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There was a time at the fag end of Nigel Lawson's Chancellorship when it looked as if the national debt would be repaid. Government was in surplus, gilts were being redeemed at such a rate they would all have gone in a couple of years, and traders in government debt were laid off because there was nothing for them to do.
In the week the US budget deficit hit an all-time high of $450 billion, it is worth remembering that less than 10 years ago, Congress was debating whether the American government could or should invest its surplus funds in equities. The US, too, was projected to have such huge surpluses it would be able to redeem all government debt.
We should have known then it couldn't last. The UK Government said this week that it intends to fund the estimated £37 billion cost of bailing out the banks by issuing gilt-edged securities — in other words, bonds to borrow the money from the investing institutions. If you say it quickly, £37 billion does not sound so much. Set against the £800 billion or so of funds that form the backbone of the nation's defined-benefit pension schemes, perhaps it is not that large. But no one has ever tried to raise this much before in absolute terms.
One of the problems with the current crisis is how few people have experience of difficult times. Debt on this scale was more common in the 1970s and 1980s when raising it was still the responsibility of the Bank of England acting through the Government Broker, who was the senior partner in a long-vanished firm called Mullens. Interest rates were raised and lowered to get the stock away, but even then it did not always work.
Labour ran into a buyers' strike in the mid-1970s, which was one reason why the IMF had to be called in to provide the money and direct a change of policy that restored confidence in the Government's finances.
Pension funds have an appetite for long-dated bonds, but maybe the Government would prefer to issue more short-term funding. It may even be tempted to try the trick the US pulled off in the 1980s when it virtually guaranteed a spread between short-term and longer-term rates on Government securities to deliver guaranteed profits to the banks, which they used to rebuild their balance sheets.
It is going to be a testing time for the Debt Management Office and the markets, given that the £37 billion needed for the bank rescue is on top of at least as much needed to meet the hole in the Government's finances that was forecast in the last Budget. The big risk is that the combination of debt issuance and printing money is handled in such a way that buyers begin to fear the return of inflation. Let us hope they do not find the learning curve too steep. We would pay a high price for another buyers' strike.
Regulation must cross borders
Events of the past few days have shown that political efforts to tackle the global banking crisis only had sufficient credibility to calm the markets when politicians of different countries came together to pool their resources.
But if this lesson seems to have been learned in terms of policy, it has not been learned in the context of regulation. Political leaders have spoken of the need for more regulation, and have implied that they or their government can be relied upon to produce something before too long. There seems to be a mismatch here. The only effective measure against the crisis has been pan-European, yet European nations are talking in terms of bringing forward their own national legislation. Surely, recent experience suggests that if regulation is to have any effect in the future, it too needs to be pan-European. The time has passed for purely national legislative initiatives.
There is a body that could handle the task. The Basel Committee on Banking Supervision has the tools and knowledge to develop regulatory standards and principles that would work across borders. Critics will say that, as a body, it is notoriously slow in developing anything, so may take years to produce new rules.
That, however, may be no bad thing. Regulation on the rebound is almost always a cause for regret. It would pay to allow time for the dust to settle.
