Monday, October 13, 2008

Cameron Foresaw Liquidity Crisis in March


I don't often quote in its entirely a blogpost from another blog, but this one from ConservativeHome's Tory Diary merits an exception. Over to Tim Montgomerie...

There's been a lot of criticism of David Cameron recently but this extract of a speech that he gave more than six months ago showed a pretty good understanding of the issues of capital inadequacy and illiquidity at the heart of this crisis:

“As well as the reforms we have outlined for the UK financial system, we need reforms at a global level too. So let me suggest one important reform that needs to take place in light of the recent crisis in world banking.

“The Basel capital accords determine how much capital a bank must set aside for a given amount of lending. This makes good sense, and, for obvious reasons, it is right to set the rules at a global level. But economists have identified some key problems with the current Basel accord.

“First, the rules on liquidity, which has been at the core of the current crisis, are too weak. Banks can operate with enough funding only to survive for a couple of weeks, but still be within the rules. Second, we need to examine which asset classes and which institutions are covered by existing rules. For example, the zero-weighting of some triple A assets has led to distortions in asset allocation. Put simply, some of the debts were kept off balance sheet so they didn’t count as lending under the rules.

“Third, judgements about credit risk were delegated to rating agencies who themselves had incentives to expand the amount of lending that was allowed under the rules. Put simply, because they are paid fees for rating debts, credit rating agencies had an interest in there being as much debt as possible. Finally, market risk was measured by backward looking models which tend to exacerbate the credit cycle, not dampen it. When credit is easy, the models allow more lending. When credit tightens, the models reduce the amount of permitted lending.

“In short, liquidity risk was all but ignored, credit risk was delegated, and market risk was backward looking. And we now know that not only did the regulators not know, but too often the banks themselves didn’t know, the full extent of the risks they were subjected to. But let me say again, any reforms at an international level will need care to ensure that in tackling the past problems they do not create the problems of the future. At the same time, we must all recognise that crises are inevitable, so a prudent Government, as we will be, that is committed tol be, must improve our response to these crises when they appear."

Thanks to Richard North of EU Referendum blogspot for pointing the extract out to us.

Now, I don't remember Gordon Brown anticipating the banking crisis in this clear way, do you? And while I am in the mood to nick things from other blogs, take a look at THIS post from Ben Brogan, where he quotes from Gordon Brown's speech to Reuters this morning...

"In future regulatory systems there will be both greater attention to issues of solvency and liquidity and probably a pro-cyclical attitude where in a period of growth you have got to lay aside more for the possibility that there will be contractions."
Isn't that what the Conservatives have been saying for the last 18 months?

40 comments:

Ozymandias said...

Bet you won't see that on the BBC who are following Campbell's script to the letter i.e. - it's all the fault of Thatcher and the Tories and thanks be that we have a leader and statesman such as Gordon Brown in these troubled times who has through his astuteness and experience saved the United Kingdom,the Global Economy and Capitalism. Truly we are blessed.

Anonymous said...

Q> What's the capital of Iceland?
A> About £2.57

Anonymous said...

Hope Letwin and others get full credit.Clearly Dave didn't write this stuff.

Anonymous said...

Has anybody noticed how Geoffrey Robinson is being wheeled out as a financial "expert" ?
freedom to prosper

Anonymous said...

""In future regulatory systems there will be both greater attention to issues of solvency and liquidity and probably a pro-cyclical attitude where in a period of growth you have got to lay aside more for the possibility that there will be contractions."

HEH. And HEH again.

Can't but help but notice the marked contrast between Gordon's idea for how banks should behave and his own behaviour as Chancellor and Prime Minister, which has involved spending the good times blowing as much money as humanly possible and ensuring we enter a downturn saddled with massive debts at both government and personal level.

Anonymous said...

Get yourself down to ALDI.

They are flogging an Australian red Vino called Badgers Creek for just a couple of quid.It is full blooded and full of ripe fruit and weighs a ton.

This is top class vino.

tachybaptus said...

Anon 11.33: I am afraid that the Badger's Creek is just what we are up. In a barbed wire canoe without a paddle.

Nor is this news of much use to the teetotal Iain.

trevorsden said...

