Mark Hannam
It was, said one MP, “a shocking cover-up.” Another was “outraged”; a third complained about “how many jobs you could support with all this money.” The broadsheets prominently covered the scandal. The cause of the distress? The announcement on 24th November that, in autumn 2008, the Bank of England provided emergency liquidity assistance (ELA) to the Royal Bank of Scotland (RBS) and Halifax Bank of Scotland (HBOS). These “secret loans” totalled about £60bn and were repaid by RBS in December 2008 and HBOS in January 2009.
Those acquainted with the workings of London’s wholesale money markets were unsurprised by the announcement. It was widely known that the Bank of England had provided significant liquidity to banks that were unable to fund themselves, until things got better. And it wasn’t especially hard to guess the likely recipients of the Bank’s help. At most, for the insiders, the Bank had filled in the details.
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David King
The science of climate change is clear, despite those leaked UEA emails. The technology to tackle the problem either exists, or is on its way. Now we need to handle the finance. That’s why putting a price on carbon was the most important negotiating point at the Copenhagen summit. It’s also why the next government needs to consider a radical new step: parachuting climate scientists and energy technologists into the Bank of England.
Post-Copenhagen, the world must work towards a global cap-and-trade scheme, in which all carbon dioxide emitted comes with a paid-for permit. If a country doesn’t control its emissions, it will pay through penalties. But this global scheme must also be underpinned by new, innovative national measures. Gordon Brown did well in this regard in 1998 with his “renewables obligation,” requiring power companies to put a rising amount of renewable energy on the grid. With the proceeds he created both the Carbon Trust and the Energy Saving Trust, two independent
bodies that have already proved their mettle in the fight against climate change.
However, I have the sense—just as when I was the government’s chief scientist—that Alistair Darling’s treasury is now pulling in the wrong direction. The wasted opportunity of the current economic stimulus package was a case in point. Most of that money could have been directed into low-carbon projects, such as energy efficiency boosts for our ageing housing stock. This also would put unemployed construction workers back to work. South Korea committed 80 per cent of its stimulus money to low-carbon growth. Even China managed 50 per cent. How shaming and frustrating, then, that Britain limped in with barely 10 per cent.
Even without climate change, there is no economic case for the high-carbon status quo. The world spends $1.7 trillion a year on Gulf oil alone. Britain should instead invest its share of this in home-grown energy, boosting the economy and reducing unemployment—the treasury’s own economic goals.
We should welcome the shadow chancellor George Osborne’s declaration that he wants to put the treasury at the heart of the fight against climate change. Indeed, half a dozen Tory speeches outlined an impressive range of measures in late November, from a so-called “green investment bank” to a commitment to cut emissions from government itself more quickly.
But there is a deep-rooted problem that needs to be tackled first. Our economic mandarins are caught in a trap. At best, the treasury sees carbon reduction as a distraction from their primary focus: GDP growth, reducing unemployment, and raising productivity. At worst, they follow the Nigel Lawson school: that even if climate change is real, we should let pure markets operate to solve it. The same is often true for central bankers, who rarely even consider carbon as an important byproduct of a stable money supply and low inflation.
And yet climate change has shown how spectacularly impure markets can be. It is the granddaddy of market failure. The only effective response will be market collaboration, with a global carbon price. At the national level, it must also mean putting climate change right into our nation’s economic heart: the old lady of Threadneedle street herself.
The problem is that any big levers the government might support—carbon pricing, long-term rules forcing more renewables and nuclear energy into the grid, much higher road tax and congestion charges—could be partially undone by the Bank of England, if monetary policy is used to push for less sustainable patterns of growth. So what to do? The obvious option is simply to relocate the climate change committee—to the Bank itself. Established under the 2008 Climate Change Act, the committee is an arm’s length government body—just like the Bank—designed to keep tabs on government emissions. Every five years it holds them accountable for their carbon budget. When I was in government, I recommended bringing energy, climate change and the environment together under one roof: now the new department of energy and climate change (DECC) is well placed to resolve conflicts between the energy industry and the environmental lobby. Similarly, we need to make sure that the Bank of England’s management of the economy is always done with an eye on the carbon implications, and vice versa.
In the first instance, the chairman of the climate change committee should be on Mervyn King’s board of governors. Better still would be if the committee as a whole were run under the Bank’s auspices, so that their respective secretariats were constantly rubbing shoulders and comparing notes. In practice, the climate committee’s staff could also take part in the monthly behind-closed-doors debate at the Bank about the economy and interest rates—known internally as the “Pre-MPC” process—feeding in relevant data to help inform a sustainable monetary policy. A climate expert should be appointed to the Bank of England “court,” its advisory body. And most radically, why not have a climate scientist or an energy technologist on the monetary policy committee itself? Generally there is one labour market economist in the group to stop the monetarists riding roughshod over the jobless. Unemployment is not a price worth paying for low inflation. Climate change isn’t either.
Alex Crossman
Above: Adair Turner’s interview in the September issue of Prospect hit the headlines and caused a furore in the City
The City takes too big a share of our economy and is bloated by doubtful profits from dubious activities. Not the allegations of placard-wielding demonstrators but of Adair Turner, chairman of the Financial Services Authority (Prospect, September), and of Lloyd Blankfein, chief executive of Goldman Sachs (to a German banking conference in September), respectively. Suspicion inevitably accrues both to an embattled regulator talking tough and an emollient investment banker. And neither Turner nor Blankfein seems comfortable in their role as Jeremiah. But is either right? Is the City too big?
