Battle lines are being drawn up between those who want to reform financial regulation and those who want to reform finance. Mervyn has chosen to be on the right side.
The belief that appropriate regulation can ensure that speculative activities do not result in failures is a delusion.As the press is reporting he supports splitting the utility side of banking from their speculative activities. He is right; anyone who wants to take deposits from the public shouldn't be allowed in the casino. Or as he puts it:
Anyone who proposed giving government guarantees to retail depositors and other creditors, and then suggested that such funding could be used to finance highly risky and speculative activities, would be thought rather unworldly. But that is where we now are.Splitting utility from casino banks is not his only idea. He wants new tools to:
(a) moderate the growth of the financial sector and
(b) lean against the macroeconomic effects of the credit cycle
This is more than I could have hoped for. The finance sector is too big and finance should lend less in the boom and more in the bad times. Mervyn drops hints that he could be even more radical:
It is hard to see how the existence of institutions that are “too important to fail” is consistent with their being in the private sector.
But he doesn't say what sector they should be in.
It is important that banks in receipt of public support are not encouraged to try to earn their way out of that support by resuming the very activities that got them into trouble in the first place.
Ouch! Who could be encouraging such recklessness?
King for chancellor?