Saturday, 24 January 2015

Did they know the 'Big Bang' would lead to the big crash?

Andrew Fisher, author of The Failed Experiment ... and how to build an economy that works - a book about the UK's failed economic model - asks whether the Big Bang's architects knew what they were doing.

If there's one moment that summed up the financial liberalisation, 'greed is good' mentality of the Thatcher government it is the 'Big Bang' deregulation of the City of London in 1986.

Papers released by the National Archives under the 30 year rule reveal that there were some concerns expressed in the heart of the Thatcher government.

A memo by future Tory minister, and then policy adviser, David Willetts, appears prescient - warning that: "If it leads to scandals and liquidations it will be labelled the unacceptable face of unpopular capitalism".

Willetts further warned of a rise in "fraud" and "unethical behaviour". But his concerns were dismissed by his boss John Redwood (then head of the No.10 Policy Unit and a future Tory minister) who said, "The basic common sense of the British public ... will not be tempted into Get-Rich-Quick Limited".

The Cabinet Secretary (a senior civil servant) also wrote to Thatcher, reporting that "People are saying that they doubt whether it really is good enough any more to leave the policing of the City to self-regulation."

Nigel Lawson, as the Chancellor, was the driving force behind the reforms and in the white paper outlining the deregulation warned against "hobbling British banks with excessive regulation".

Lawson was not a dogmatic Friedmanite true believer in free markets being the handmaiden to utopia. Unlike John Redwood, who, according to the FT "reassured Mrs Thatcher that there would be a new principle of fair dealing, a duty of skill, care and diligence, and a duty of disclosure". Note only a principle, not a law or regulation.

While Lawson didn't belong to the delusional world of Redwood he was both aware and content of the risks his policies entailed. He and Cecil Parkison (the Minister of Trade and Industry) had, earlier in the 1980s, squashed attempts by the Office of Fair Trading to investigate the City of London arguing that the City should be allowed  to reform itself (in other words remain a law unto itself). Self-regulation was enshrined in law in the Financial Services Act 1986, which established self-regulatory organisations (SROs) to oversee the City.

Writing in his memoirs six years later, Lawson reflected that "the SROs did not always prove as vigilant against fraudsters as might have been hoped". Of course City regulation before and since the 'Big Bang' has always been specifically designed to be lax - hence the

Lawson himself attributed it only to some temporary exuberance, writing "it was inevitable that a time of boom and optimism such as the second half of the 1980s should see such an upsurge in financial fraud". As I wrote in The Failed Experiment, "it is hard to imagine a senior government minister ever being so blase about benefit fraud".

Lawson's position is perhaps most aptly reflected in his comment that "a financially deregulated economy, while more efficient and dynamic, is also probably less stable".At least he was right about less stable.

They knew the risks to the economy, they took them, their successors endorsed them, it crashed the economy, yet most of them still keep the faith: 'whatever the finance sector wants is good for the economy'.

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