Monday, October 06, 2008

The love that dare not speak its name

Briefly mentioned by the BBC at lunchtime, David Cameron has descended from his Churchillian heights to write for that obscure little rag, The Financial Times.

In what some might suggest is a statement of the bleedin' obvious, the Great Leader tells us mere mortals that, in the light of the current financial crisis, "a concerted policy response is vital to avoid serious economic consequences."

As to what "policy" is needed, Cameron's script now runs to three things. We need action, he writes, in three areas: liquidity, asset quality and bank capitalisation.

Liquidity, the Great Leader, thus informs, is the immediate priority, particularly in the wholesale money markets. This he has got dead right and this is what he was pointing out in his unscheduled speech last Tuesday in Birmingham. Then, as you will recall, he told his adoring audience:

The third thing we need to do is break the self-fulfilling cycle that is reducing banks' ability to lend. The problem is this. When the value of financial assets falls, a new international accounting regulation called "marking to market" automatically downgrades the value of banks. They are less able to raise the money to carry on their business. That in turn causes further falls in the value of financial assets. And this is making the financial crisis worse than in previous downturns. So our regulatory authorities, together with the European regulators, need to address this difficult issue.
Now, however, the tune has subtly changed. Instead of flagging this up as the main problem, the Great Leader explains that, "Dramatic increases in spreads and banks' increasing reliance on overnight funding have created a fragile environment." And, for the immediate solution, he hopes that, "Tuesday's intervention by the Bank of England to broaden the range of collateral with which banks can access the Special Liquidity Scheme will un-cock the gun."

Then, and only then, "Once liquidity is restored," does he tell us we need "temporary action to tackle the failure of illiquid markets to value asset quality." And, instead of telling us that "mark-to-market" is "making the financial crisis worse than in previous downturns," we simply get the anodyne: "In the current crisis mark-to-market accounting is exacerbating a self-fulfilling cycle of falling asset values and restricted lending."

The subtle shift continues. Last Tuesday, he was declaring that "our regulatory authorities, together with the European regulators, need to address this difficult issue." Now he now tells us: "Regulators should work with their European counterparts to address this difficult issue."

The crucial thing here is that European "regulators" has become "counterparts", quite deliberately conveying the impression that UK regulators need to be working with those in other member states to solve a common problem. His earlier statement was far too close to suggesting that the "elephant" should be involved – that he must go cap in hand to the EU commission and the Committee of European Banking Supervisors.

Thus, while on Tuesday, the "elephant" briefly emerged – albeit fleetingly – it has re-acquired its cloak of invisibility. The obfuscation on the part of the Great Leader cannot be accidental. And this is the man who wishes to lead us and whom we must trust to tell us the truth about the European Union.

  • Other posts on the financial crisis here.