15 October 2008Simon Jenkins
So this is to be Brown's Falklands. Victory on Mount All-fall-down. Bonfire of the bonuses. Service in St Paul's. March-past by the Royal Troop of Derivatives Traders. Anthem to the Bankers' Brigade. Tomb of the Unknown Arbitrageur.
A fortnight is clearly a long time in ideology. What fun historians will have with October 2008. Do you remember the hoary old days when they let Lehmans go bankrupt and refused to guarantee bank deposits? Where were you when a governor of the Bank of England worried about inflation and something called moral hazard? How tables turn. Socialism is now cock of the walk, capitalism mugged by reality.
It is rubbish, total rubbish. Market failure has been compounded by brain failure of the discredited profession of economics, overwhelmed by journalistic wish-fulfilment and glee.
The banks have not been "nationalised", just deluged with money. They remain pluralist and competitive institutions, with independent boards. Their workers are not civil servants. Investors retain their shares. The bonus culture will revive. The impresarios of greed have been punished, or at least a few of them. But this is not socialism in our time, just public money hurled at the face of capitalism.
Guardian writers and Labour politicians have been drooling all week over what they call the "collapse of the free market model" of a modern global economy. They are simply wrong. All markets required regulating. It was regulation that failed last month, not the market economy. When a car is driven too fast and crashes it does not invalidate motoring.
For the record, exactly the same gloating was heard after the crash of 1987. It too "spelled the death of market economics". As Martin Taylor, formerly of Barclays, said on the radio yesterday: "Yes, people will return to old-fashioned banking - until they forget about what has happened." Then the game will start all over again. Business can do without most things, but not private banks.
In a seminal encounter in the early 1980s, the late Nicholas Ridley was trying to persuade a reluctant Margaret Thatcher of the virtue of privatisation. She feared she would lose control over such key industries as oil, gas and electricity. Ridley pointed out that it was far easier to command the heights of the economy by statutory regulation than by public ownership, which was encumbered by trade unions and Treasury control. Thatcher was persuaded, and the age of Oftel, Ofgas and Ofcom was born.
The one that got away was the City. Hence the fiascos at BCCI, Lloyd's, Barings and Black Monday. Hence too what happened when the new building society/banks, encouraged by Thatcher and her successors to this day, went potty over homeownership. Britons were told that house-buying was the sensible way to save. Ministers would declare the "right to homeownership" and demand that "every young person be helped on to the housing ladder".
Nobody cared how much this might impoverish them, or who lent the money or how, provided ministers could take credit for soaring homeownership. Nobody even cared when the negative-equity crisis burst in 1991.
I carry no torch for the recklessness of the bonus culture, but it is politicians, not bankers, who should be apologising for the housing bubble. As for the bonus-drenched BBC constantly demanding that bankers "say sorry" for bonuses, words fail me. And its bonuses are not even earned.
The toxic housing loans that were the cause of the credit crash will take time to bleed out of bank balance sheets. But bleed they will.
Provided politicians can be restrained from re-hyping the British and American housing markets, the system will return to normal. Taxpayers will then get their money back, as shares are sold in tranches when the market suits. This is state "greenmailing", albeit on a grand scale, as was done with British oil shares in the 1980s. Governments will have performed their proper function in easing market adjustment after the bursting of a bubble.
How quickly this works will depend on how far ministers show they understand banks. The toxic loan scandal began with politicians mesmerised by house-buying. MPs even expected taxpayers to pay their own mortgages for them. Mortgage splurging became so politically correct that nobody dare associate it with loan sharkery.
On Monday Brown demanded that the banks in which he now has an interest stop paying dividends and bonuses, and return mortgage lending to its 2007 level. This was the surest way both to send bank shares through the floor and to revive the sub-prime chaos. The City minister, Lady Vadera, then added to the confusion by wanting the banks only "to maintain the same level of marketing and availability" of their mortgage offers. What does that mean?
Brown's purpose in aiding the banking sector should be simply to guarantee a revival of reputable borrowing, not to pick and choose. Forcing banks to eschew commercial decisions and make bad mortgage loans will drive them back to dodgy derivatives. The arrival on the scene of Vadera, author of the chaotic nationalising of Railtrack, is hardly inspiring. These people have failed the whelk-stall test too often for comfort.
All this has nothing to do with the death of capitalism, rather with its resuscitation after a nasty accident. As every student of economics knows, capitalism depends on confidence, and confidence depends, in the final analysis, on power. Belatedly, governments are feeling their way to honouring this responsibility.
But we should repeat the cause of the crash. It was British and American politicians who encouraged people to buy houses they could ill-afford. They duly acquired assets that would, in most cases, be realised not by them but by their children. In the rest of Europe these people would be renting their homes and saving in a safer and more liquid fashion.
The first round of let's-play-banker by Brown and Vadera this week suggests that this housing madness is far from cured. We should therefore expect that its message will again be forgotten and the sickness eventually return.
Though bankers are more fun to blame, it was politicians whose laxity and craving for popularity lay at the root of the present trouble. They should at least be denied any triumph for aiding its cure.
http://www.guardian.co.uk/commentisfree/2008/oct/15/credit-crunch-banking
