Banking regulation: Labour and Tories BOTH got it wrong

Watching Prime Minister’s Questions the other week, the ‘yah-boo’ politics as described by SDP leader David Owen in the 1980s was alive and well. Following the charade on the Twitter hashtag, Gabby Hinsliff summed it up well; “Shortened version #pmqs if you can’t be bothered listening: the banking crisis is the other lot’s fault (says everyone)”. Not only is such tribal politics an immense frustration for the general public, but it is unproductive. Hinsliff’s tweet also raises the question of who was to blame; David Cameron and Ed Miliband’s rhetoric at the dispatch box would probably have you believing whoever the last person to speak was. Mindless tribalism is an important topic for another day (I’ve been called ‘Tory scum’ just for wearing a Lib Dem ID card on the streets of Newcastle at the Spring Conference in 2012), but who was to blame? Both parties.

Intuitively, the Conservatives are on to a winner when the issue of banking regulation surfaces. Priding themselves on economic competence at Labour’s expense, they justifiably deride the Opposition for Gordon Brown’s promise of “no more boom and bust”, along with their feather-light regulation which helped to lead to the 2007 banking crisis. New Labour’s hubris when it came to economic regulation is evident in Gordon Brown’s Mansion House speeches, such as his declaration in 2006 that “we (New Labour) were right to build upon our light touch system”, and in 2007 that the Government was “enhancing a risk-based regulatory approach”. In his first Mansion House speech in 1997, Brown proved his Thatcherite credentials by wishing to “make supply side improvements that are needed” (or Reaganomics if you prefer). By capitalising on this, Cameron can expect a big cheer from his Coalition backbenchers at Prime Minister’s Questions, and get one or two red faces on the Opposition rows. Or does he?

Ed Miliband returns the serve by sneering that Cameron demanded “even less regulation”, and simple quote searching makes this accusation accurate. Cameron will wish to forget these quotes in a hurry, and like Brown he made them eerily close to the financial crisis from 2007-onwards; in 2007 he said “We need to make it more difficult for ministers to regulate, and we need to give the critics of regulation more opportunity to make their case against specific new proposals”. If that wasn’t embarrassing enough, Cameron added “A Conservative Government should relax banking regulation, allowing a new breed of venture/micro-credit institutions...the regulatory burden should be measured and reduced year on year”. The Thatcherite consensus was alive and well.

In short, Labour got it wrong in office, and the Tories got it wrong in Opposition. The problem is, in an age where banker’s bonuses appear to be escalating, and RBS can get away with lending little despite being 82% nationalised, we seem to be left with a depressing option of picking a lesser of two evils. Do we believe the approach to banking of Miliband and Balls, the right-hand men to Gordon Brown in office? Or do we hope that Cameron has ‘changed his mind’ on deregulation and is prepared to hit the banks hard? A lack of timescale on implementing the Vickers Report may allow for cynicism.

However, without intending to invoke Anthony Giddens, there is a third way. Way back in 2003, when the economy appeared to be booming and any talk of crisis was scoffed at, Liberal Democrat Treasury Spokesman Vince Cable asked Gordon Brown “Is not the brutal truth that ... the growth of the British economy is sustained by consumer spending pinned against record levels of personal debt, which is secured, if at all, against house prices that the Bank of England describes as well above equilibrium level?" Added to this, Cable was widely judged to have edged the 2010 Chancellor’s debates with George Osborne and Alistair Darling. For all the talk that the Lib Dems are continuing a pandering to the banking industry, their 2010 manifesto commitment is, slowly, being realised:

“Break up the banks, to ensure taxpayers are never again expected to underwrite high-risk banking. We would establish a clear separation between low-risk retail banking and high-risk investment banking, and encourage the development of local and regional banks. We will introduce a Banking Levy, so that banks pay for their tax-payer guarantee, until the break-up is complete”.

This manifesto commitment is being realised in two ways. Firstly, the Vickers Report (set up the Coalition) recommends “The ringfence - trailed in the interim report in April - should include domestic retail banking services while global wholesale/investment banking should be outside”. Secondly, a permanent bank levy raising £2.5 billion a year has been made. To prove that the Lib Dems were not recent regulation converts like Labour and the Tories, their 2005 manifesto stated that “We will tackle irresponsible credit expansion in  mortgages and personal loans by curbing misleading advertising and anti-competitive practices by promoters of insurance for mortgages and loans, and of credit cards”. So at least one party was talking tough on banking regulation.

The 2007 crisis was also down to global events. It may or may not be clear by now that I’m not an expert in economics, but I do know from history that the causes of the 1929 Wall Street Crash (and subsequent Great Depression) and the 2007 debacle were frighteningly similar; easy credit schemes along with an overheated financial sector. I’m a consistent praiser of the 1933 Glass-Steagall Act in the USA, brought in by FDR’s “New Deal” administration; an Act which separated investment and retail banking. The Act lasted until 1999, where it was repealed by the Gramm-Leach-Bliley Act, sponsored by Republicans but curiously not vetoed by President Clinton; arguably a key instigator of the subprime mortgage crisis. Barack Obama’s administration sought to eradicate this with the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, sometimes dubbed “Glass Steagall II”. 

These elements show that the financial crisis was a culmination of global events and domestic errors. I will put my economic tin hat on here, but with tougher regulation in the UK, it’s likely that the crisis would have still been severe, but nevertheless softened to a degree. The problem is that global events allow for New Labourites and the current Labour Opposition (it’s sometimes hard to tell the difference between the two) to gain a scapegoat, humorously satirised by Rory Bremner declaring (as Gordon Brown) that the economic crisis was “none of our doing, but the result of events elsewhere; in America, in China, and in a small village in Mexico”. 

A vote for the Liberal Democrats economically or otherwise may be considered anathema to those who call them ‘Tory poodles’ who have ‘sold out’. However, answer me this question; who would you rather have as Chancellor? George Osborne, Ed Balls, or Vince Cable?