British politics needs to get serious about Finance.

Dogs not Barking

Despite the 2007-12 UK finance-cum-macro catastrophe and its ongoing aftermath, the size and role of finance remains all but absent from British political debate.

By contrast and even with distractions, it is on US presidential candidates' websites (though not in the Clinton/Kaine pot-poiler "Better Together"), in their stump speeches, occasionally in journalists' headline questions to them, and it has a set of political slogans juxtaposing Wall and Main streets. Given other blind spots, an impressive fraction of US voters have heard of Dodd-Frank and/or Glass-Steagall.

This despite US finance being around 1/4 of its UK counterpart relative to GDP, and so having wrecked far less domestic carnage lately. Yet the British dogs are mute.

I pressed this issue at the recent "Monetary and Financial Policy Conference" 1/ in London. One panelist pointed to a document attached to the 2010 Tory manifesto (six years ago!); another respondent acknowledged that the issues "arise differently here"; and another said even traders (pros) in his finance firm did not know what the FPC was, without googling--so what hope for politicians or the general public?

So let me hazard some guesses about this British quiescence, and then stir the pot.

  • History. Suspicion of Big Finance is an axis on which US politics turns, dating from the Revolution through Jefferson, Jackson, Jennings Bryan, and both Roosevelts. When that political vein is crossed--as Hamilton, and Hillary's "Financial reform really has to come from the industry" 2/--transgressors need self-immolating opponents. The closest but very distant British parallel, "commanding heights nationalization", is discredited by association with Old Labour.
  • Independence. 1929 put paid to any residual US political presumption to "leave finance to insiders". Till now, no such UK disaster could so squarely be pinned on British banking, so veneration of insider--including Bank of England--independence persists.
  • Capture. Finance exercises political sway in all forms on both sides of the Atlantic. But while the US party favoring untrammeled finance was tarnished by pre-crash incumbency and dismissed, the British broker-belt party took charge mid-crisis.
  • Bad apples. US commentary excoriated the likes of Madoff and 13 TBTF bankers 3/ but broader finance did not escape. In contrast, apart from such as Messrs Vickers, Miles 4/, and Jenkins 5/, UK dissent focussed almost exclusively on austerity, leaving the "crash-was-global-plus-bad-apples" narrative largely unchallenged. And "let us off the naughty step" 6/ acknowledges only childlike misdemeanors.
  • Fixed. The political presumption is that folding the FSA into the BoE, the new committees, Basle III, Andrew Bailey as head of hounds at the FCA 7/, ring-fencing, and fines have fixed fixable problems, such as they were. So let sleeping dogs lie.

Even allowing all this, it is remarkable that British finance-insiders still enjoy the political benefit of the doubt, even after catastrophe.

And this despite adding more fuel to the fire. Their recent claims that "bank capital is now 10 times that pre-crisis" 8/ and that "resolution, supervision, and the counter-cyclical buffer offset systemic capital requirements" 9/ are not just risible sleight-of-risk-weighting, base-bias, and blind-faith, but as such, they are emblematic of intent to deceive. The bottom line is that these folk now bless leverage of 30 for the UK banking system against leading academic consensus of between 4-10. Way off 10/.

Moreover, they've been only too happy to see the Bank of England dual-mandated: to promote and regulate the city. Perhaps that is because the former curbs the latter.

Defending all this does not make Mark Carney Bad-Apple-in-Chief: he would not be in post otherwise. But he has much to answer for. The UK Independent Commission on Banking watered down its leverage proposals due to threat of arbitrage, overlooking that Carney heads the global body--the Financial Stability Board--which sets global requirements which curbs those risks. His go-easy approach on leverage at the FSB thus co-opted the ICB into the globally coordinated stability race to the bottom. And so the British finance buck still stops with the taxpayer.

That is playing with fire. Finance has already taken the UK fiscal to the cleaners--with credit boom-bust over the past two decades pushing public debt from 40 to over 90 percent of GDP--so both the fiscal backstop for finance and broader budgetary room for maneuver over the medium term are now deeply compromised. But the UK's lax leverage ceilings still presume to lean very heavily on it.

On top of this, having stoked--by financial crisis--the Brexit fire, UK finance now threatens to decamp to the mainland, absent new forbearance. In any other context, all this would be called extortion. And independence-reverence remains!

Moreover, as one conference attendee exasperated: "I cannot say if UK regulation is OK now unless you tell me if the goal is crisis 1 in a 100 or 1000 years", an unavoidably political question. Yet still finance chants "Keep Politics Out!"

And such finance-self-serving is relentless. Its lament against deviations from a "level playing field" blithely ignores that different citizenries may have very different answers to the "1 in 100 or 1000 year" question and widely varying fiscal backstop capacities. Either suffices to render non-level-playing fields first-best. But no matter.

Even worse, recent attacks on the Bank of England--from the likes of Messrs Rees Mogg 11/, Hague 12/, and the Prime Minister 13/, all, ironically, stoked by the BIS 14/ --miss the mark, not only on substance, but also by assaulting its monetary rather than its regulatory stance. John McDonnell defends (in a telling choice of words) the Bank's "sacrosanct" independence, but even his (Blanchflower) review 15/ looks only at monetary. While there are monetary matters to debate 16/, focus on them is a severe case of elephants in rooms.

When I asked Johns Vickers and Kay at the conference what's to be done about all this, they--not typically taciturn--both demurred. Perhaps that reflects reluctance to let go of faith that the alternative to unpredictable political engagement is the sweet water of pure reason, however strong the evidence just summarized that the alternative is, rather, unapologetic and unrestrained self-serving by finance insiders.

In short, there are far too many "bad apples" 17/ for the orchard to be regarded as sound. And in any case, politics cannot ultimately and should not be shut out: the attempt to do so partly accounts for the the enraged vote for Brexit and for Labour's leftward lurch. Far better to seek ways to bring politics in more productively, to insist on the underlying fiscal and public interest, at a much earlier stage.

In particular, it should now focus on driving up capital requirements and undoing the Bank of England's dual promotional and regulatory mandates.

Such engagement will not suffice to prevent misfortune, as the US itself demonstrates. But we have tried the alternative. British dogs should be howling.