Not Me Guv Government

He's to blame

Do you remember "joined-up government"?

No, don't scream. Labour's slogan said that government under the hopelessboomandbust Tories operated in silos- they would join it up again to servethemanynotthefew.

You remember that?

The real world has turned out to be a tad more problematic.

For one thing, just bunging everything together under one roof doesn't automatically remove the silos. The dysfunctionalnotfitforpurpose Home Office was an excellent example of that, as was the multi-role internally conflicted DTI (eg see this blog). A giant wobbling blob is no substitute for realistically defined objectives, and an honest alignment of power with responsibility.

But worse than that, Labour in power has actually dismantled some of the joined-up structures that had previously operated quite successfully. New half-baked quangos have taken powers and reponsibilities out of government departments, often resulting in important bits dropping down the cracks in between. The result is Not Me Guv Government, a perennial issue in PAC investigations of public sector disasters (see many previous blogs- including this one on the shambles of NHS nursing staff).

And now we have a real humdinging classic- Gordon Brown's 1997 decision to split responsibility for the financial stability of our banks between the Bank of England and the FSA.

Previously, the whole responsibility had been in the hands of the Bank. And overall they'd done a pretty good job- Britain hadn't seen a run on a High Street bank since 1425... well, OK, not since Victorian times.

But Brown/Balls decided they knew better. For reasons that have never been entirely clear- and which were strongly opposed by the Bank in 1997- they hived off responsibility for regulating banks to the FSA. The problem was, the FSA was not given a cheque book to shore up wobbly banks if the need arose. The cheque book (aka emergency last resort lending) was left with the Bank.

Now, just a decade later, this new untried stucture has failed its first big test. We've had a bank run that has undermined confidence so much the taxpayer has been made to write a blank cheque guarantee. And goodness knows when and how we'll be able to retrieve it.

What happened was that when it came to the crunch, Brown's tripartite "memorandum of understanding" between the Bank of England, the FSA, and the Treasury broke down.

According to the memorandum, in the event of a crisis:

"Each authority would:

assess the situation and co-ordinate their response within the framework agreed with the other authorities. The form of the response would depend on the nature of the event and would be determined at the time; and

where possible and desirable to facilitate a solution to a problem, and hence reduce risks to wider financial stability, encourage negotiations between third parties whose agreement might be beneficial for the reduction or resolution of the issue, in its area of responsibility." (para 16)

But what on earth was supposed to happen if the three authorities couldn't agree? This morning the FT reports:

"Recriminations... started in earnest... when it emerged that the Financial Services Authority had repeatedly urged the Bank of England to intervene in order to avert a crisis of confidence.

FSA officials and senior banking executives had in recent weeks pressed the Bank to widen the types of collateral it would accept when lending to financial institutions, people familiar with the matter said.

But the Bank refused, arguing that this would promote moral hazard by offering banks and their shareholders a bail-out without punishing them for taking excessive risks."

Pre-Brown and Balls, doubtless there would have been similar arguments around a table inside the Bank of England. But at the end of the day, everyone would have understood they were accountable to one boss- the Governor. And that boss would have been accountable not just for overall macro-financial stability, but also the micro business of staying on top of individual banks.

Instead of which, despite the fact that page one of Management for Dummies says you should only ever have one boss, Labour's tinkering reformers threw out the tried and tested, and set up a new untested structure designed for delay, indecision, and turf conflict.

Not Me Guv Government.

And just like with everything else, we taxpayers foot the bill.

PS- for more backgound on bank regulation and financial stability, see this paper by Prof Charles Goodhart.
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