mr King said that ministers should avoid 
rushing into imposing new rules too quickly.

"Whatever exuberance - rational or irrational - existed has been 
destroyed by the crisis. So we have time to reflect before we decide 
on the shape of a new regulatory system," he said.

He said that the Government must now lay out its "exit strategy" for 
the crisis, explaining how it intends to pay back the hundreds of 
billions of pounds worth of debt it has incurred, saying: "there 
needs to be a credible plan for consolidation of deficits and debt in 
the future contingent on the state of the economy."

He added that the Bank would also lay out its plan for reversing the 
asset purchases it has taken on through quantitative easing.
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2. Britain showing signs of heading towards 1930s-style depression, 
says Bank
Britain is showing signs of sliding towards a 1930s-style depression, 
the Bank of England says today for the first time.

By Edmund Conway, Economics Editor

The country is displaying early symptoms of being trapped in a so-
called "debt deflation trap" where families find themselves pushed 
further and further into the red every month, according to a Bank 
report published today.

The stark warning will cause serious concerns, since it was this 
combination of falling prices and soaring debt burdens that plagued 
the US in the 1930s.

The Bank is using its Quarterly Bulletin to highlight the threat 
posed to the economy by deflation - where prices fall each year 
rather than rise.

Although inflation is currently in positive territory, it is expected 
to become negative in the coming months.

The Bank is worried that this may combine with high levels of 
indebtedness to squeeze families further.

It says that families with high debts could fall prey to the debt 
deflation trap. This means that the cost of their debts, which are 
fixed, would rise compared to average prices throughout the economy. 
While inflation erodes debts, deflation makes them relatively higher.

The Bank's paper suggests that Britain is particularly at risk 
because there is a high proportion of families with significant 
levels of debt, and many of them are on fixed mortgage rate, which 
means they will not benefit from rate cuts.

Britons' total personal debt - the amount owed on mortgages, loans 
and credit cards - is, at £1.46 trillion, more than the value of what 
the country produces in a year.

Total personal debt has risen by 165 per cent since 1997 and each 
household now owes an average of about £60,000.

The Conservatives claim this is the highest personal debt level in 
the world.
The Bank's paper also says that consumers were suffering as banks 
keep the cost of borrowing high, despite Government attempts to get 
them lending again.

Alistair Darling, the Chancellor, and fellow finance ministers used 
their pre-G20 meeting this weekend to warn that more drastic action 
was necessary to help bring the world economy back from the brink of 
a possible repeat of the 1930s.

The Bank's report puts pressure on Gordon Brown, who this weekend 
faced further calls to apologise for the recession, to secure 
agreement on an effective international rescue strategy when he hosts 
the G20 leaders at a summit in London at the start of April.

It comes as figures this week are expected to show the number of 
people unemployed will reach the two million mark.

The Bank's report says: "This configuration of falling asset prices 
and depressed economic conditions in the face of an adverse demand 
shock is consistent with recent and prospective macroeconomic 
developments in the United Kingdom and internationally".

It helps explain why it took such dramatic action earlier this month 
to pump extra cash into the economy.

The bank slashed interest rates to just above zero and pledged to 
create £150 billion worth of cash with which to buy up government and 
corporate debt.

This so-called quantitative easing is regarded as a radical measure 
to help prevent a repeat of the conditions associated with the Great 
Depression.
Many experts believe that the US authorities' initial reluctance in 
the 1930s even to cut interest rates was partly responsible for 
causing the worst economic slump in Western history.

The Chancellor acknowledged at the G20 meeting that the economic 
situation was "grave" but pledged not to allow a repeat of the 
Depression years. The ministers promised to pump more cash into their 
economies if necessary in the next few months.

However, some have expressed concern that the meeting failed in its 
aspiration to reach a specific agreement on the amount of cash 
countries need to spend in the coming year. Others have warned that 
it does not set a clear enough agenda for the much-anticipated full 
G20 summit on April 2.

Some speculate that the Prime Minister may use the G20 as a 
justification for a series of further tax cuts and spending increases 
in the Budget next month, though many economists have warned that 
despite the scale of the recession faced by the UK the Treasury has 
little capacity to borrow more.

Mr Darling has signalled that the meeting must not be allowed to 
mirror a 1933 summit in London which failed to halt the Great 
Depression. He said failure to agree co-ordinated action then meant 
that the Depression continued for years when it "need not have done so".

Writing in The Sunday Telegraph George Osborne, the Shadow 
Chancellor, said Mr Brown must use the G20 as "the moment to send the 
clearest of signals that, unlike in the 1930s, this banking crisis 
will not send the world spinning into a protectionist spiral."

He said that "ministerial promises" had failed to deliver any real 
benefits to struggling home owners or desperate businesses