Thursday, October 22, 2009

Bank of England versus the British government

A big political fight is underway between the Bank of England and the British Labour government, about how to deal with the financial and economic crisis. It is an important one.

But first, a bit of background. In decades past, there have been major conflicts between the British government and the City of London (by "City of London" we mean the financial services industry, not the narrower City of London Corporation.) One of the more famous historical quarrels led Harold Wilson, the British Prime Minister, to shout:

"Who is Prime Minister of this country, Mr. Governor, you or me?"

In general, it is fair to say that when there has been a conflict, the Bank of England has stood shoulder to shoulder with the City of London, against Britain's democratically elected politicians.

The essence of the latest argument is this. Mervyn King, governor of the Bank of England - and supported strongly by Britain's Conservatives Party, the real party of offshore -- wants the main focus to be put on separating "casino" banking (the stuff that's brought us all the trouble) from "utility" banking (the socially useful stuff that helps you and me get cash out of ATMs, and so on,) just as was done in 1933 with the "Glass-Steagall" Act in the United States, repealed in 1999. Now there is nothing wrong with King's proposal: it seems like a good idea.

Yet that is not all there is to the story. The British government, for all its craven kow-towing to the City of London in the past, should at least now get credit for speaking some truth.

Two points stand out. First, as Chancellor Alistair Darling said:

“The cause of the problem is that banks had been insufficiently regulated at a global level and we have got to set standards for that in the future."

If this could be achieved meaningfully, it would confront the threat from the secrecy jurisdictions head on, and would be far more effective than would separating "casino" from "utility" banking. More specifically, the FT adds:

"Mr Darling wants all banks to draw up “living wills”, allowing them to be wound up over a weekend without endangering the banking system or jeopardising depositors’ accounts."

The "living wills" approach would also constitute a direct assault on the secrecy jurisdictions: see here and here for more on that.

It would seem sensible, in fact, to implement both the Bank's and the government's approach: global regulation and living wills, plus a new and updated Glass-Steagall Act (globally).

But politically, of course, you have to choose your battles.

And note that Britain's democratically elected government, for all its terrible flaws, has chosen the important battle - the one that would truly promote tax justice - and the Bank of England has chosen the battle that would, while achieving something positive, allow the City of London to continue to remain the global centre of international financial abuse.

Perhaps the main lesson should be this: the Bank of England, the City of London's top cheerleader unaccountable to Britain's population, ought to be brought under appropriate democratic control.


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