© David Cameron, 28th March 2008

There's been a lot of criticism of David Cameron recently but this extract of a speech that he gave more than six months ago showed a pretty good understanding of the issues of capital inadequacy and illiquidity at the heart of this crisis:

“As well as the reforms we have outlined for the UK financial system, we need reforms at a global level too. So let me suggest one important reform that needs to take place in light of the recent crisis in world banking.

“The Basel capital accords determine how much capital a bank must set aside for a given amount of lending. This makes good sense, and, for obvious reasons, it is right to set the rules at a global level. But economists have identified some key problems with the current Basel accord.

“First, the rules on liquidity, which has been at the core of the current crisis, are too weak. Banks can operate with enough funding only to survive for a couple of weeks, but still be within the rules. Second, we need to examine which asset classes and which institutions are covered by existing rules. For example, the zero-weighting of some triple A assets has led to distortions in asset allocation. Put simply, some of the debts were kept off balance sheet so they didn’t count as lending under the rules.

“Third, judgements about credit risk were delegated to rating agencies who themselves had incentives to expand the amount of lending that was allowed under the rules. Put simply, because they are paid fees for rating debts, credit rating agencies had an interest in there being as much debt as possible. Finally, market risk was measured by backward looking models which tend to exacerbate the credit cycle, not dampen it. When credit is easy, the models allow more lending. When credit tightens, the models reduce the amount of permitted lending.

“In short, liquidity risk was all but ignored, credit risk was delegated, and market risk was backward looking. And we now know that not only did the regulators not know, but too often the banks themselves didn’t know, the full extent of the risks they were subjected to. But let me say again, any reforms at an international level will need care to ensure that in tackling the past problems they do not create the problems of the future. At the same time, we must all recognise that crises are inevitable, so a prudent Government, as we will be, that is committed tol be, must improve our response to these crises when they appear."

Thanks to Richard North of EU Referendum blogspot for pointing the extract out to us.

Comments

[Felicity Mountjoy]

So Cameron was first!!

[Teesbridge]

Well, DC's lips certainly moved, but did he actually understand what he was saying? (or were we in "post-neoclassical endogenous growth theory" territory?)

[michael mcgough]

"so a prudent Government, as we will be, that is committed tol be, must improve our response to these crises when they appear."

How?

[Tony Makara]

Nobody questions that David Cameron was aware of the root causes of the problem. What troubles people is the way he positioned himself behind the government, handing the public intiative over to Gordon Brown. It would have been far better if Mr Cameron had played politics and used the crash to attack the Labour government because that would have been in the true national interest.

The truth is that the Conservative position on economic matters has been too close to that of Labour, in fact senior Conservative politicians have been afraid to make the case for tax-cuts and cuts in govt waste until recently. There is a case to be made, however now that the Conservative team has stood behind the bail-out one has to wonder where the scope for tax-cuts will come from? The bail-out was wrong because it encouraged obscene levels of government borrowing, support for the bail-out now means that the Conservative team can hardly turn the torch on other government borrowing. The crash should have been a time to batter Brown, but all he got was a pat on the back.

[Malcolm Dunn]

You really think that would be in the national interest Tony? I have to say I'm amazed that you think that. Do you really think it would be prudent to allow RBS and HBOS to go bust which was the alternative?

[Tony Makara]

Malcolm, the government should not be using taxpayers money to prop up bad lenders. Instead of the massive bail-out the govt should have established a brand new state bank, which in turn would have served as a permanent save haven for depositors and could even have become a stream of steady liquidity in the shape of govt issues of money that could be created and destroyed on repayment. Thereby creating new money to enter the system to provide liquidity and impetus but not staying in the system to become inflationary.

On the matter of whether it was the right thing to back Gordon Brown, I have to say that the national interest would have been best served by destroying the last vestiges of government credibility. Instead the Conservative party has shored up the position of Gordon Brown, united the Labour party and revitalized Labour's passive core support. Gordon Brown has been allowed to cultivate an image for himself as the saviour of the nation, when in fact he carries much of the blame for the current crisis.

I fully support consensus when it is in the national interest, however I don't believe the bail-out or the return of a Labour government helps our nation one bit. The govt should have guaranteed core deposits but allowed the lenders to take a hit. Rather like in the states, politicians have been led by the nose to open the nations coffers to bail-out lenders who fully deserve to go bust.

