George, don't do that!
George Osborne's proposals to reform the UK's system of financial regulation make for good short-term politics but bad long-term policy. He should think again.
Blaming the tripartite structure of financial regulation for the banking crisis makes sense politically, because it suggests that the Prime Minister, who designed the structure, was responsible for the crisis.
Good politics does not always make for sound policy however. There are three reasons to think that Mr Osborne's proposals are ill conceived. First, unless the opinions polls change dramatically in the next few months, the FSA will start to haemorrhage high quality staff and will not be able to replace them.
Second, if the Conservatives implement these plans they will throw the financial regulatory system into chaos for two or more years while the re-organization takes place. This will create risks in an already fragile financial system and generate costs for an already depleted public purse. Regulatory reform on this scale is neither quick nor cheap.
Third, if these reforms are fully implemented the UK will find itself with a system of banking supervision run by a management team that in practice knows nothing about banking and nothing about supervision.
When I worked at the Bank of England in the mid-1990s there were two career options for ambitious employees. To be successful at the Bank required a couple of degrees in economics leading to a job in the Research Division, preferably on monetary policy.
For those who preferred not to remain at the Bank, a successful stint in the Markets Division was the route to maximize one's options, by later departing to the "real world" of the financial markets. This is the path I took.
For the aimless and the loafers there was Banking Supervision. Occasionally a bank would collapse and a junior official would be fired to appease the critics. For the most part it was a pleasant way to earn a decent salary with a pension at sixty.
Since then banking supervision has been taken over by the FSA, where it has been gradually re-engineered into a serious job. Markets activities have been outsourced to the Debt Management Office or scaled back. The brightest and the best now come the Bank solely to work on monetary policy, where they report to people who know nothing else.
Of the nine current governors and executive directors only one has any recent experience of real banking. Most joined the Bank straight from studying economics at university and have never worked anywhere else. The exceptions, like the present Governor, joined the Bank after teaching economics at university.
If the Bank had taken an open-minded approach to monetary policy it would have recruited people from the financial markets who knew about the price of money and its effect on other asset prices. It would have spent some time talking with markets participants rather than talking at them. Instead it hires and promotes ingénues.
The idea that the "Threadneedle Street School of Economics" is an appropriate place to embed the teams of people charged with supervising the UK's major financial institutions is therefore risible.
Young Mr Osborne probably does not remember Joyce Grenfell's celebrated monologue, in her role as a nursery school teacher. He would do well to heed her advice: "George, don't do that!"
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