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What Osborne should have said

George Osborne has missed a chance to lead us out of The Money Trap.


George Osborne, Chancellor of the Exchequer, made an autumn statement in the House of Commons yesterday. This is what he should have said.

Mr Speaker, Honourable Members,

Successive governments have allowed the problems related to and in part caused by the operations of banks in this country to drag on. No solution is in sight. I therefore propose to tackle it head on. This will take a number of years to complete, but we start today.

The way we have organised banking in the past contributed mightily to the crisis and the recession and to the continuing difficulties in extricating the economy from it. The system of regulated, subsidised, state-protected finance has failed. As we have seen, It has produced ever greater financial crises and burdens on the taxpayer. The financial system is on present policies likely to burden the taxpayer for many years to come.

I announce today that this government will remove all forms of state subsidy for finance completely over a 10-20 year period. This will include abolishing/withdrawing all forms of state aid for banks, implicit subsidies such as guarantees against failures, liquidity support, lender of last resort facilities, as well as tax advantages such as the tax deductibility of interest, which discriminate against other, healthier , forms of finance. I will eliminate all the special breaks for hedge funds, private equity and other special interests. Over a period, I will eliminate state support for deposit insurance.

I calculate that once completed these measures will save several hundreds of billions of pounds a year for the public purse.

Under this new regime, there is every reason to expect the City to survive and prosper. The City did not grow to be the world’s greatest international financial centre on the back of State support and subsidy. It does not need such support in the future.

Indeed, the constant changes of official regulation, the uncertainty about what regulations will come down the road next are crippling private initiative and the management of banks.

The UK will lead the way towards a healthier system of finance. Many kinds of financial and business services will be unaffected. Many of those that did not receive subsidies will indeed benefit from lower taxes.

It has been calculated by the Independent Commission I set up – the Vickers Commission – that support for financial institutions is costing every adult in the country several hundred pounds a year in subsidies, and that’s in good times, let alone the enormous additional cost of the bail outs. Unless I take action, I cannot guarantee that this burden will not rise further. Indeed, given the lower growth and high unemployment forecast by the OBR, and ill winds from overseas, I warn the House that without taking action now, our banks may well run into another round of bad debts.

How are they going to absorb these losses? The Bank of England has warned that investors cannot trust the way banks keep their books. Thus there is little reason to expect investors voluntarily to put their own money at risk by subscribing more capital for banks that are approaching bankruptcy. The taxpayer, yet again, would be asked to pay. I regard this as intolerable.

Despite all the financial support and regulation, banking still isn’t safe.

I call on individuals and companies to make their own arrangements for safekeeping of their funds, as indeed individuals have done throughout history until recently. Seek out responsible, adequately capitalised institutions and vet them.

The Bank of England will have a role to play but it will change radically. It will discontinue all its work on regulation. It will stand ready to open accounts from all institutions, subject to eligibility checks, and will facilitate the clearing of payments, and accompanying provision of liquidity for the payments system as needed, but it will not in future act as lender of last resort to financial institutions in difficulty. It will not provide clearing facilities to any institution in receipt of state aid.

The Bank of England and Treasury will enter into discussions with the British banks about how they will effect the transition to the new era. RBS and Lloyds will be nationalised, divided into a number of parts and floated as independent businesses or, where there are parts of the groups that cannot be floated, go into orderly liquidation. On the basis of preliminary discussions, I expect that major investors and boards of other banks will quickly conclude that the universal banking model is no longer likely to be viable in the new conditions, since it depends on continuation of state subsidy. I do not think it sensible for me to prescribe what kind of legal forms of ownership or business models will succeed the failed universal bank model. I suspect that private partnerships and similar arrangements will play a large role.

These reforms will mean that individuals and companies will in future pay the market cost for financial services. But they will have incentives to ensure these costs and prices are kept to a minimum – an incentive missing in current arrangements.

I will reduce UK participation in the international financial regulatory fora to a minimum, consistent with our international obligations. It is clear to me that the efforts to create an international framework for finance have failed. In fact they are doing more harm than good. They are increasing distrust among governments, as repeated disputes about how to share the burden of failing institutions demonstrate. They are failing to re-establish trust in banks. They are a large, expensive and growing bureaucracy – compliance costs run into the billions of pounds a year, and all these are a dead weight on business, on bank customers and taxpayers.

This is the first step in what I will propose as a radical overhaul of international banking and money.