Afternoon:
10°c
There can be few things more misconceived and insulting than Chancellor Alistair Darling's plan to surround Bank of England Governor Mervyn King with advisers from the City so that he will be kept in touch with emerging threats to financial stability. Those who are likely to be the advisers from the City are the problem - not the solution.
And if there has been a knowledge gap at the top of the Bank, it is Gordon Brown's fault. He it was who lay behind the decision to get rid of civil servants no longer wanted in Whitehall by shunting them off to the City to become Deputy Governors. Rachel Lomax and Sir John Gieve are both likeable enough, but they could never hope to understand the City as they would another department of state.
But in spite of this handicap, the regulators in the Financial Services Authority and the supervisors in the Bank have never had any problem knowing where the dangers lay. Their difficulty was in getting anyone to listen when those in positions to do something about it could make so much money by continuing to be irresponsible.
Though it was only Chuck Prince of Citigroup who was stupid enough to say out loud that as long as the music played his group would keep dancing, it was an attitude shared by all of the bankers. And these are the people the Chancellor now thinks should advise the Governor!
Those who think the regulators were not up to speed should do a bit of research. They could start with a speech that Sir Howard Davies delivered when he was still running the FSA (and he has been gone five years) in which he clearly and explicitly warned about the invention of collateralised loan obligations and credit default swaps and described them as toxic.
Nor did you have to attend the dinner to hear the speech. His remarks were reported in this column. Look, too, at the speeches of Alastair Clark, the Governor's eyes and ears throughout the period.
There was a lecture he delivered at Cass Business School at least three years ago that could not have been more explicit in warning of the dangers of mispricing risk and the loosening of lending standards. That was also reported here.
Or look at Mervyn King's own speech almost exactly 12 months ago at the Lord Mayor's Mansion House banquet, just weeks before the markets cracked where he told the bankers to their faces that they were hurtling towards the abyss. None of them changed their behaviour. They preferred not to listen - deafened by greed, possibly, caught up in the thrill of the chase certainly.
And look at the FSA's annual publication on the risks it sees to the financial system and the Bank's half-yearly Financial Stability Report. The insanity of the financial markets is chronicled there for all to see, and was regularly reported on throughout the period.
There is also a darker side to this. I once heard the head of one investment bank (who will no doubt be relieved to see that he is not identified) explain how he did not talk to the press because it did not matter what the public thought. If he wanted something, he talked direct to the Treasury. If the Treasury proposed something he did not like, he told them to drop it. As he had direct access to Whitehall, he did not care about anything else.
"Anything else" included warnings from the authorities. When challenged about this, Treasury officials protest their innocence. The problem, they say, is not the civil servants but the ministers, who are in turn either seduced by the City or terrified of it.
Either way, they are incapable of dealing with it rationally. On this analysis, it is the Government that needs financial advisers to tell it what is happening in the real world, not the Governor.
There is one further point. Imagine if you will that this committee had existed two years ago, and agreed with the Governor that the cheap and easy lending by banks to the private-equity industry had got quite out of hand, was a threat to stability and should be stopped - all of which is at least arguably true.
The protests would have brought the roof down, and if that failed, the private-equity industry would have threatened to move overseas, and if that failed they would have moved. The Government is so fond of saying that ownership does not matter, and is well aware that selling British companies to foreign buyers pays for its profligacy in other areas.
And most of the time, it does not matter. But it does mean Government has very little power to tell these foreignowned banks, brokers, fund managers and private-equity houses what they should and should not do.
