Jeremy Hardie asks whether Britain's Whitehall-led bailout is really better than America's messy compromise.
Not for the first time – remember the long lost belief that our troops could handle things better in Basra than the Americans would in Baghdad – there are signs of complacency that the British rescue package for our banks is smarter and neater than the messy Paulson plan in the USA. Martin Taylor, the ex Chief Executive of Barclays has described the Brown/Darling plan as ‘trenchant’, ‘terrific’. The Treasury notice which announced it last week is excellently written, in the kind of polished mandarin prose that comforts us that maybe we at least do indeed still have Rolls Royce minds in our civil service. This contrasts with the sheer scrappiness of the Paulson proposal as first presented to Congress. Then there was the nerve wracking week, while Rome burned, of infighting and US pork barrel politics before finally the Americans got there. Contrast how our constitution worked – a swift decision promptly executed by an effective government machine. And now everyone, including the Americans, is imitating the big, broad, British package – you have to go beyond the sticking plaster of buying up toxic assets.
We will of course have to wait to see whether either of these plans really does the trick, and if they don’t, this kind of reflection will seem irrelevant.
But the messiness of the US debate can be seen as the messiness of democracy. During that week, we saw and heard widespread public disgust at the greed of bankers and their betrayal of ordinary depositors and borrowers. There was a real confrontation between the urgent need to bail out the fiduciary system which sustains money as a vital public commodity, and the repulsive proposal to use public funds to buy back the bad investments which the rich financiers had made. The state doesn’t compensate ordinary businessmen or investors on that scale. The confrontation made salient the inescapable paradox of the fractional banking system – that we use private companies to provide us with a public good. Or, as it is often put, the system guarantees that profits are private and losses public.
In Britain, the neatness of our solution is the neatness of technocratic and private process. No debate about whether we should do it, or what it should be. A fait accompli. Of course, there are mutterings. And, particularly if it fails, there will be a political price – though oddly, for a Labour government about to have to explain why it had breached Brown’s proud, prudent golden fiscal rules, it is a blessed relief that such measures as the ratio of debt to GDP now look like fussy technical details – who cares now whether it has gone above 40%? Here, public assent or at least acquiescence can be taken for granted.
But one issue of principle remains and will recur. The US plan was criticised for not giving details of how exactly would it work – for example, what assets would be bought at what price from whom? Paulson wanted to say ‘give me the money and I will decide how exactly to use it to solve the problem’. The critics said ‘tell us in advance the rules you are going to follow’. Again, this debate never started in Britain. The Treasury plan, for all its intelligence and clarity, never said exactly what money would be made available to what bank on what terms. That was left to case by case discretion – so that no doubt HSBC will take no Government capital, let alone equity: and RBS will take a lot, including equity.
The debate about rules v. discretion will run and run. We have scarcely begun to think through what we mean by ‘better’, ‘more effective’ regulation. So far these terms are mere hand waving towards a solution which will magically combine the freedom of the market with bright new ways of avoiding its excesses. In the good old days, the Governor of the Bank of England knew everything that was going on, and if a bank were to run unacceptable risks it was told to stop. Ad hoc, expert judgement based intervention. Not transparent, not accountable against a set of ex ante rules. We don’t, for many reasons, like that sort of thing now. But ask yourself this question. How should we have dealt with the excesses at Northern Rock and Bradford and Bindley? Should we have had better rules? Or should we have had smarter regulators who just said it is too dangerous to increase your lending so fast, or to base mortgages on self certificate income and drive by valuations? Do we want regulators who apply the rules well and fairly, or are street wise enough to intervene case by case when they see that it will end in tears?
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