Tuesday, February 17, 2009

Eddie George Knew of Regulatory Failure in 2002

Eddie George was always a sceptic about Gordon Brown's economic conduct. But he was faced with a Chancellor determined to get his own way and completely sure of his own rightness. I've stumbled across a speech Eddie George gave to the Commonwealth Finance Ministers conference way back in 2002. It seems to me that he knew full well that Brown's new regulatory framework wasn't working.

The market-based approach is, in principle, the best means we have of allocating resources to where they can be most productively used and raising global as well as national economic efficiency. But that can’t mean simply a free-for-all. It needs accompanying conditions to limit distortions if it is to work well.

It needs a consistent framework of macro-economic stability, for example, with countries living within their means, limiting aggregate public and private sector demand to the supply-side capacity of our economies. [That involves both fiscal “prudence” to borrow the Chancellor’s favourite expression – if I’m actually allowed to borrow from the Chancellor – it used to be the other way round! – and it involves “monetary stability” to use my own favourite expression. But more than that, markets needs to operate within a transparent framework of accepted principles and standards of behaviour if they are to function effectively.

But we also need a clearer and more predictable framework governing the massive increase in international private capital flows - which can be of real benefit to recipient countries if they are sustained, but deeply damaging if they prove to be volatile – as we have seen dramatically demonstrated in recent years. We have come a long way in the various international fora to address the many issues arising under this heading but the recent disruptive volatility of financial markets in the industrial world reminds us that we still have a long way to go.

But I want to make just two points this evening.

The first is that while governments – nationally and internationally – clearly have the primary responsibility for establishing and applying the framework within which markets operate, reflecting both social and economic priorities, they cannot do everything themselves. An effective market-based system depends fundamentally upon the standards of professional competence and behavioural conduct of the private sector participants in the market. We’ve recently seen the damage which markets themselves inflict on those involved when standards fall short of what is expected. My concern is that without high standards of professional responsibility the market system will become increasingly rule-bound.

Wasn't that a clear warning that the tri-partite system wasn't working? And yet no one did anything about it. Or am I reading too much into this?


Demetrius said...

Eddie George, who I heard speak a time or time, was essentially a prophet without honour in his own country. There were others around at the time becoming concerned about the increasing waywardness of the markets, and disassociation of the government from realities Those trying to be heard were either ignored or told to be quiet on pain of public humiliation or punishment. Well, if the policy is to shoot the messengers who bring the bad news, the flying pigs will all crash land.

Alex said...

You are readng far too much into this. At the time Basel II was not fully implemented so it looks like a bit of cebtral banker waffle. Still I expect he got a decent lunch out of it.

Matthew said...

You are reading a huge amount too much into it. He doesn't actually say very much at all.

As Adair Turner has said, there is absolutely no difference between the fate of countries that had regulation carried out by central banks and those that didn't. Countries in both categories have struggled equally to deal with the economic crisis.

Critics of tripartite regulation opposed it at the time, and surprise surprise, they now blame it for Britain's current economic difficulties.

Unfortunately, the facts don't support this analysis, and all you're left with is self-justification.

Anonymous said...

The Zimbabwean Finance Minister was obviously fast asleep through all this - but where was Gordon Brown.

Anonymous said...

The BBC is reporting another HBOS whistleblower is getting in on the act.

Claims they sold mortgages to people who could not possibly afford them.

Makes you wonder what the point of all these risk managers were there for.

He claims that basically a salesperson was put in charge of risk.

Anonymous said...

Oh wait a minute - the BBC go to Westminster for a comment and who do they interview - oh yes Vince Cable!

Easy to see where they are coming from.

Tom Powdrill said...

He doesn't even mention the tripartite system, and all of the points he makes are equally applicable to other models. As Matthew says above, Adair Turner made this point rather well at the weekend. There doesn't seem to be a correlation between regulatory 'architecture' and whether your banks fail.

