State-run banks won’t save Britain – or even Brown

There is seemingly no financial crisis so bad that it cannot be made potentially worse by the prime minister’s intervention.

Mick Hume
Columnist

24th February 2009

As the financial crisis continues on both sides of the Atlantic, the whole world hates a banker; the UK’s former director of public prosecutions even suggests that the corrupt money-men should be treated like muggers and terrorists. Thus it is that prime minister Gordon Brown, never afraid of following a crowd, has finally decided that, after a decade of cosying up to the big bankers, it is time to crack down on them instead.

Brown has apparently agreed that bankers’ bonuses are the root of all economic evil, as if it had been some other chancellor of the exchequer who championed the City’s ways for 10 years. Now he wants to put the outbreak of public banker-bashing into practice. New Labour’s rushed-through Banking Act has just come into force, giving the UK government unprecedented powers to intervene in the banks – having already nationalised Northern Rock and taken effective control of others. The prime minister is also pushing for a new international system of banking regulations, to be agreed at the G20 summit in April.

In an article published at the weekend, Brown argued that his aim is to create a banking system that ‘becomes the servant of our economy and society, never its master’. Who could disagree with that – or dispute the suggestion that many self-inflated bankers deserve to be taken down a billion or two pegs?

Yet there is seemingly no crisis so bad that it cannot be made worse by Whitehall’s intervention. Brown’s proposals look as if they could leave us with the worst of all worlds. On one hand, the heavy hand of state and international regulation is unlikely to encourage the sort of boldness or productive risk-taking necessary to rebuild the economy. On the other, New Labour’s conservative bean-counters seem to have no intention of using their extensive new powers radically to shake up or reconstruct the financial system.

While the outcry against the excesses of bankers is understandable, it is underpinned by a couple of false premises. Over the past decades of inflating and deflating financial bubbles, banking in the UK has never been an unregulated world of wild risk-taking cowboys. The financial world has often been subjected to the same kind of box-ticking regulatory mentality as the rest of society. At the same time, of course, the authorities encouraged the spread of the credit-fuelled financial splurge that passed for economic growth in Britain and has now imploded so spectacularly. Yet even that was as much about risk-avoidance as risk-taking. Slicing and dicing all manner of dodgy debts into packages that were sold around the global system was a way for financiers to spread risks and avoiding taking responsibility for what they were doing. This lethal cocktail of recklessness and risk-avoidance has ended up in a crisis where nobody really knows who owes what to whom or how much they are worth, and everybody has become even more risk-averse and wary about making loans and investments.

Now along come Brown and his friends in the Euro-bureaucracy to insist that the solution is less risk-taking and ever-more regulation. Yet the really serious underlying problem is that, even in the ‘boom’ years, there has been far too little bold risk-taking and productive speculation in our lifeless economy. For example, Rob Killick’s interesting blog, UK After the Recession, links to some revealing statistics on the tiny scale of venture capital being invested in UK hi-tech start-ups: last November, Lord Drayson of the British Venture Capital Association noted that, ‘When I appeared before the science and innovation select committee a few weeks ago, the talk was all about UK start-ups entering the valley of death. Here’s the nub of the problem. Although BVCA members invested £34billion last year, little more than £200million of that was in early-stage UK technology.’ This seems fairly typical of the low levels of investment in research and development in the UK economy. Even Brown, in his Observer article, recognised the need for ‘new institutions to support British start-ups, particularly those with innovative, high-growth potential’.

But is ever-more state regulation likely to provide that sort of impetus for investment? History suggests that it is far more likely to act as a dead hand on innovation and growth, as it has elsewhere in life. Think of the EU attitude to micro-managing everything, extended to the most dynamic and productive new sectors of the economy. This is not about specific measures – of course the banking sector needs rules. It is about the wider dominant culture of state regulation, risk-aversion and control.

At the same time, it is striking how Brown appears to lack the will to use his unprecedented powers over the banking system to make big changes or build a new financial order. Instead, despite the inflated rhetoric about how ‘Britain needs to lead the world in reforming and restructuring our banking system’, his actual plans seem very conservative and small-minded. As the BBC business editor Robert Peston noted of the plans set out in the prime minister’s newspaper article (the preferred forum for important government statements), ‘He is saying no to a British version of the 1933 Glass-Steagall Act, or the kind of sweeping reconstruction of the banking system that was prompted by America’s Great Depression’.

Brown indulged in a bit of nostalgia about ‘the reinvention of the traditional savings and mortgage bank in Britain’, as if trying to evoke the local building society as his version of John Major’s warm-beer-and-cricket symbol of parochial Britishness. Then in the same breath he denounced ‘parochialism’ and made clear that, in Peston’s words, ‘Under this prime minister, banks that look after the savings of households and businesses will not be banned from engaging in speculative trading in securities, even though such trading and investment has caused so much of the losses that have hobbled the banking system’.

Brown’s justification for his conservative proposals seems straightforward: ‘Global financial flows and liquid capital markets have brought massive benefits to our economy’, and now in the face of the financial disaster ‘we are not evacuating, but rather entrenching, our place right at the heart of global commerce, finance and trade.’

In other words, Brown’s aim is as far as possible to make things carry on as they have done in recent decades. That, however, seems neither advisable nor possible. spiked writers have discussed at length how the UK’s emptied-out economy has come to rely more and more on credit from elsewhere, notably the dynamic economies of the East. This helped to finance the inflated paper values of property and shares that passed for economic growth over the past decade. But can that sort of shallow pseudo-economy really be the future in our credit-crunched age?

Yet Brown has no alternative to offer. Instead his ambition appears limited to retaining as much as possible of the old system, to keep some air in the deflating financial bubble, and add some more rules and populist gestures. How this is supposed to reinvigorate a more productive UK economy for the twenty-first century, far less ‘lead the world’ in showing the way ahead, he does not divulge.

Despite the frenzy of proposals from government, this is surely what the crisis of leadership really means today: an absence of any vision of a different future, or even of a willingness to ask difficult questions about how we got here or where we are going. For all Brown’s criticisms of economic short-termism, this looks like another example of the ‘presentism’ that has paralysed political life of late – a distaste for the past and a fear of the future that leaves our leaders frozen in the moment, unable to see further than the next opinion poll.

These radically modest proposals will save neither the economy nor Brown’s premiership. Yet there has been relatively little serious criticism of his statist approach to the crisis from his political opponents. All of them now look to the state to solve economic problems, one way or another. The death of even rhetorical support for the free market has been remarkable.

This old Marxist is no fan of the free market, either. But you do not need to be pro-capitalist to question whether the great clunking conservative fist of Brown-style state intervention and regulation can inspire the sort of innovation and aspiration required today and tomorrow. Or to point out that the authorities are running up trillions in debt to ‘save’ the UK and the world economies, while refusing to admit to the cuts in state spending and tax rises that will be required to pay for this useless outburst of money-burning. They are indulging in a game of fantasy finances to outdo any over-mortgaged consumer or cowboy banker a million times over.

Mick Hume is editor-at-large of spiked.