Two important speeches
There have been two important economic speeches in the last 24 hours both of which which should be recorded here.
First, Bank of England Governor Mervyn King has delivered a pretty devastating attack (pdf) on the failure to reform the banking system, saying that it was a “delusion” that greater regulation and bigger capital requirements would stop failure. Alistair Darling has gone on to defend borrowing.
I’ve often thought the Governor has two distinct sides. He can be both cautious – as the failure to lower interest rates in the run-up to the recession showed – but he can also be radical as he was last night. He certainly is not in the pocket of the City, and while what he said to a TUC General Council earlier this year was not on the record, no-one would have left the meeting without understanding this.
As he said last night, speaking about the bail-out, “Never has so much money been owed by so few to so many. And, one might add, so far with little real reform.”
Indeed he argued that things could now be worse. Big banks now know they are too big to fail, and whatever risks they take they will be bailed out. This is what economists call moral hazard, defined by wikipedia as:
Moral hazard is the fact that a party insulated from risk may behave differently from the way it would behave if it would be fully exposed to the risk.
He called for banks to be split up. Only the Lib-Dems have supported this.
This morning Alistair Darling made a strong defence of borrowing and investment and said that ending government support now would be “wrong and dangerous”.
“We can resign ourselves to a decade of austerity, low growth and low employment. Or we can embrace change, turn it to our advantage and seize the huge opportunities a global recovery will bring.”
Withdrawing government support to the economy “would put the recovery at risk and abandon people facing unemployment”.
“We must support the economy until we’re sure the recession is over. Some are tempted to think the crisis is over. It’s not. Banks all over the world are still dependent on government support.” …
“Not only is growth the best way of creating jobs and increasing prosperity – it is also the best way to earn the money to pay down debt. We need growth, because when we grow, the economy becomes bigger, we all become richer as a country, and it gets easier to pay back debt.”