So I was all sarcastic about Iain Martin pretending Peter Lilley foresaw the great financial crisis back in 1997. And then I found out from a comment on Simon Wren-Lewis’s blog that Lilley actually claims this himself.
” …..I was shadow Chancellor when the Bill that became the Bank of England Act 1998 was introduced. He pointed out that I then warned the House that: –
“With the removal of banking control to the Financial Services Authority…it is difficult to see how…the Bank remains, as it surely must, responsible for ensuring the liquidity of the banking system and preventing systemic collapse.”
And so it turned out. I added:
]“setting up the FSA may cause regulators to take their eye off the ball, while spivs and crooks have a field day.”-[Official Report, 11 November 1997; Vol. 300, c. 731-32.]
So that turned out, too. I could foresee that, because the problem was not deregulation, but the regulatory confusion and the proliferation of regulation introduced by the former Chancellor, which resulted from a failure to focus on the banking system’s inherent instability, and to provide for its stability.”
The line about regulators “taking their eye off the ball” is the one Martin relied in his book on RBS. It was nonsense then and it’s still nonsense now. The plain English meaning of Lilley’s remark is that the process of setting up the FSA might distract the regulators temporarily. Does anyone imagine the phrase as he uses it might stretch to events ten years in the future, long after the FSA was operational?
The remark about the Bank of England “remaining…responsible for ensuring the liquidity of the banking system” is even worse. “Ensuring the liquidity of the banking system” is what a central bank does all day, every day. In 2007, it ensured the liquidity of the banking system by lending the banks a lot of money, and then later by implementing QE. It did so until it thought Northern Rock was insolvent, and then, as its principles required, cut it off.
Lilley might have had a point had he said “solvency” rather than “liquidity”. The problem, in the end, was that the banks ran out of capital, not out of cash. If it had only been a liquidity problem, the Bank of England would have been able to fix it with much less drama. But he didn’t say that.
And he couldn’t possibly have done so. After all, he is still in denial about financial deregulation. He claims the problem was too much regulation. Surely, if he believes that, distracting the regulator would have been a good thing? And if the problem is too much regulation, what would the Bank have done to restrain the banks? Wouldn’t that be awfully like regulation?
The main conclusion I draw from this is that Lilley is just as weaselly as he was when he was a minister.