The myth of Prudence
18/05/2009
'Prudence' - the watchword of Gordon Brown's Chancellorship, has not actually existed since the change of government in 1997 argues Mature Times reader Peter Bray.
Anyone who has watched and listened to Brown since that first Budget (assuming they qualify for a pension now) must have had very strong feelings of deja vu. We have been through this before with other labour administrations, but this time is yet more devastating because Brown used that word; over and over; it has been his mantra; the result has been the very opposite.
He started with the greatest credit balance of any chancellor in modern times, possibly of all time, had a string of further cash balances coming in from the remainder of the privatisations created under the Tories, raised yet more tax from the so called stealth taxes. Then he proceeded to spend it all, much of it without any restrictions on how best it should be used, and utterly failed to show even a modicum of prudence by retaining a safety net of funds to meet unknown emergencies in the future. Then he went even further by borrowing up to the limit that the market would bear without downgrading Guilts. And during all that time he sat on a growing and worrying boom. No more boom and bust he declared during that first budget. I do hope that those words will haunt him for the rest of his life.
Having created a damaging position for our economy, when the banking crisis arose he did nothing until it was obvious that the government could not continue to sit on its hands. Soon after that as our economy started its downward path, and many other countries were in similar economic difficulties, up he comes, smiling broadly, claiming that it a global problem and that we need a global solution. That is patent rubbish! We need not have been in such a terribly weak position if he had really been prudent. And it conveniently ignores Canada.
Alone amongst the western nations Canada has not succumbed to the banking crisis. Their banks have been much more conservative, better regulated and not taken in by the enormous banking trade in all those toxic assets. How is this? Much of Canada, its institutions, its administrations were modelled on the British versions. Whilst it has been hugely influenced by its smaller but successful neighbour, it has not relinquished its reliance on its roots. So its banks followed ours in the way that had served ours for almost 150 years. And, as all true bankers know, the first and overall importance for a banker is risk. They must recognise every risk; analyse and assess it; then decide whether or not to take it; and, if so, then to decide on what terms and conditions.
Clearly British banks failed woefully to do that with those toxic assets. Now we are told that they did not understand them; that they cannot be valued. A true banker would never, never take on a risk that he did not understand!! Our banks joined in the fray with gusto regardless, and that is almost entirely due to their downgrading of risk assessment. leaving it on a par with all the profit centres and computer modelling. Minor officials, all of who could easily be ignored by the board and CEOs, were designated with the job. CEOs and their boards were consumed with the need to make ever increasing profits. Unfortunately those profits were built on sand, as we all know to our collective cost.
None of this should have happened to UKplc. It was Brown who decided that the banks should be 'regulated' by the FSA, and we have ample evidence that the FSA was not up to doing its job even before taking on the banking duties. So failure by the FSA allowed businessmen to 'take over' the banks. Business and banking are two opposing concepts, two completely different animals. To allow businessmen to gain control of a bank is to invite them to get their hands on the honeypot. Banking is about risk, not taking on unacceptable risks, conserving capital to meet bad debts; and when this is done properly they make a profit. Business is all about profit and businessmen take many, many unquantified risks seeking to make ever larger profits. When a business fails, it fails. All the people walk away to find other avenues. If banking fails we all lose, no matter what we are doing.
This is what our politicians are just now waking up to. Suddenly they realise the essential importance of banking and how it must be protected from all those who are not bankers. But I do not hold out any hope that they will get this right for the future. So far we are told that it is all about bonuses. The Treasury Committee, under its chairman John McFall, has decided from all the evidence gathered that the bonus culture is to blame. They have decided this by looking at, in particular, Sir Fred Goodwin. But Goodwin has proved to be a failed businessman above all else; he bought up ABN Amro at a price well above its true worth and without assessing all the risks inherent in that acquisition. It was that purchase, more than anything else that ensured the collapse of RBS, which had been our largest bank with a long and distinctive history.
What about the future for British banking? Do not expect Labour to have any answers; they have taxed and spent their way through more that all preceding Labour administrations added together, and proved yet again that they cannot manage our economy. I am not convinced that we any politician who knows the answer, although Vince Cable does put forward good suggestions on many subjects.
Sadly, I cannot see much improvement until banking is put back into the hands of true bankers. The present retrenchment taking place will lead to balance sheet improvement, but it will do nothing about the computer controlled future. We need people to make decisions, not rely upon computers. Computers are only tools, and those tools are only as good as the people who programme them. They have not been programmed by true bankers.
Gordon Brown, eat your hat, resign, disappear. You have down irreparable damage to our future. We now have to bear the brunt of your brand of 'prudence'.
Peter Bray