Sound money


Rather a shock admission from ex-Chancellor Lord (Nigel) Lawson at the Legatum Institute/AEI London Forum yesterday. I asked him to confess that his flooding the world markets with cheap money after the 1987 stockmarket crash got central banks hooked on the drug of cheap money – an addiction that grew and grew, until it inevitably ended in the cold-turkey episode we're just going through.

No, he said: China's hugely expanding population of savers meant that rates were naturally low. But, he said, he did think that mistakes were made during the 'Big Bang' deregulation of London's financial markets in the 1980s. Of course, the Big Bang had to happen. I remember the City of London still being in the quill-pen era, while technology and communications allowed its business to fly to other centres across the world. But when retail banks, stockbrokers, commercial banks and all the rest started to merge, the old relationships and restraints broke down. US banks came to London, relieved to be able to grow, free of Glass-Steagall and other onerous regulation. The Bank of England wanted the UK banks to be in the same league, and encouraged the mergers of retail and investment functions.

That active encouragement, Lawson suggested (if I understood him correctly), was a mistake. He would like to separate investment and 'utility' banking, so that customers know where they are. If we bail out anyone in a crisis, it should be the small retail customers of conservative banks who have come a cropper for some reason, with the Bank of England as lender of last resort (a role it seems to have messed up a year ago). But taxpayers shouldn't bail out the professionals in the world investment markets, who know the risks they are taking.

Amen to that: but I'd like to add the sine qua non of sound money into that particular policy mix.