Britannia Radio

Don’t be put off by the FT’s headline - the daft sub-editors must be  
crazier than I thought!  What it should read is “Commercial banks  
must once again be separated from risky investment banks”  or  
possibly  “Your bank must play by tight rules; risk-taking financiers  
must bear the risks themselves”

It is long-overdue and it is lunatic that the rule should ever have  
lapsed.  I have recommended it here before but Nigel Lawson spells it  
out so clearly here.
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Meanwhile the sleaze in parliament [which I have hitherto left to the  
media)  has spilled over into the G20 hyping.   Boris Johnson traces  
today two foreign references to the issue - - -

“ ...as the G20 leaders prepare to arrive in London to consider the  
merits of yet more state spending and borrowing, the news could not  
have come at a more embarrassing time for Gordon Brown. When Barack  
Obama checks the New York Times website this morning, he will see  
that the Home Secretary has ingeniously managed to break the rules of  
politics, by getting embroiled in a scandal that is both sexual and  
financial at the same time. "British Minister Promises to Pay for  
Porn" is the headline, which surely deserves a prize as the most  
ludicrous news story ever generated by a Home Secretary and holder of  
one of the great offices of state.

In Germany, where Chancellor Angela Merkel is already having doubts  
about the wisdom of trying to boost the global economy with more  
borrowing and more spending, the news has broken like a thunderclap.  
The German press rejoices in the hilarious "Porno-Affäre" of "die  
britische Innenministerin", and Chancellor Merkel will arrive in  
London with a powerful argument in her quiver.”

xxxxxxxxxxxxxx cs
===========================
FINANCIAL TIMES                31.3.09
  Capitalism needs a revived Glass-Steagall
        By Nigel Lawson

That capitalism has been shown, in practice, to be endemically flawed  
should come as no surprise. That is the nature of mankind. What is  
more important is that history, notably the history of the world  
after the second world war, has demonstrated beyond dispute that  
every other system of economic organisation is far worse. So  
capitalism both deserves to survive, and will survive, just as it did  
after the even greater economic disaster of the 1930s.

But there is another lesson of the 1930s. It is that although  
capitalism survives it is capable of retreating behind a  
protectionist shell, at great cost to global prosperity. This is a  
real danger today. The “Buy American” provisions in President Barack  
Obama’s fiscal boost are an ominous sign. The impulse to resort to  
protection when economic hardship suddenly strikes is, of course,  
always present. But there is today a dangerous new factor which  
magnifies the threat. The leaders of some of America’s largest  
corporations have already joined up with organised labour (the AFL- 
CIO) to urge Congress to impose tariffs against imports from  
countries (such as China, for example) which are understandably  
unwilling to bear the heavy costs of an obligation to curb their  
carbon dioxide emissions.  [Who can blame them for not wanting to  
waste theirmoney? -cs] There is considerable support in Europe,  
notably within the European Commission and in France, for a similar  
approach.

It is essential, both in the US and in Europe, that this is  
resolutely rejected. The first and most important requirement for the  
future of capitalism is the preservation of globalisation, and the  
massive benefits it confers on mankind, in particular in the  
developing world. There are, inevitably, costs of globalisation; but  
they are hugely outweighed by the benefits. So resistance to  
protection, whatever arguments may be used in its favour, must be  
rigorously maintained. Nor is this an exclusively economic argument.  
It is a moral imperative, as well. Moreover, a trade war with China  
could well have unpredictable, and potentially highly damaging,  
political consequences.

But will capitalism need to change in the future? Again, the lesson  
of history is that the answer is “not really”. The economic cycle is  
endemic and inescapable, and everyone (with the exception of prime  
minister Gordon Brown) has always known this. What the current crisis  
does underline, however, is that a cyclical downturn associated with  
a collapse of the banking system is by an order of magnitude worse  
than a normal cyclical downturn.

So there does need to be a change to the banking system. In a  
nutshell, we need to return, in all major financial centres, to the  
separation of commercial banking from investment banking that was  
enforced in the US under the 1933 Glass-Steagall Act, until it was  
repealed by President Bill Clinton  [The number of dire things HE is  
responsible for makes a daunting list -cs] in the 1990s. This is all  
the more important since we now live in an age in which the  
acquisition of wealth appears to count for more than reputation.

Achieving this will not be easy or popular in banking circles, but it  
can be done. We have time to get it right: this is not firefighting,  
but fireproofing.
The overriding reason why this separation is essential is  
straightforward. It is only a commercial banking crisis that poses a  
systemic risk and can lead to the sort of mess we face today. It is  
folly to allow core banks to be in a position where they can be  
brought down by exciting but highly risky investment banking  
activities. But the idea that this can be prevented by judicious  
regulation of investment banking activities is a chimaera. In the  
real world, that is not possible: either the investment bankers will  
outsmart the regulators, or the regulators will respond with damaging  
overkill.

Thus investment banks should be left to their own creative devices,  
and subject essentially only to the discipline of the marketplace.  
This leaves a much more limited, and practicable, but still  
absolutely essential, role for bank supervision and regulation:  
namely, to ensure that the core commercial banking system is  
thoroughly sound and adequately capitalised at all times.

It is worth adding that it is the capital adequacy regime, and not  
primarily interest rate policy, which needs to be responsive to asset- 
price bubbles.
What else (other than the maintenance of what passes for world peace)  
is needed to ensure that capitalism survives (as it will) and  
prospers (as it should)?

There is a danger in many parts of the world, and certainly in the  
UK, to imagine that since this is a global problem it requires a  
global solution, so the overriding need is for a global agreement.  
This may sound statesmanlike, but it is in fact a dangerous delusion.  
The overriding need is for the authorities in each country to put  
their own house in order.

The threat from terrorism is an instructive parallel. Terrorism is  
indeed a global problem, and international co-operation is clearly  
desirable. But that in no way diminishes the overriding duty of  
national governments to do what is necessary to protect their own  
people.

The same applies to financial regulation. As the Basel II bank  
capital rules clearly showed, international agreement is slow in  
arriving and, when it does arrive, it is likely to prove inadequate.  
As far as the UK is concerned, Mr Brown’s decision, as chancellor, to  
scrap the strengthened system of bank supervision I put in place in  
1987 and replace it with a system that has proved largely  
dysfunctional was not very clever. Without waiting for global  
agreement, however desirable that may be, we need to, and can, do a  
great deal better.
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The writer was the UK’s chancellor of the exchequer from 1983 to 1989