Comments on: Don’t blame the FSA

By: Damian

Damian — Mon, 31 Mar 2008 22:16:10 +0000

I disagree with your premise about the FSA as it is very obvious that their stress test model is flawed and several of their banking team have left. Northern Rock was at some stage going to fail given the increasingly poor quality of its book, buying so much business when house prices had diverged so far from any sustainable trend was setting itself up for problems, problems already visible in 2006 in the USA. The refusal of loans to banks is nothing new in the London market nor is significant difference in terms, a trip back to the heady days of ‘Competition and Credit Control’ would enlighten in this respect. Indeed Brown’s prudence and stability economy have much in common with this 1970s period, October 1973 even to come?
The Bank of England has been marginalised by Brown and though with 20:20 hindsight an argument that extra liquidity might have helped it’s not obvious that it would as banks weren’t going to lend and the BoE would have had to underwrite NR’s questionable mortgage book. That is the Chancellor’s job.
Rates are set by the market; the Bank should not interfere bar loans to stabilise short term. To do so will be reminescent of Canute. Brown has set up a terrible situation in which rates should rise significantly as demand for money will rise (public and private sectors) and to flood the market with money will weaken sterling and hike prices. That the Tories hadn’t criticised Brown in 1997 or for using CPI and setting the target too high suggests a political electoral rather than a good husbandry bias.
The way the Fed has bailed out the US system is terribly flawed it should not have reduced rates but just provided liquidity. The hiatus now with Bear Stearns is a nonsense and just crowns the terrible flawed reign of Sir Alan Greenspan. A revisiting of 1987 with its change from Volcker, 40% boom in DJ-30, and huge bailout in October and subsequent asset inflationary policies is wince making.
It would be better for Cameron to outline a very diffficult period c/o Brown for the UK, which he is beginning to do.
BTW: I sense that some greater scrutiny needs be made of the insurance takeover game or we will be facing in a few years to a number of Equitable Life type calamities; new owners like some leveraged Private Funds finding difficulties in supporting liabilities. After all insurance companies are themselves primarily Hedge Funds.

By: Iain

Iain — Fri, 28 Mar 2008 10:32:26 +0000

You are probably correct in your analysis but I am not prepared to be so forgiving to the FSA, for the FSA seems to have been guilty of failings it wouldn’t tolerate of the companies it regulates, after all failing to keep proper records is a serious breech of FSA rules subject to heavy fines, yet something they have been found guilty of with NR.

So who fines the finer?

By: Robert Davidson

Robert Davidson — Wed, 26 Mar 2008 20:12:27 +0000

My first response to your post was one of horror, but on reflection I think you are closer to the truth than most commentators.

The immediate problem was liquidity, and a B of E operating in the way it was before BG’s tripartite mess would have done a better job at managing it.

The second problem is potential insolvency. We still don’t have any real insight as to the size of this issue as the necessary audit work on the loan book has either not been done or not published. If NR has made bad credit decisions and there are unrecognised losses then the management and shareholders have to take the pain. There is nothing the FSA can do to undo bad commercial choices. Trying to substitute a regulator’s assessment of what is or is not good business is no way to run a dynamic economy especially if the regulator suffers no pain for getting it wrong.

In short you conclusion of putting the B of E back into its old role and scrapping the FSA seems to make sense.

By: MOppenheimer

MOppenheimer — Wed, 26 Mar 2008 17:24:05 +0000

Well, having just written on this topic, I don’t think I could agree with you more. I am slightly perplexed why David Cameron did not make a better job of making the case as to why it was / is a bad idea to split the regulation of banking between the FSA and the BoE. I do agree with the sentiment that the government must take responsibility of this failure, but so too must the FSA. I sincerely hope this is not the last we here from you and other Tories on this issue as I think in light of recent events the status quo can’t remain.

Reply: I am pleased to say David cameron did at PMQs yesterday state that it is now Conservative policy to give powers back to the Bank of England to control money markets and regulate banks.I suspect it is something the government will inch towards as well.

By: APL

APL — Wed, 26 Mar 2008 15:07:09 +0000

JR: “Don’t blame the FSA”

In the same way you don’t blame an infant for doing something stupid, one usually has hope that a child might grow mature. The FSA is a hopeless case and should be abolished.

By: Neil Craig

Neil Craig — Wed, 26 Mar 2008 13:02:16 +0000

“The correct response to this crisis is not to appoint more staff at the FSA and let the FSA take the blame”

Nice one.
The normal response to a failure of government regulation is increasing regulation. This is a good deal for both politicians & the FSA. The politicians get somebody else to take the blame & the FSA get to expand their empire.

By: Chuck Unsworth

Chuck Unsworth — Wed, 26 Mar 2008 12:37:34 +0000

“The correct response to this crisis is not to appoint more staff at the FSA and let the FSA take the blame. The correct response is to strengthen the banking arm of the Bank of England, and reconnect the Bank more directly to the full working of the money markets, with a remit to keep the markets reasonably liquid.”

I’d agree entirely, but which is the ‘correct’ political response?