There’s no doubt that Mr King has put a bomb under the ‘don’t rock the boat’ attitude of the Treasury and the government. They’ve been forced to think and to justify. The justifications so far - as one might expect where Brown is involved - contain more bluster and invective than convincing argument.
Part of the government’s response is for Darling to say that the Government would prop up the economy until recovery was established, and not act to bring down soaring borrowing levels until the recession was over. This is like feeding more heroin to a drug attic fatally and permanently harming the patient. The markets reacted, sensing a speculative opportunity by boosting the Pound against both the dollar and the euro (to $1,662 and €1.1081) . The immediate effect of this is to make British exports less competirive which will be music to the ears of the anxious French, And A British company which a week ago received 93.4p from exports to Europe finds itself down to 90.2 p today. You;d have thought that Darling might have been more aware of of the need to think before opening his mouth.
All this reminds me of a film I saw as a child - The Ghost Train". When the local stationmaster is asked about the approaching steam train blasting non-stop on its whistle on a stormy night - he replies "Where do 'ee come from? Where do 'ee go? Nobody knows - not even the driver"
Christina
TELEGRAPH 22.10.09
1. Mervyn King is right - the economy is changing and we're blindfolded, without a map
Even Mervyn King admits we have yet to work out how we will run our economy in the future, says Edmund Conway.
By Edmund Conway
We are letting this crisis go to waste. This is not a new sentiment, but when coming from the lips of the Governor of the Bank of England, it carries a certain added weight. If Mervyn King didn't put it quite as starkly in his speech on Tuesday night, it was only because, as a central banker, he is duty bound to talk as gnomically and elliptically as possible. But the undercurrent ran through his words like red ink in water.
Mr King raised two issues: first, we are missing an opportunity to overhaul the structure of the banking system; second, we have yet to work out how we will run our economy in the future. It is the former point – which involved a demand that Britain's biggest banks should be split up – that has dominated the headlines. Arguably, though, it is the latter that is the more compelling and important. Of this, more later.
The Governor has once before addressed the size of our financial institutions. This summer, he called for a break-up of the largest banks, warning that those which were "too big to fail" were, by extension, too big. The essence of his argument is as follows: banks provide an important utility function for an economy – helping families and businesses prepare for the future by lending them money and giving them a place to save.
However, they also get up to rather more risky activities, taking major positions in everything from currencies to – in the case of the most recent bubble – property-related assets, gambles which can occasionally explode.
So, the argument goes, casino and utility should be separated. That this is a problem, and that something needs to be done about it, is hardly new. Such was the idea that underpinned America's Glass-Steagall Act of 1933, which split investment banks from their main street counterparts, until it was repealed during the Clinton administration. It was one of the key issues raised in a report written for Gordon Brown by the industry expert Don Cruickshank, back in 2000 – and conveniently ignored.
But – and this may come as a surprise – most of the people who matter have also bought into it: Alistair Darling, the Chancellor, and Lord Turner, chairman of the Financial Services Authority, to name but two. The difference is in the way they intend to bring about the separation.
A friend tells me that if you are determined to break up with your girlfriend, there is only one way to do it. Rather than simply taking her aside and explaining that "it isn't you, it's me", you deploy a more underhand technique. You stop returning calls; you stop treating her or giving her gifts; you act surly. In short, you make yourself as unpleasant as possible. All being well, she will soon take it upon herself to do the breaking up.
Whereas Mervyn King appears to believe in an honest, upfront approach, the Treasury seems to favour the manipulative method. Its White Paper on financial reform, produced this year, may not endorse an immediate break-up of banks, but it attempts to do everything possible – in terms of draconian rules on capital and leverage requirements – to encourage them to undertake the dismemberment themselves.
This lacks intellectual honesty. And, indeed, it is impossible to know whether it will succeed – just as, for some girls, a boyfriend's new hard-to-get attitude may prove irresistible. But, in the eyes of the Treasury, it is seen as the least worst option.
Which side you take depends mostly on whether you believe the warnings that an instant split-up of the banks would spark another crisis. That is what the industry itself is warning, but then that's what you would expect.
Such questions, important as they are, pale in comparison with the more profound point at the end of Mr King's speech: that in future, the way economies are managed will be almost unrecognisable from today's model. In modern Britain, it is easy to find out what the central bank is up to in its running of the economy – you just look at where inflation is and where interest rates sit. The future, the Governor implied, will be far more opaque: the Bank will use not just interest rates, but a diverse range of levers to control the economy and the behaviour of the financial system.
Shifts in the nature of monetary policy happen very rarely: one occurred in the 1970s, when we moved from Keynesian to monetarist policies; another in 1992, when Black Wednesday forced us to start targeting inflation rather than exchange rates. It is happening again today.
As yet, though, we haven't worked out either the thing we're supposed to be targeting (rather than simple inflation), or indeed the tools with which to do it (although the Bank is due to publish a paper on this today or tomorrow). This is what I find rather more disturbing.
In the case of the bankers, most of us are agreed on the direction of travel, if not the speed. In the case of the wider economy, it is not merely that we are up the creek without a paddle; we are also blindfolded with no map.
2. (Leading Article) The lessons of the banks' failure are yet to be learnt
Telegraph View: Mervyn King, the Governor of the Bank of England, fears that by rescuing the banks, they may become even more reckless.
By Telegraph View
As one financial observer put it yesterday, the only thing worse than rescuing the banking system would have been to let it sink. Mervyn King, the Governor of the Bank of England, does not dispute this; but he certainly has some serious misgivings about what happens next. His speech in Edinburgh placed him at odds with the approach being taken by the Government and, indeed, by much of the rest of the world. Mr King's unpalatable message was that while the financial system has been saved, it remains a danger to the global economy. The patient has been given a new liver to keep him alive but insists on continuing to hit the bottle.
Mr King's principal prescription is to do something that has been rejected by British, American and European policy-makers: to separate the commercial banks from their investment arms, the "safe" utility bit from the "casino". The thinking here is that if the high-risk side gets into trouble, it can be cut loose without jeopardising the whole bank and, by extension, the entire financial system. It is not, however, as straightforward as that. As Gordon Brown pointed out in the Commons yesterday, Northern Rock was a retail bank (albeit one involved in risky ventures [that qualification is understated. It was an invesrtment bank in its ‘wholesale’ dealings in all but name; also at the time Godon Brown sat there like a mesmerised rabbit and did nothing until too late -cs] ) that came close to collapse, while Lehman Brothers, an investment institution, was allowed to fall, thereby precipitating a wider crisis that almost wrecked the entire system.
Nevertheless, the Governor has a very powerful point. His concern, and it is one that we should all share, is that the lessons of the past few years have not been learnt: the return of spectacular bonuses for bankers suggests that he might well be right. Mr King points out that the support extended to the banking sector around the world has created possibly the biggest "moral hazard" in history. By underwriting risk-taking that is normally constrained by the prospect of bankruptcy, the banks could become more reckless, not less.
Mr King's message was aimed less at the financial world than the political. The inescapable lesson of what has happened is that the regulatory system introduced by Gordon Brown failed to deliver and that control should be once more vested in the Bank, as it was until 1997 and will be again if the Tories come to power next year. The impact of the banking failure was exacerbated by the cavalier way that the Government handled the public finances. This was a speech as much for David Cameron and George Osborne to reflect upon as Mr Brown and Alistair Darling. It will be the next government that will have to pick up the pieces if Mr King's warnings go unheeded.
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