T. Just when the unthinking City-bashing was starting to calm down, with everybody beginning to act in a grown-up fashion, it’s all kicking off again, thanks to Vince Cable. The business secretary told City A.M. last night that the government was still considering another tax on bonuses. This comes despite the fact that the Treasury and the rest of the government increasingly understand that the anti-City action and rhetoric has now gone too far, and that business, wealth, jobs and tax receipts are being lost. There have been lots of productive behind the scenes discussions; various ill-thought through policies have been dropped, such as an unilateral UK attempt to impose liquidity rules – and I’m told real progress is being made on a proper banking resolution system to deal with bust banks without bailouts.
It is looking as if there is now serious support for a new special administration regime for banks that will include automatic debt-equity swap procedures to impose losses on bondholders in going concerns and recapitalise banks automatically. This would be a great move, strengthening the City while improving stability. Some in the Bank of England are also looking kindly on proposals to create special storage deposits, which would be separate from regular current accounts. The former would be truly safe but pay no interest; the latter will pay interest but be riskier, with depositors becoming preferred creditors in the event of a crisis with limited, if any, deposit insurance. Let us see exactly what actually emerges but the thinking has become much more sophisticated. It would allow much more market discipline to be reintroduced into the system, reduce moral hazard and protect taxpayers.
Returning to the world of meaningless gesture politics, the biggest UK-based banks are also set to announce, together with the government, that they will be paying out fewer bonuses this year. This will be partly propaganda – new European rules, to be unveiled this week, will force everybody to pay a lower proportion of total compensation in bonuses and to defer much of this, so the “choice” to cut bonuses isn’t one – but the idea was to draw a line beneath the City-bashing. Again, this would have been real progress. Alas, it was not to be, thanks to Cable.
The Liberal Democrats (and Cable himself) have lost a lot of their left-wing supporters since the election and especially since they came out in favour of higher tuition fees, which they opposed in their manifesto. Nick Clegg has been good at justifying his u-turn, pointing to how the poor will be protected by the government’s complex deal on the matter. Other Lib Dems have been barely able to conceal their disquiet at the policy, however, and Clegg is facing a serious challenge to his authority. Cable in particular has constantly given the impression that he couldn’t make up his mind whether or not he would support his own policy (as business secretary, he also controls university policy).
This embarrassing spectacle has been going on for days; no wonder that ahead of Thursday’s vote in the House of Commons Cable is trying to distract everybody’s attention by threatening a bonus tax again. That he has no direct control on taxes (it’s a matter for the Treasury) doesn’t seem to bother him; it is all about sending a dogwhistle to the left that he is still on side. At least one thing is now clear to all: “St” Vince has lost his halo.