Ho ho Mr 'Mouse 10.28' ... as if good old 'post classical endogenous growth theory Balls' did not write up all Brown's own crap enonobabble.

Just bugger off Dolly

And thank you thank you thank you Iain for so eloquently pointing out what I have been saying in these pages for a few days now.

Does anybody know Pestons email address? I suggest we all bombard him with copies of this report maybe Nick Robinson and the good old Chairman of the illiterate Beeb as well.

Anonymous said...

errmm Iain I know financial matters arent your strong point but the credit crunch started over 12 months ago.Pay attention.

Auntie Flo' said...

Straight to the heart of the matter. Simple, clear, lucid and compelling. No spin, no whitewash, no self-agrandising jargon, no evasion, no Blairite emoting or theatricals, no sinister non-verbal signals, no lies. In short, no Brown.

Don't you just love David Cameron!

no shortage of fools said...

http://news.bbc.co.uk/1/hi/business/7664007.stm

More English cash going north?

gnomelife said...

"Second, we need to examine which asset classes and which institutions are covered by existing rules. For example, the zero-weighting of some triple A assets has led to distortions in asset allocation. Put simply, some of the debts were kept off balance sheet so they didn’t count as lending under the rules."

All asset classes are covered by the existing rules. He means "how" the asset classes are covered. Shows a pretty fundamental lack of understanding of Basle Accord.

If AAA assets are assigned a non-zero weighting then this will lead to more, not less, assets being kept off balance sheet. The real issue is the methodology by which structured assets were assigned a AAA rating based on simulation of defaults.

It is a pretty badly written piece and hardly prescient given these issues have been raised for many years now. Hardly a goal for the Tories.

Anonymous said...

oh shut up !!!!!!.

This is school yard poltics... My dad is bigger than your dad...How embarassing

Anonymous said...

Oh Iain, this is real embarrassing stuff. Firstly an Anti EU nut found it and secondly.

Would you like links to numerous speeches were Camera On:

* wanted less, not more regulation

* Advocated city bonuses ( politics of envy and all that )

If you think Camera On predicted this while the entire world didn’t then you are plan barking

Anonymous said...

Not sure how he foresaw it as he was commenting on events at the time.

Sadly at the moment he appears to be hold Gordon's coat.

Anonymous said...

while counterfactual history can be overdone I think there are two things we can be absolutely sure would be the case had the Tories been in power for the last 10 years.

1. we would have troops in Iraq
2. we would be in a financial crisis

Mike Kingscott said...

"Isn't that what the Conservatives have been saying for the last 18 months?" - that may be so Iain, but what's crucial is they are not saying anything now. David Cameron's weak performance at PMQs last week and muted response from the opposition is baffling - at least George Osborne is beginning to put the boot in, but much more needs to be said, fingers need to be pointed, TAXPAYERS MONEY NEEDS TO BE GUARDED, I just can't believe GB is getting away with it with nary a word from the Conservatives!

Anonymous said...

capitalism
all very well in theory but never works in practice

Anonymous said...

Glad to see Boris is still calling to keep City Bonuses and more City deregulation

But then again his new business advisor dont pay any tax in the UK

Why should he

canvas said...

Iain, this is still the argument to nowhere.

"David said it first, Gordon said it last." blah blah blah. Who really cares? No politician managed to avert the crisis.

Trying to score cheap political points at a time like this is unhelpful.

This is a time when the country needs to unite. How about a more positive and constructive view?

Summer said...

Ah ha, Canvas reveals the socialist Achilles heel. They don't like all the warning there have been to Brown pointed out.

They'd rather the Conservatives said nothing and 'united'. Well I don't see anything very united about Brown's actions at PMQ last week, or in anything else.

I think, do as 'the master of the universe says' is more the order of the day for Brown and his spinning Orcs.

Walter Mitty comes to mind!!!

Anonymous said...

I would like to defend the BBC and Nick Robinson in particular.
I'm sure I heard Nick call GB "the Bastard of the Universe".

GB£.com said...

Oh this is plain embarrassing Iain.

This was written in the middle of the crisis, six months after it began.

Cameron foresaw nothing. In fact, just like the government he ignored all the warnings about a house price bubble about to burst and just tried to find ever more ways to get more people on 'the ladder'.