[David]

A state bank would have done nothing to sort the liquidity problem and in fact exacerbated it as depositors fled to put their funds in the new entity, leaving the banks with no money, causing their share price to plummet leading to a systemic collapse.

Good idea, Tony.

[Tony Makara]

David, it is not the responsibility of the state to prop up failed lenders, just as it shouldn't prop up failing industry. If money hemorrhaged from unstable private lenders to a secure state bank then why would that be a problem? Bad lenders don't deserve to lend and don't deserve the support of the public.

[wolvesjohn]

The question is would DC have nationalised the banks today like Broons mob.

We may have missed the boat on this one.

[David]

Tony, it is the responsibility of the state to prevent a systemic collapse of the financial system if it can and all else has failed. It seems to me that you don't understand the problem, or the consequences if all you think will happen in this case is banks continuing. I suggest you investigate what is happening with grain, for example.

[Malcolm Dunn]

Sorry can't agree with you at all Tony. I don't like propping up failing institutions but with other countries guaranteeuing deposits and saving their banks if we took up your idea we wouldn't have a British bank left in existance in a very short time. I genuinely believe there was no choice.

[Tony Makara]

The reality is if the private banking/lending system has broken down that it would have been far easier to establish a new state back, rather than borrowing an astronomical amount to buy into these failed lenders. People do not seem to understand the function of money, which is a promise to pay, rather than a being physical commodity, that being the case a state bank would be in the unique position of being able to create and destroy monetary values at will, and could therefore loan to business, provide liquidity, without recourse to funding from elsewhere, so long as the loan is recalled and destroyed, the money supply is kept under control.

The problem as I see it is that career-politicians do not understand the nature of money or how it is created. For this our governments resort to gilt-edged securities incurring interest into the national debt. However I am moving off-topic here so I will return to my main point which is that government should not be rewarding failed lending institutions, compensational support for depositors is a decent thing to do, but the bail-out is a hell of a price to pay for a fourth Labour term. Conservative support for this has shown a naivete on behalf of the party leadership and a certain amount of intellectual indolence in not coming up with a better response or plan.

[ChrisD]

I have to agree with Malcolm Dunn on this, we were not talking about the failure of an individual bank like Northern Rock last year or even BCCI.
No, this week we were facing the global meltdown of the Western banking system and the implications of this would have been catastrophic.

I think that Brown and the PLP misread the mood last week, but I don’t think that Cameron and Osborne did. I suspect that the Conservative Whips worked just as hard as the Labour Whips to make sure that the Conservative benches behaved in exactly the opposite manner to their colleagues across the floor.

Back during the Conservative Conference Cameron was able to articulated the current problems in a much more voter friendly way than Brown, the bipartisan attempt to get the government into the drivers seat and get the engine started was effective.
Brown turned down any offers to share the limelight with Osborne and Cable, but they were offered in this time of economic crisis.

Now its time for a reality check some honesty from our politicians. We are not in a good place to weather this economic downturn, and we are facing years of belt tightening both personally, and in the public finances.

Very tough decisions are going to need to be taken sooner, rather than later. And if this government continue with a Scorched earth policy for short term political gain, rather than longer term fiscal prudence, then they need to be held to account at every point.

Cameron and Osborne need to carry on with their strategy of being honest about the difficulties, and tough medicine which will need to be administered. They need to knock this spin about military wars, this is an economic tsunami.

We had Black Wednesday, this is more like Black October!

[GB£.com]

This is pretty desperate stuff.

So Cameron gave a speech in the middle of the crisis, six months after it began!

I take it that you haven't been able to find a single speech from Cameron or Osborne prior to 2007 warning of a property bubble about to burst?

Why was this that everyone except the government and opposition saw it coming and instead tried to find ever more ways to pile more people onto 'the ladder'?

[GB£.com]

It took about 30 seconds to do a Google archive search to show that the news was full of exactly this stuff (626 articles) in the month before Cameron gave this speech.

For example:

A Red Flag for Bank Liquidity
Business Week 17th March

Fed set to slash rates to battle banking liquidity crisis
Turkish Press 18th March

[rugfish]

Given the fact if a bank went bust here, we'd end in the same boat to America as Iceland is to us, I don't see there was any viable option to recapitalise the banks to make them healthy again.

Granted it's a bigger rug to sweep the mess under but at least it hasn't led to what would amount to an unpayable government debt to the US. along with political fallout which would be catastophic for the entire UK politically as well as economically otherwise.