The Blame Game

Lord Turner, the Chairman of the Financial Services Authority on the Toady programme on Radio 4 this morning and later quoted by the Daily Mail, did admit that his Authority did over- look the danger of complicated financial instruments ultimately based on bad debts, and thereby contributed to the credit crunch.

In his view, so did Gordon Brown and many other bankers and academics. Finance ministers across the world also failed to spot the dangers, and they must bear some of the blame as well. "The key problem was not that the supervision of Northern Rock was insufficient, but that we failed to piece together the jigsaw puzzle of a large UK current account deficit, rapid credit extension and house price rises, the purchase of UK mortgaged-backed securities by institutions in the US performing a new form of maturity transformation, and the potential for irrational exuberance in the market price of credit."

Who should have pieced together the jigsaw pieces, - not the FSA, - their task was to regulate financial institutions?

The parties who failed to look at the bigger picture here were H.M. Treasury and G. Brown!

They not only failed to appreciate what was happening in the money markets here, after the liquidity they had pumped into house purchase and debt generally, they also saw no connection to the larger and larger trade deficits we were incurring. He was hell-bent on driving through and financing his expenditure programmes. Once he left Prudence, he seemed blind to the dangers of alternatives.

At the moment there seems to be a spat between Lord Turner and the government over the fact that the FSA has permitted "short selling" to begin again. Turner claims that there is no evidence that short selling has been instrumental in recent bank share plunges, but a rather prickly government and chancellor did not want reinstatement.