Short Note - British Economic Conditions

The Bank of England’s latest financial stability report suggests that the system remains vulnerable if lending does not pick up and if the economy then starts to stall once again.

Banks globally appear to have retreated from international lending to concentrate on their own domestic markets. In the UK, lending to non-financial ‘real’ economy companies is still low and possibly still falling.

Unemployment has still not yet reached early 1990s levels by any means but it is clearly rising. Mortgage arrears are also rising, although, again, the trajectory remains unknown. Otherwise, the main economic stories remain the scale of borrowing and preparations for a new Banking Act.

The Government now appears to be taking the line that it is the powers of the FSA that should be strengthened rather than that more powers should be given to the Bank of England. The FSA will have (it would seem) a new statutory duty of maintaining financial stability.

This suggests powers being taken away from the Bank to give to the regulatory FSA. This creates genuine political debate – the Conservatives want to increase the powers of the Bank of England (which seems to be the subject of much Treasury criticism for failing to warn it of the impending crisis).

The Government is determined on a more sector-specific regulatory approach to financial stability. The expectation is that tensions will increase between Chancellor and Governor and this might explain the FSA’s earlier and pre-emptive attempt to try and indicate a more co-operative stance with the Bank.

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Squabbles Over Financial Regulation In London

The squabbles over financial regulation continue with four competing players: Treasury (Government), Financial Services Authority; Bank of England; and the financial services industry itself, backed by its own lobby organizations and the City of London.

The ‘aggressor’ in this case is the Bank of England which wants tougher financial regulation whereas the Treasury and the City worry that a regulatory turn of mind, in an excess of risk avoidance, might kill the goose that lays the tax and profits egg.

The Bank of England’s concern is probably more noble. It genuinely fears that, having escaped from economic meltdown by the skin of our teeth, we have no second chances and that a future crisis could break the back of the British economy.

A second crisis (though never said) may place the future of traditional British liberal capitalism in doubt. The FSA, meanwhile, is probably least noble in its concerns – protecting its turf from attempts by the Bank of England to take over many of its key functions and so displace the primary City regulator.

The FSA has, however, seen the writing on the wall, especially as the Bank has some US precedent behind it. An incoming Tory Government might very well adopt a similar tough line, if only because something decisive may need to be done by the incoming Chancellor for political reasons.

The FSA model is not to hand over powers to the Bank of England but for improved collaboration with the Bank through a financial stability committee. It is seeking co-dominion over City regulation. Much of this is bureaucratic self-protection and need not detain us for long.

More importantly, all this is another sign of the weakness of the New Labour Government in allowing these non-Governmental bodies to fight a turf war in public without settling the matter through edict.

The financial services sector is remaining cautiously and relatively silent except on the attempted coup against the City of London through a new EU Directive where it fears that a weak Government really will take its eye off the ball and allow a French knife to slice the goose's throat.

Bank and FSA are united in seeing bad behavior returning to the banking sector. They are now expressing, often indirectly, concerns at the effects of political weakness on policymaking as the immediate threat recedes.

Centrist governments and finance capital are already drifting back towards their old strategies of collusion.

The technocrats charged with the economy are getting worried that laziness and fear will mean no reform – and that no reform may mean that we will have to go through the whole crisis again at some later stage with much worse effects on the economy and perhaps the polity.

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