Britain faces an estimated bill of £130bn for shoring up its banking system, a higher proportion of GDP than any other country. This alone should put the issue of the “right” size of the finance sector on the agenda. Unfortunately, the question yields no easy answer. There is no consensus on a relevant measurement, or even on whether the statistics—especially those in Britain’s national accounts—are reliable. Britain has a historic comparative advantage in finance, so one would expect it to have a relatively larger finance sector than some other countries. No one thinks it odd that Germany has a big car industry.
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CityBoy
Fuld: the stoic banker
A year on from one of the most traumatic events of all time in the financial market and we are all driven to a period of sober reflection. Well, almost all.
The media vultures are still pecking at the corpse of Lehman Brothers, 12 months after the fourth largest American investment bank collapsed.
In contrast to the heroic captain of James Cameron’s Titanic who stayed at the helm as the boat went down, Dick Fuld, Lehman’s erstwhile chief executive, was to watch his reputation sink with his ship. Also unlike Captain Smith, Fuld’s demise was not played out to “Nearer my God to thee” but to the soft thud of a former employee’s right hand as he was floored while exercising in the firm’s en-suite gym.
In many ways he has become the Midas figure of the crisis. After taking the reigns of the troubled investment bank in 1994 his rise to prominence was somewhat staggering. Within a decade Lehmans was challenging the mighty Goldman Sachs for dominance on Wall Street—these were golden days indeed! Read more »
Tom Streithorst
Krugman: too easy and too hard on his profession
Reality has a way of destroying elegant theories. This recession has demonstrated the vapidity of most neoclassical economics. It is hard to predict the collapse of the world economy and the destruction of a quarter of its wealth if you start with the assumption that people are rational, utility maximising and omniscient. Back before the bust, even distinguished economists were so infatuated with the Efficient Market theory that they argued bubbles were impossible. If markets always get prices right, bubbles can’t exist. One published a book claiming that the famous Dutch tulip bubble was no bubble at all but rather a rational response to supply and demand.
How did economists get it so wrong? That’s the title of Paul Krugman’s article in this week’s Sunday New York Times magazine and his short explanation is that they forgot Keynes and developed an amour fou for the free market. From Adam Smith until the 1930s, most economists believed that markets were self-regulating. They didn’t look self regulating in the 1930s, with the economy stuck in high unemployment and no prospect of escaping it. Keynes realized that lack of effective demand and unemployment fed on each other, trapping the economy in a low equilibrium state. His solution was for government spending to take up the slack and it seems he was right. It took World War II and the greatest government deficits ever seen to end the Great Depression.
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Tom Streithorst
City limits: the sector must shrink
The outcry at proposals recently floated by FSA chief Lord Turner in Prospect suggests that the City knows they would be effective. The City does not fear “regulation”; regulations can always be circumvented. But a Tobin tax, an infinitesimal levy on all financial transactions, would squash the profitability of much of the short-term trading which swells investment bank profits without doing anything to create value in the real economy.
For the past 30 years, the economics profession has been in the grip of a dangerous delusion, namely that all financial transactions are intrinsically beneficial, in that they create “deeper, more liquid markets.” The credit freeze that began on 9th August 2007 tells us that this liquidity is more apparent than real, that in moments of danger, when markets really need liquidity, it just evaporates. Without the liquidity “fig leaf,” the rationale of social and economic benefits for much trading activity becomes impossible to maintain.
The current financial crisis gives us a chance to return to an earlier understanding of the purpose and function of financial markets. Finance exists in order to most efficiently transform societal savings into productive investment. It is a deal between the present and the future; forgoing consumption now in order to invest in capital goods which will spur productivity, thus allowing greater consumption at a later date.
The explosion in the size and profitability of the financial sector since the early 1980s has almost nothing to do with the creation of capital goods. Real investment as a share of GDP has declined even as financial sector profits have gone through the roof. Arbitrage, intra-day trades, short term purely financial self-referential transactions, which do nothing to create real investment and do nothing for the real economy, would all be priced out of business by a Tobin tax.
The financial sector has grown too big. It needs to shrink. The Tobin tax will do that, without hurting the rest of us. That’s why the bankers are getting apoplectic in the Financial Times. Finance needs to stop being a parasite on the real economy and once again return to its traditional role of creating capital goods and so increasing worker productivity. That is how finance can make all of us richer.
JONATHAN_FORD
Learning from Lehman
“Here’s your money,” is the near universal refrain from the bankers to the politicians. “We want our laissez-faire economy back. If you won’t give it to us, we won’t lend and there won’t be any recovery. And if that’s the case, it will be your fault.”
People have pondered long and hard since last September whether the US government was right to allow Lehman Brothers to collapse. Some believe that it was a reckless act that imperilled the global financial system. Others think it was a necessary shock that gave us at least a chance of changing behaviour in the financial system and checking the bubble mania of recent years.
I am in the latter camp, but find myself increasingly feeling that the opportunity to reform the financial system has been fumbled. We have had the pain without the gain, so to speak. The view now seems to be that the crisis of last autumn was so scary that it is imperative that the system should be shored up quickly, even at the cost of effective reform. Hence the queue of banks on either side of the Atlantic clamouring to repay their government money. They want to get back in the game as fast as possible.
The Lehman crisis was supposed to shock the financial system into behaving better—to force it take fewer risks with investors’ (and ultimately taxpayers’) funds. But far from cowing the bankers, who have recovered their bounce, it has cowed the politicians, the very people who were supposed to take charge and enforce new rules. The best hope for change now probably lies with the central bankers. Let’s hope they rise to the challenge.
This article first appeared in “Crisis Watch” in the July issue of Prospect
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