The fractured Brown/Balls regulation system had left massive gaps, which allowed the Libor crisis to emerge. And worse: London, in fact, became the Wild West of global banking. While Brown and Balls would lose no opportunity to say that the crisis “started in America”, the Americans are now beginning to wonder whether London was, in fact, the source of contagion. Just last month Carolyn Maloney, a New York congresswoman, asked why “all the problems appeared in London”. AIG, Lehman and UBS are all foreign-owned banks, she said, but it was in their London divisions that the rot set in. Why? And she might have added: why is there no equivalent of the Libor crisis elsewhere?
The answer is that Brown’s regulators had, in effect, backed off from the banks – at least in terms of their dealings with each other. The Financial Services Authority fretted about life assurance policies, not people buying life insurance companies. When Howard Davies was appointed to the FSA, Mervyn King, now Bank of England governor, told a friend: “Howard will get so bogged down with regulating ISAs that he’ll miss something.” So it was to prove. The FSA took a caveat emptor approach to the bank’s dealings: let the buyer beware, and these men in pinstripes could do what they liked with each other. “With Libor, the feeling was that these were grown men, quite capable of dealing with each other,” one senior regulator tells me.
This is why the Libor, the average of the rate at which banks lend to each other, was unregulated – and, therefore, wide open to manipulation. Now, it is seen as a matter of great outrage that traders were fiddling the figures. But then, it was seen as part of the rough-and-tumble of everyday life. During the parliamentary investigation, it may emerge that the Bank of England knew that Libor was corruptible, and did nothing about it. Its officials, too, believed they had found a magic formula in the City, where the banks were given freedom and profits churned in.
Throughout all of this, Balls was widely credited for what Brown called a “golden age” for the City of London. Even when he was Children’s Minister, the City would take his word as gospel. He was seen as the real architect of this strange new deal where Britain had become what can, in retrospect, be seen as a bankocracy. For a while, bankers even wrote government policy. The late Sir Derek Wanless (NatWest) conducted the NHS review and Sandy Leitch (Zurich Financial Services) wrote the skills review. Labour did not just befriend the banks, it was – in effect – governing in coalition with them. This was corporatism, not capitalism.
Perhaps the greatest single cause of the crash was an addiction to cheap debt – and a belief that this was the new normal. Just yesterday the Bank of England decided to print another £50 billion to keep the Government’s cost of borrowing artificially low. Fiddling the interest rate, it seems, is a game that a long list of distinguished people can play.
It remains to be seen how much of this will come out in the parliamentary inquiry. Tyrie may have one of the most forensic minds in Parliament, but he is not a praetorian – and I suspect he was deeply nervous about Osborne’s attack on Balls, fearing this may prejudge the outcome of his committee. But the Chancellor is, as always, thinking ahead to the next election campaign, where his slogan will be: Britain is recovering, don’t let Labour take us back to the bad old days. This explains why he is making his j’accuse with such force, and why Balls is defending himself with such venom. This is not about Barclays. For both Balls and Osborne, this is the first skirmish of the next election campaign.
Fraser Nelson is the editor of 'The Spectator’