Threesomes are bad for you

I don't want to moralise about people's private lives. I just want to comment on the tripartite system of financial regulation set up by Gordon Brown. The system, with some detailed changes, is to be retained after a review of lessons learned from the collapse of part of our banking system.

The review also follows the G"20" summit in London at the beginning of April, where Brown announced a whole series of international agreements to co-ordinate on economic and regulatory management.

The trouble with the tripartite system was that when things went wrong it wasn't clear who had responsibility. The Financial Services Authority had information, the Bank (of England) had the money to bail out banks and the Treasury had ultimate authority but neither information nor immediate access to money. None of the detailed changes correct this mistake. They do suggest banks should have more capital, which is good, but there is still a gap between the the FSA's detailed supervision and the Bank's management of cash flows and monetary supervision.

The Conservatives have produced an alternative: to convert the FSA into a consumer/conduct of business organisation and to give the Bank responsibility for all capital/financial issues. This removes most of the lack of clarity of responsibility, and also seeks to apply the best aspects of the monetary policy committee's processes to macro-regulation. There are two problems: it means a reorganisation (which inevitably ties people up unproductively) and any system can only be as good as the people who operate it. But its certainly more likely to be successful.

Antoine Kaletsky suggests some other requirements for a new regulatory system, which I think are right. (I disagree with his opening comment, that Darling did good work in saving the system; as I'll say later, everything was too little too late. But the rest of the article is helpful).

The review has not taken into account international co-operation. This is mainly because despite the summit promises there has been none. And in some ways this isn't surprising: individual countries' taxpayers are at the end of the day the only people who can bail out banks, so it is inevitable that individual countries' own political priorities are more important than acting globally.

I've commented before on the issues leading up to the credit crunch. But:

- the tripartite system set up by Brown didn't work because it assumed nothing would go wrong;

- the independence of the Bank of England to set interest rates didn't work because it was told to only focus on price inflation, not on ecenomic stability as well;

- a massive public sector deficit was created as public spending was increased but without productivity improvements;

- nothing was done for ages to resolve uncertainty over bank stability, and that was after too much dithering over Northern Rock;

- despite majority ownership of two major banks, and the implicit guarantees behind others, nothing has been done to increase lending or to create confidence in bank balance sheets on a stand alone basis, or to improve regulation. So we see a shortage of credit persisting, making unemployment worse than it need be, while at the same time margins on bank products increase allowing excessive bonuses to be paid on the back of taxpayer support which is not being properly charged.

In other words: the economic policy hasn't worked and the Government hasn't actually done much to improve stability recently. The proposed changes to regulations won't change much: the Conservative proposals have more chance of shaking things up.