In fact Eddie George seems to be acknowledging this in the last para your highlight. Unless there are high professional standards, regulation and government intervention won't get you very far. And as we have learnt to our cost, professional standards in the banking sector have been somewhat lacking.

so I wouldn't say you are reading 'too much' into his comments, I think you are reading something into them that doesn't seem to be there at all.

Chris Paul said...

You might argue that this was an argument for better voluntary restraint of the blessed markets.

Gordon Brown trusted this industry. They were not however trustworthy. Lesson learned?

Anonymous said...

Brown trusted the industry? Did he indeed?

Well that does not say much for his acumen then does it?

Plain fact is he took advantage of the industry - it was a nice little earner. It was a tax milk cow. And it helped fuel the bogus idea that our GDP was rising and we were somehow better off.

Bonuses? "I'll take 40% please - oh and then there's NI on top."

Brown encouraged the industry - they were all in each others pockets. When brown wanted a tame 'name' to give him a report he wanted - he called up a banker.

Unknown said...

Matthew - You believe Adair Turner, then?

whufcpj said...

I think these sentences make it abunduntly clear what he thought at the time:

"It needs accompanying conditions to limit distortions if it is to work well."

"It needs a consistent framework of macro-economic stability, for example, with countries living within their means, limiting aggregate public and private sector demand to the supply-side capacity of our economies."

GB blew away the regularity conditions, allowed borrowing to exceed normal constraints, increased taxation of the modest middle class beyond the optimum level of taxation and allowed the Public sector to grow at the expense of the wealth creators.

Iain you are not reading too much into this, it was a warning to the Chancellor.

Lola said...

Look, I'll say again, the FSMA 2000 - by which Brown implemented his regulatory 'system' was and is entirely flawed. George knew this.

And Brown did not 'trust' the markets. He has tried via the Act to manipulate them for his own ends.

I have run a FS business under this act and it is not, repeat not, light touch. It is detailed and prescriptive. It is nationalisation by one remove. And George seems also to have realised this.

Furthermore Brown deliberately distorted banking regulation and sought to make them distributors of choice for his failed experiment with price controlled stakeholder products. he thought he could use them to get people tucked away into these useless products.

The whole thing is a disaster until now we have the FSA with zero credibility and no authority, just power and coercion.

It's an absolute disgrace.

Jon Lishman said...

Dude, threshold-of-pain shrillness warning to us headphone users next time perlease!

I've gone deaf in at least two ears.

Anonymous said...

Hmmmmm....... This may be a coded warning but it is still a warning.... words spoken at this level would not be randomly and thoughtlessly used...

Although "living within their means" does not need a lot of translation....

Manfarang said...

As the Americans say hindsight is 20/20.

Mitch said...

looks like gordon studied street Magicians.
The FSA existed solely to distract the people while the Lab supporting banks did whatever the hell they wanted.

Roger Thornhill said...

It does not make Eddie a saint - he seems to have compartmentalised reality.

On the one hand voicing concerns over aggregating public and private demand while he sat there letting it all go wrong.

In a way it is worse. He KNEW it was going wrong, yet he did not have the cojones to stop it or walk out.

Chris Paul: "Lesson learned?"

No, for he has bailed them out. Like giving sweets to a toddler in a tantrum.

Matthew said...

Brian 9.08pm - Yes, I do. If you think he's wrong, perhaps you could cite some evidence to the contrary?

P said...

Gordon Brown always thought - and probably still thinks - that he knows better than everyone else. How ironic that when Fred Goodwin et al were grilled last week they were asked about their banking qualifications - how about some asking GB what qualifications he has to run the UK economy. Answer - none

davidc said...

people refer to the banks as 'cash cows' for g. brown but did they pay much tax in the u.k. ?

not an economist said...

I guess I may be missing sthg here but I don't see a coded attack on Gordon in this Iain.

My guess is we will have to wait 3 or 4 years for when Ed brings out his diaries or at least starts to do interviews with coded messages contained in them. Personally I would like to see a quote along the lines of "Y'know - Gordon Brown? Complete and utter toss pot that bloke. Didn't have a ****** clue. That Clarkson fellah - he was spot on he was."