Memories are short. Fourteen years ago, the world came as close as possible to financial meltdown. Some banks were going under, while others were being rescued or forced to merge. In the end, disaster was avoided, but at a cost to the global economy of $10 trillion, not to mention the social misery of huge job losses and fierce government austerity measures.
Then, it was widely agreed, we could not go through the same again; that we only just escaped total disaster. Don’t worry, said governments, regulators, financial industry representative bodies and the main corporate players themselves, we will tighten the rules to ensure there is no repeat.
This week, 58 leading economists and politicians, including the former business minister Vince Cable, wrote to Chancellor Rishi Sunak, warning the UK is at risk of another crash.
Why? Because the government is proposing cutting red tape in financial services and making “competitiveness” with other international financial centres an objective of the City’s regulators.
It was precisely this emphasis on both winning and defending business from the likes of Singapore and Hong Kong, say Cable and the other 57 signatories, among them Greek former finance minister Yanis Varoufakis and Columbia university professor Adam Tooze, that caused the 2008 crisis.
“We wholeheartedly support the government’s aim to stimulate long-term UK economic growth, including through financial regulation,” their open letter said. “Yet we believe that competitiveness is an inappropriate objective for regulators.”
Their fear is that making London more “open to business” could spark excessive risk-taking, of the sort that took the world’s markets to the brink. They’re responding to Sunak’s intention to “cut red tape” through a new financial services and markets bill.
Sunak can make the move because the UK is no longer in the EU. The City is seen as vital to the country’s prosperity, a world-beater — hence the decision to row back on obstacles perceived as preventing that from occurring.
But this ignores why they were introduced in the first place. After the collapse, insurers and banks were required to maintain greater capital reserves. Similarly, banks were obliged to separate retail and investment banking. The appointment of banking directors was made subject to more rigorous examination; the barriers to entry for challenger banks were tightened.
These, and more, were implemented to inject greater caution, to stop the banks and financial services companies behaving in a cavalier, and ultimately foolhardy, fashion of the sort that caused such carnage.
Now, the government, supported by lobbyists from the financial community, want them scrapped. Businesses argue they’ve yet to see any of the Brexit “dividend” they were promised. Here, they say, would be one package of benefits that would give London a boost.
“After the last global financial crisis … it was accepted that a focus on competitiveness by the then Financial Services Authority (FSA) had helped cause the disaster,” the letter said.
They pointed to a 2019 speech by Andrew Bailey — the Bank of England governor who formerly headed the FSA’s successor, the Financial Conduct Authority — in which he argued against reintroducing a competition objective for the City watchdog.
“It didn’t end well for anyone, including the FSA,” Bailey said.
Cable issued a statement. “It is extraordinary that the lessons of the financial crisis are being forgotten already, despite the massive harm that was done,” he said.
“The new emphasis on ‘competitiveness’ rather than stability and safety is an ominous warning that those who forget their history are doomed to repeat it.”
It’s impossible not to be in favour of the City maintaining its hegemony — after all, it is one of the few global champions in the UK’s armoury. That, surely, cannot come at the price of undoing precautions that were created for a perfectly sound reason.
The danger, though, is that this a government led by someone who has spent his entire life ignoring the rule book. We have, too, an administration that drove though Brexit, that is gung-ho in wanting to show that was the right strategy.
It’s also one that quietly, behind the scenes, is in the thrall of its rich donors and friends in business.
It’s no coincidence that several of the backers of the Brexit campaign were hedge funds that did not wish to be subjected to interference from Brussels. We leave the EU, and the government is under pressure to go the extra distance and demolish the safety steps put in place after 2008.
There is a knee-jerk aspect to regulation at present, which is alarming; the sense that things are not being fully considered.
We’re witnessing it writ large with Northern Ireland, when Brexit was rushed through without enough regard to the province and how the border with Ireland, still within the EU, would function. We’re seeing it with the plan to haul illegal migrants off to Rwanda, without due attention being paid as to how that will operate in practice.
We’ve seen it again this week with the energy watchdog, Ofgem, announcing proposals to update the household price cap four times a year instead of the two.
Martin Lewis of MoneySavingExpert said the changes “sell consumers down the river” and were “killing hopes of firms launching cheaper deals”. He was not alone: Citizens Advice, the charity, said the scheme would “make it harder for people to save on their energy bills, even if wholesale prices drop.”
In other respects, the state appears powerless or reluctant to act. In March, Sunak cut fuel duty by 5p, in an effort to lessen the effect of rising petrol prices.
Evidence has emerged, however, that far from taking their lead from the chancellor and helping drivers, the petrol retailers have actually increased their profit margins by an average of 2p a litre since he made his announcement.
They were making an average of 9p on a litre of unleaded petrol, now, says the RAC, they’re netting 11p. On diesel, the margin was 6p, now it’s 8p.
There are calls for a new pump-watch regulator to ensure fair prices, but the government merely says it has “engaged” with the Competition and Markets Authority.
The result is a familiar lack of consistency, a government that makes questionable moves against heating bills but not petrol.
We’re all for advancement and improvement, of course we are. But not if it means one step forward, two back.