The Government and Opposition completely ignored the brewing storm until it was upon us.

It was only a month before it began, the worst economic crisis in 60 years, that the Tories announced that we had moved away from an econocentric paradigm to a sociocentric one!

Johnny Norfolk said...

Just proves again the one sided approach of the BBC and its open support for Labour.

All they do is attack the Tories on behalf of Labour.
A public broadcaster should have used Camerons speech to attack the Labour government, but they are now trying to make out Brown is some kind of hero.
He helped create the set up that has allowed the banks to do what they have done.

The voters will not forget though at the election.

GB£.com said...

Iain,

A quick Google archive search reveals 626 articles about the liquidity crisis in the month before Cameron's speech. Try it yourself.

Your headline is a complete piece of propaganda. Cameron foresaw nothing, he just read the news like the rest of us.

africanmum said...

It doesn't matter who forsaw what, free market idealism is dead.
I've always been socially conservative but voted Labour always as the lesser of 2 evils, since I never bought into this dog eat dog economics peddled by Thatcher and Reagan. The Conservative Party and all of that persuasion should return to the drawing board. Their monetary madness has brought the world to the brink. And if the crash has been a left wing coup d'etat to show how barmy monetary economics was, well kudos to them.
Hopefully now, conservative politics in USA and here would now be practised along CDU lines in Holland and Germany, ie, social conservative policies while recognising that all of SOCIETY (yes, it does exist) should be looked after, not just greedy pigs stuffing their snouts at the expense of the working person.
Trickle down economics = let the poor go hang and let the middle class feed off the crumbs of the richest people's table. Very unchristian and as we've just seen, ultimately futile.

the original anonymous said...

So why does Gordo look so smug these days? The last time we saw him like that was in the back of a limo after dear Tone had been given his marching orders. Just like Hannibal in the A-Team, Gordo just loves it when a plan comes together.

Gordo looks to have been ahead of the curve during this crisis -- begs the question, what did he know about these banks' exposure and when did he know it?

Doug said...

I think the Cameron speech is good. It shows a greater depth of comprehension than anything Brown has said BUT I'm not impressed. I would be impressed if Cameron had said something like this before the Northern Rock happened.

Chris Paul said...

This is so incredibly weak Iain. Cameron wouldn't have to have crystal balls to predict that. He could have just read GB press releases from December and January to give the closest examples to his "scoop" insight.

Anonymous said...

This blog is just becoming more cringe worthy every day. He's never going to give you a seat Iain, give it up. The fact he was aware of it (many months after it began!) makes it more damning he doesn't have any solutions.

Letters From A Tory said...

It gets better than that.

From BBC website yesterday:

"[Gordon Brown] said there had to be "a new financial architecture for the years ahead", with global supervision to match a world where money flows across borders and firms operate multi-nationally.

Mr Brown, speaking at Reuters in Canary Wharf, said he had sought to bring in such changes since 1998, but there had always been something more pressing for other countries to worry about."

If you believe that, you'll believe anything.

http://news.bbc.co.uk/1/hi/uk_politics/7666695.stm

tachybaptus said...

That was said in March. What's he saying now? He is just acting as a staircarpet for the auto-apotheosis of Brown as he 'solves' a crisis partly of his own making.

Cameron's performance over the past few days has been utterly abject. I hope the next poll figures give him a well deserved poke in the eye.

Paolo said...

Christ, Draper and his troll legion are really spinning the "who cares whose fault it is, We all need to unite"

What a load of rubbish. Blame needs to be apportioned for this and much of it falls squarely on Brown. If, as so many of you claim, Cameron was just repeating other warnings on the coming crisis, then what the hell were GB and the government doing? Sticking their fingers in their ears and shouting "la la la we can't hear you"?

Matthew Parris is, as always, spot on

"Mr Brown's real intention will be less worthy: to silence critics and bind political rivals into policies that they will not subsequently be able to criticise; to pre-empt their blaming him if things go wrong; to allow himself to slur those who voice disagreement in Parliament and the media as “unpatriotic”; to imply that any challenge to his own leadership is irresponsible; to stifle discussion of his own past role in the “Age of Irresponsibility”; and to go into the next election having effectively nobbled the opposition parties."

Rebel without a clause said...

