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From the moment the banking crisis began, through to the present, Gordon Brown has insisted that our troubles were born and bred in subprime America. The UK could not avoid the fallout, but it was not our fault.
Understandably, not everyone is convinced, but the sceptics have for the most part targeted their attacks on the Government towards its cavalier running of the public finances, which means government indebtedness has curtailed its freedom of action and there is no money for stimulative tax cuts.
Philip Augar's latest book Chasing Alpha* shows that government responsibility runs much deeper. It tells how the City behaved from 1997 when the Labour government sought to reinvent the British economy as a hedge fund crossed with an offshore tax haven.
Brown's deliberately engineered policies, coupled with an unusually benign international economic climate and the post-cold war supremacy of free market and shareholder value ideology, unleashed a mix of greed, guile and excess in parts of the City which ultimately led to today's disaster.
Brown's decisions when he was Chancellor first to introduce taper relief on capital gains tax and then to cut the qualifying period to only two years and preserve the favourable tax regime for non-domiciled residents made London the natural European centre for hedge funds and private equity. These became the City's main engines of growth.
In the early years of this decade, the low interest rates that resulted from the recycling of Chinese trade surpluses back into the US created a wall of cheap money that created near-perfect conditions for hedge funds and private equity to flourish. Returns from conventional investments were low, they offered something more. They geared up and gambled on minute price movements or used cheap debt to buy assets at prices which trade purchasers dependent on equity could not afford. This was them “chasing alpha”.
To do this, they needed the advisory services and financing skills of investment banks that had been largely disabled by the legacy of their excesses in the dot-com boom, but grabbed the chance to build new lines of business.
Their reinvention and recovery led to the dominance internally of their prime brokerage services and proprietary trading desks. Dealing profits became the dominant part of their earnings and traders came to dominate their management. The casino culture was given free rein, and when it interacted with a bonus culture that no longer bore any relation to the social worth of the services being provided, excess piled on excess in an ever-upward spiral of risk and complexity. Its success made it impossible to challenge the model. Only disaster could do that.
So when Brown says it is not his fault, he speaks with forked tongue. He fostered and promoted the boom in financial services and he, we and the country, asked too few questions, along the lines of where is this money coming from, while we were enjoying the benefits. He and we may not have known how it would turn out. But we know now, and we all have responsibility.
Because he is clear about the causes, Augar is also clear about the solutions. Much has been made in recent weeks about how regulation failed and must be reformed so that a crisis such as this may never happen again. But when regulation fails, it is usually either because the people in charge of enforcement have not been sufficiently alert, or it is because the regulators are being asked to do the impossible.
In neither case is more regulation the obvious answer, though it is depressingly the one which politicians and the public demand. Such tinkering may deliver short-term security, but as memories fade, confidence returns and the pressure builds up, it will again be seen to be inadequate.
Augar in contrast shows how excess is the inevitable consequence of the structure of the City. Because of the way the place works any banking leader who sought to be cautious, to have throttled back and reduced risk, would have been turfed out by baying shareholders hungry for more profit. It is easy to blame Northern Rock's Adam Applegarth, or HBOS's Andy Hornby, but this was a systemic, not an individual failure. So to mitigate the risk of it happening again, the structure needs to be changed.
Banks which take retail deposits should be restricted to old-fashioned banking. Investment banks which gamble should be allowed to do so, but only with their own money. The two must be kept entirely separate and the advisory services should be even more separate. That way there is a chance it may not happen again.
* Chasing Alpha by Philip Augar. Published by Bodley Head, £20.
