Not the end of the line for capitalism

SAU, £20

Alex Singleton

YOU might be forgiven for thinking that another book on the financial crisis was unnecessary. After all, Gordon Brown has already written a comprehensive tome. You know, the one in which he forgets about all the mistakes he made with regulation, congratulates himself for saving the world, and bangs on about the need for more Church of Scotland-style morality.

OK, so maybe another book is necessary. And when William Norton’s Monument and Bank dropped into my hands, I thought: at last. This heavyweight paperback takes up 728 pages. But it’s more than just a paperweight written by a man with an encyclopaedic knowledge of the City’s institutions. It is a peculiarly successful hybrid of history book, economic commentary, and defence of Anglo-Saxon capitalism.

So what does Norton blame for the financial crisis? First, he says that the inflation targeting conducted by the Bank of England (BoE) from 1993, and more formally once Brown entered the Treasury, was wrong. The Consumer Price Index, and RPIX before it, failed to take account of asset prices. And retail prices, which these statistics did measure, were misleading. What they really reported was that cheap Chinese workers were helping us out. This allowed an asset bubble to grow, but let the BoE justifiably claim it was meeting its inflation target.

CAPITAL CRIMES
Second, Norton blames Basel rules for substituting common sense with tick-box regulations. The rules required banks to set aside the same proportion of capital no matter how big the institution was. Ridiculous, Norton says, because if a big bank collapses, it can cause a systemic crisis. If a small bank goes bust, there’s little problem. So big banks need more capital than small ones.

Moreover, Norton argues that by setting minimum capital requirements, “it anaesthetises part of the judgement” that banks make. They end up just meeting that requirement, in the knowledge that if they run into trouble, they can tell the government: “Well, we followed all the rules, so bail us out.”

Third, he suggests that the involvement with collateralised debt obligations (CDOs) by the smaller British banks was due to government mismanagement of the property market. The former building societies, such as Northern Rock, needed to bulk up in order to compete against the Big Four high street banks. The former building societies were too pricey for foreign banks to acquire, but foreign banks could see that they operated in an attractive market because of the huge returns in the UK property market.

Norton says that CDOs, therefore, were the easy way for foreign institutions to get into this lucrative market. He says that the real question we should be asking is: how on earth did we let the property market get so distorted that something as basic as property became such an attractive investment?

Needless to say, Gordon Brown won’t like Norton’s book. For the rest of us, it weaves thoughtful analysis into a wonderfully lucid story. Recommended.

Alex Singleton is the founder of Alex Singleton Associates, a public relations firm based in the City of London.