Notice how when Brown explains a fiscal issue Brown makes it sound very much more complicated than it is - when Cameron explains it he uses plain language and makes it all seem almost OBVIOUS. Conclusion Brown is an obfuscating b\s artist and Cameron is both underrated and underestimated. That will of course change when the electorate is faced with rising taxes and rising unemployment. Brown had better enjoy this 'dead cat' bouncer for all it's worth and it is typical that he is now trying to take the crtedit for borrowed ideas!

trevorsden said...

What is quite laughable is the lefties sticking their head in the sand pretending the Tories and their leader were not concerned about bank lending and liquidity before this crisis blew up in the governments faces.

Dear Dolly Trollys you fool nobody.

By the way lefty lovers -- the credit crunch has its origins in Bill Clinton taking time off from dipping his cigar behind his wifes back and passing legislation to FORCE banks to lend to mortgages to bad risks (just to reward all his black and Hispanic voters).
Actually the "“The National Homeownership Strategy: Partners in the American Dream” programme was a rehash of a Jimmy Carter Act. Its just that vicious anti discrimination zealotry also forced banks hands.

The attempts by Bush (and indeed McCain) to reform this mortgage mess was blocked by Democrats in Congress.

In 1999 Clinton also signed the Gramm-Leach-Bliley Financial Services Modernization Act, which some claim helped make things worse. This is a complicated story and I suspect no one comes out of it well, but it was passed (not least thanks to the Democrats insisting on a strengthening of Carters Community Reinvestment Act) by the senate 90-8 with some murky goings on centering around Clinton's signing it .

So when Brown talks about this 'coming from America'; first - he probably does not know what he is talking about and two - he is ignoring the massive culpability of his friends in the Democratic Party (lefties to you and me)

Thatcher and Ronnie sleep easy in your beds...

tory boys never grow up said...

There are some grains of truth in what Cameron says - but the way he mixes up capital adequacy and liquidity clearly show that he (or more likely is speech writer) hadn't much real understanding of how financial regulation is meant to work.

So Cameron knew the banks were undercapitalised 6 months ago - so where was his plan for recapitalisation of the banks?

The current problems were caused by 20 years of financial deregulation being the only show in town. And both Labour and Tory Governments worshipped at the same altar. The Tory's only criticism of Labour was usually that they didn't go far enough down the deregulatory path. If anyone is naive enough to think that the Tories have no responsibility for this it is perhaps worth considering that before the Tory Building Societies Act allowed conversion the Halifax, Northern Rock, Bradford and Bingley, Abbey and Alliance and Leicester were all mutual building societies - with restrictions on the amount of wholesale borrowing they could undertake, restriction on the type of lending and otehr activities they could engage in, a capital calculus that required higher capital requirements for riskier lending, no overt profit motive, no share options, lower levels of directors emoluments not based on profit levels, restrictions on the liquid assets and derivatives that they could hold etc etc. And I wonder what became of them?? (perhaps we could reapply the old building societies regulatory regime to them now they have been nationalised.

Let us all rejoice that the era of deregulation is now dead. Somehow, I think that the Tories may have more problem in adopting to a situation where market regulation, based on international co-operation, is the norm. Some discussion with your less ideological centre right colleagues in Europe may well be called for. As for Labour we shall just have to go back to our social democratice Keynesian roots.

Anonymous said...

Another, Hindsight Professor with a degree in, being wise after the event.

Anonymous said...

was it when he was working for the last tory government

now what was his role

crisis what crisis

Anonymous said...

File on 4 tonight has remarkable item about class and other law actions hitting Barclays UK and Lehman Bros US by UK, Irish and US lawyers. Ratings agencies also in the frame. US lawyers quoted on File on 4 say: "SINCE NU LABOUR came to power regulators in the UK and US instituted a race to the bottom on light touch self regulation in the two markets...the British government who brought the FSA into being should take much of the blame for the disaster now hitting banks around the world ... it is a matter of supreme irony that because the taxpayers now own the banks involved the lawsuits are going to be paid out of taxpayer provided funds!" What price MacPrudence and his useless moronic band now?

Anonymous said...

Somehow I think it puts David Cameron and the Conservatives about 5 years behind Vince Cable and the Lib Dems.