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9 October 2008

Don’t blame me for Labour’s failings

Nationalising the banks will merely transfer risk to the taxpayer. John Redwood, who warns against p

By John Redwood

This is not the moment to be playing petty politics. I find it extraordinary that Labour ministers can spend time briefing that I have been too keen an advocate of deregulation, and even more bizarre that they think people will believe them when they say deregulatory views caused the current crisis. They should take a cold shower and then do their jobs as regulators of economic policy more carefully.

In the Conservative economic policy review Freeing Britain to Compete, published last August, we made it clear that we believed the removal of powers from the Bank of England was dangerous. We said that when a banking crisis hit, the Bank would be ill-equipped to deal with it. We made the case for stronger controls well before the run on Northern Rock. We also pointed out that the government had introduced a lot of mortgage regulation that would prove useless, as unfortunately it has.

Labour was regulating the wrong things in the wrong way. Never has banking been so regulated and never has it gone so wrong in my lifetime. Of course, we should first blame the executives of the businesses now in trouble. They took wrong decisions and should pay the financial price. But we should also blame the central banks in the UK, US and Europe that debauched the money supply in the years of easy credit, before dramatically withdrawing funds in 2007 in a way designed to bring some banks down. We should blame the regulators who accepted business models based on massive leverage, and international regulators who encouraged banks to increase off-balance-sheet activities. We should blame governments that encouraged these banking practices.

In the days of easy credit everyone was in it together. The US administration wanted to encourage home ownership for poorer people. The UK government wanted capital projects it could not afford from taxes, so went on a huge (off-balance-sheet) borrowing spree. In the UK, the Monetary Policy Committee of the Bank presided over the credit bubble. Its members drew their salaries and solemnly opined each month from 2003 to 2006 that interest rates could stay low because prices were under control. They missed the way excess credit was driving up the price of food and oil. Now the MPC is driving with its eyes glued to the rear-view mirror. It has kept rates high and in recent months talked tough about inflation when the problem has shifted to avoiding recession. On the way up it ignored the warning signs from surging property prices. On the way down it ignored falling property, commodity and retail prices.

Last autumn, I recommended making more liquidity available to money markets to prevent solvent banks being driven under. The Bank has finally become responsive to these demands, although too late to save the mortgage banks. I proposed lower interest rates. We may get such a cut but far less than needed.

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Banks that thought they had good asset cover are finding those assets are worth less than they supposed. Banks that thought they had good protection from borrowers find the security they took may be insufficient to cover the loan. We are in for a bumpy ride. Banks will demand more collateral from borrowers and cut back on lending facilities to companies and people.

The US treasury secretary, Hank Paulson, tried to reignite confidence with a deal promising billions of dollars to the banks. It did not instil confidence because it was poorly thought through. The way in which it was sold by the Establishment has further damaged confidence.

The authorities must get on with helping to raise the extra capital the banks need in the longer term from the private sector. In the short term all they can do is make markets more liquid by lending to the banks, to see them through the worst conditions I have ever seen.

Nationalising them is not the answer. It just transfers the risks to taxpayers. The banks are too big for taxpayers to take on, and the losses would be unacceptable.

John Redwood MP is leader of the Conservative policy group on economic competitiveness