If our response focuses only on the symptoms rather than the underlying causes of the crisis, then we shall bequeath to future generations a serious risk of another crisis even worse than the one we have experienced.
The Bank of England head has come out unequivocally against continuing with the status quo. He sees grave risks at large global institutions like HBOS and RBS, which lent recklessly and leveraged up to a point where they threatened collapsing the entire UK financial system. As a result, he is now calling for them to be broken up or we risk a more severe crisis down the road.
However, Gordon Brown has rejected this notion and is looking to move forward with a tweaked version of the status quo.
Mr Brown told MPs that "the difference between having a retail and investment bank is not the cause of the problem."
The Prime Minister added that "the cause of the problem is that banks have been insufficiently regulated at a global level."
Mr Brown was responding to Mr King’s fiercest attack yet on big banking in a speech he gave in Edinburgh last night. Mr King indicated the country’s high street banks should be separated from their risky investment banking arms.
"“It’s clear King’s not happy with where we are now,” Colin Ellis, an economist at Daiwa Securities told Bloomberg. “He said the regulatory structure was inadequate, and coming from the governor of the Bank of England that’s as damming as it could be."
Lest we forget, Mr. Brown is the architect of the present regulatory structure in the UK. It was under his guidance as Chancellor that the regulatory structure was divvied up into the tripartite authorities of the FSA, the Bank of England and the Treasury. As with any incumbent, Gordon Brown has a legacy to protect and this puts his interests at odds with ours. So, it should be a given that Brown is not going to break up the banks, especially since he was the architect of the Lloyds-HBOS merger to begin with.
But, it is disingenuous for Brown to claim that right-sizing these institutions means abandoning the Universal Banking model. There are 100 different ways to downsize a bank as the forced downsizing at Citigroup demonstrates.
Below is a video of Governor King speaking on the subject, making his call for greater regulation and an end of too big to fail.
In related news, Goldman Sachs’ Vice Chairman Lord Griffiths has defended Goldman and their outsized bonuses with the unfortunate phrasing that Britons must:
tolerate the inequality as a way to achieve greater prosperity for all.
To make matters worse, he threatened Britain with a loss of tax revenue by explaining bankers will just move to Switzerland if the UK tries to take their money away.
Are we looking at “the biggest moral hazard in history?” That’s how the Mervyn King video ends.
To be continued.