аЯрЁБс>ўџ :<ўџџџ9џџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџьЅСq` №ПТ)bjbjqPqP .4::œ!%џџџџџџЄ       xD@ @ @ 8x Œ МИЖЌ Ќ "Ю Ю Ю Ю Ю Ю 7999999$nhжž] ЩЮ Ю ЩЩ]  Ю Ю rЧЧЧЩˆ Ю Ю 7ЧЩ7ЧЧ  ЧЮ   ‰ѕLUЩ@ Q”Ч7ˆ0ИЧtхˆtЧt ЧpЮ ,њ жЧаЌ|MЮ Ю Ю ]]mZЮ Ю Ю ИЩЩЩЩМММ„@ МММ@ 4R"t      џџџџ Lessons to be Drawn from London’s Failure Jim Cuthbert Margaret Cuthbert October 2008 Following the near collapse of the UK financial system, it was noteworthy how Gordon Brown broke the unspoken all party consensus with indecent haste – to claim that the “rescue” of HBOS and RBS demonstrated the benefit of the Union for Scotland. In fact, as we will argue here, recent events demonstrate precisely the opposite. What we are seeing just now is the failure of the London model of political and financial organisation: our chances of developing a satisfactory alternative are much better if problems are approached from a Scottish, rather than a London, perspective. It is simply naяve to claim, as Gordon Brown has done, that the roots of the current crisis lie elsewhere, in the American sub-prime market, and could not have been foreseen. It has been clear for a long time that the UK economy was supported by twin bubbles of property prices and personal debt: that these had been largely brought about by our slackly regulated financial system extending credit with little regard to prudence: that the true state of the UK’s public finances was much worse than it appeared – because the actual extent of the public sector’s liabilities had been kept “off the balance sheet” through schemes such as PFI: and that all of this was paid for, not by the goods we make and sell, (which the UK does less and less), but by reliance on borrowing from abroad. A crash at some stage was inevitable. The fact that we live in a globalised economy, and that many other countries have copied, to a greater or less extent, the worst features of the so-called anglo-saxon model, means that the whole world is affected by the current economic crash. But the UK, by common consent, is among those worst placed to cope with the crisis. Remember, all of this happened on Gordon Brown’s watch: not that he was asleep – on the contrary, he was actively driving this process. A large part of what has gone wrong has been a failure to regulate the financial system properly. But it would not be correct to attach the primary blame to the regulators. Politicians get the regulatory system they want – or deserve. It is worth remembering that Gordon Brown himself designed the regulatory system which has failed so spectacularly: it was he who set up the tri-partite responsibilities of the Bank of England, the Financial Services Authority, and the Treasury. True responsibility for what was happening disappeared down the cracks between these bodies. The primary failure has been the willingness of the UK political system to be seduced into believing that the financial system could perform the impossible: (a seduction presumably made all the more easy by the City’s habit of offering well paid retirement posts to selected politicians and senior civil servants). In large part, politicians’ gullibility stemmed from their failure to appreciate the true nature of risk. Risk is an unavoidable fact of life: and one that all of us would like simply to go away. The City promised to manage risk for us – at a very considerable price. It is perfectly true that one of the great successes of 19th century capitalism was the development of mutual and insurance societies, which successfully managed the risks of accident and mortality which are part and parcel of everyday life. But the risks involved in that case related to events which occur largely independently, and can be modelled statistically. What the City promised more recently was that it could go into quite different territory: and that, by laying appropriate bets, in the form of various types of financial derivatives, it could insure us against events like the collapse of large institutions, swings in whole markets, or major system failures. The problem is, events like that do not occur independently, and are not subject to fine tuning in the kinds of model the City uses. One systems failure or institutional failure triggers another, until the “insurance” scheme collapses: and we find we were never protected against the basic risk in the first place. The tragedy was that the City put its best brains into devising ever more complex financial instruments, which only made the eventual failure of the whole system more inevitable, and more catastrophic. At the same time, this meant that no-one paid sufficient attention to the vital, and very difficult, task, of allocating scarce investment resources into their most productive uses. No society which was behaving rationally would have distorted its economy as fundamentally as the UK has done, by putting so much of its resources into the housing market. But Gordon Brown, judging by his description of the “success” of the UK economy under his stewardship, was quite unaware of the true risks he was running – on the contrary, he clearly felt he had invented the economic equivalent of the perpetual motion machine. So what lessons do we take from this, as regards RBS and HBOS? Surely the key lesson is that, if we had been responsible for regulating our own financial sector, then HBOS and RBS would not have found themselves in anything like their current plight. It is just not conceivable, for example, that an independent Scotland would have let RBS build up its reported potential trillion pound exposure to the derivatives market. Far from being an argument for the union, what has happened is nothing short of an indictment of the union. But the past is the past: looking to the future, the key question is: would we stand a better chance of moving forward to a stable and prosperous future if we were now in charge of our own destiny, as opposed to being tied to London? The answer is clearly the former, for the following reasons. First of all, it is clear that the political establishment down south has not really begun to grasp the magnitude of the adjustment that is now required. Consider, for example, Yvette Cooper’s comments, when the massive Brown bail out of the banking system was announced. In setting the target that lending to the housing market would go back to 2007 levels, it was as if she was wanting to turn the clock back, to a world where house prices resumed their merry upward trend. There was no recognition that this was unlikely: and indeed, that it would be undesirable, since it would build in a level of house prices which is unaffordable for many people, and also in due course lead to a further crash. What was completely lacking was any recognition of the very difficult problems which will have to be faced if house prices are to be stabilised at a lower level: e.g., in helping those who will find themselves in negative equity. Secondly, there is a limited range of political choice on offer down south: when the effective choice on offer is one or other version of market fundamentalism, (of the Brown of Cameron varieties), then there are real problems about coming up with effective solutions. Thirdly, the power of the City is much more entrenched at the heart of the political system in the UK: and the whole economy has arguably been much more distorted by the property market, and the casino culture of the City, than it yet is in Scotland. This is not to say that things are perfect in Scotland: some of our financial institutions forgot their traditional values, and were all too keen to embrace the culture of greed: and politicians of all parties have arguably been too close to the financial sector, and have tended to put too much faith in market solutions: witness our reliance, both past and present, on PFI and its variants. But if we had the powers, it seems clear that we would stand a much better chance on our own of developing the kind of financial sector that is really needed. One that is the servant, not the master, both of society and the economy. One that provides the essential, and difficult, role, of channelling savings into the most productive investment opportunities in the real economy: a real economy where things are produced, and sold internationally. And where there is strong regulation, to control the financial sector’s well recognised tendencies towards hubris, excessive reward, and irrational, bonus-driven risk taking. But in the meanwhile, Scotland will have to cope as best as possible with the impact of the present crisis on our economy, without the powers required to effect fundamental change. We plan to return in a future article to consider what steps might be taken, given the levers currently available to the Scottish Government, to minimise the impact on our economy.     PAGE  PAGE 1 *67VK N Ф Ы к gqш'0„!#3KY^jl"UV #(<=д@ABDVW@Aѕ , ? 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