John Redwood: his part in the credit bubble
Here’s his defence on his blog:
“What the study I chaired actually said was we needed tougher regulation of cash and capital in banks, as credit was too easy. Events proved that right.”
Well, I’ve had another look at Redwood’s 2007 review (co-authored with the Next chairman Simon Wolfson) and I’m afraid I’m not left with the impression of someone who was alarmed at the prospect of an impending financial collapse, or massively concerned about our fragile banking sector.
There is a mention of “easy money” on page 2 and this:
“The main central banks worldwide have opted for low interest rates, the ready creation of credit, and tolerance of innovatory means of financing public and private sector activity through big increases in debt. It has been the era of public/private partnerships, specialised credit-based funds and funds of funds, collateralized debt obligations, collateralized loan obligations, credit default swaps, special purpose vehicles and many other similar ways of raising borrowing throughout the financial system.”
Which sounds quite prescient until you read Redwood describe this as part of a “massively favourable trend“. Of course, Redwood could argue that it was favourable up to the point where it becomes a disaster – but there’s no mention in the report of fears of a credit implosion. Indeed, Redwood’s main criticism is that Britain’s growth since 1997 has not been strong enough given these benign conditions.
As for banks’ capital, the report concedes that the previous government was justified in imposing regulation here, but Redwood, contrary to what he says now, did not suggest that banks should be mandated to hold more capital in his review.
But more significant is this on page 59 under the heading “financial service regulation”:
“There is not necessarily a good reason why a regulator should have to be involved in product design and marketing for rich and sophisticated investors. We recommend that such investors should be able to sign a piece of paper, which allows them to go ahead and buy unregulated products at their own risk.”
Michael Lewis’ masterful opus on the financial crisis “The Big Short” makes it clear that the root cause of the whole meltdown was “sophisticated” investors, including banks, buying up credit instruments that they simply did not understand. Redwood wanted to make it even easier for them to do all this.
Other parts of the report make for interesting reading too. Redwood pushes the case for Britain to follow the Irish example on page 9:
“The Irish move to a very low corporation tax has generated very significant revenue growth, considerably in excess of Britain’s, where a slower economy has been combined with a number of stealth taxes.”
We now know that Ireland’s growth was even more reliant than Britain’s on an insane bubble. And so were its tax revenues. But Redwood, like the rest of the British right, didn’t spot it, so blinded was he by his ideological fixation on cutting corporation tax.
In fairness to Redwood he did spot a potential problem with division of responsibility between the Financial Services Authority and the Bank of England in the event of a banking crisis:
He argues on page 14:
“We think it would be safer if the Bank of England had responsibility for solvency regulation of UK-based banks, as well as having an overall duty to keep the system solvent. Otherwise, there could be dangerous delays if a banking crisis did hit.”
Yet it is unlikely that, even if the Bank of England had been in charge in 2008, it would ultimately have made much of a difference. The destructive forces had been building for years. The credit meltdown wasn’t a consequence of poor crisis management.
Does any of this matter? Wasn’t Redwood’s 2007 review an irrelevance? Aren’t his views now of even less significance? I would argue that it does matter. One of the reasons why Labour was so lax in controlling the banks (something even Ed Balls now admits) was that the Tory party was even more laissez faire. If Labour had tried to curb the banks’ excesses people like Redwood would have howled blue murder. Ministers would have been accused of killing growth, undermining “one of our few successful industries” and other clichés.
Those who were even more laissez faire than Gordon Brown and Tony Blair in the boom shouldn’t be allowed to get away with rewriting history now and presenting themselves as unheeded prophets. Thankfully, with Redwood at least, we have the paper trail to show that he was no such thing.Tagged in: bank of england, banks, capital, deregulation, fsa, ireland, john redwood, regulation, rewriting history, rightwing, Simon Wolfson
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