I fear Alistair Darling didn’t get much rest over Christmas. The Chancellor seems to have spent his holiday trying to ferret out what Tony Blair might have called “eye-catching initiatives that I can be personally associated with”.
In the first week of the year, the Treasury has been busy launching a new broadside against private equity, telling mortgage firms how to run their business, summoning the energy regulator to a meeting and floating new plans for banking regulation. But much of this activity is at best useless and at worst potentially deeply damaging.
Take Darling’s proposals to prevent another Northern Rock debacle. The Chancellor must have been delighted with the headlines he got for his plan to give the Financial Services Authority (FSA) the power to seize depositors’ cash in a failing bank. But what does this actually mean? Does he think this cash is sitting around in bank vaults as opposed to lent out to customers? Perhaps he means the FSA should seize assets such as mortgages as collateral. But what assets? And on what terms? And under what conditions? And if depositors are to be pushed to the top of the queue ahead of other creditors, why is he bothering to also raise the government guarantee on deposits?
The Chancellor seems to be talking through his hat. The same is true of the other changes he announced. He said he will reform the much-maligned Tripartite Committee, which governs the way the Treasury, Bank of England and FSA handle financial crises, to make it more like Cobra, the Whitehall emergencies committee – thereby making clear the Chancellor was in charge during a crisis. But the Tripartite arrangements make this clear already.
Meanwhile, Darling wants to give the FSA more powers to investigate the solvency of banks – even though no one has suggested a lack of such powers had any bearing on the fate of Northern Rock. In fact, the real problem was that the authorities failed to make the most of their existing powers. They failed to spot the problems before the crisis, they failed to push the Rock into the arms of Lloyds TSB when they had the chance and, when that option fell away, they failed to nationalise it. Of course it suits the Bank and FSA to go along with Darling’s charade. But no amount of spin should obscure the fact that misjudgements caused this mess.
But Darling’s spin over this was harmless compared to his grandstanding this week over energy prices. His decision to call in energy regulator Ofgem to discuss the latest rises in household energy bills smacks of a deliberate shot across the bows of an independent regulator. You can see why he was tempted. With inflation high and the Government trying to impose wage restraint on the unions, the last thing Darling needs is a 27% increase in fuel prices.
But UK retail energy prices are set in a competitive market in which more than four million customers changed suppliers last year. Energy firms face soaring costs, not just from rising wholesale gas and coal prices, but as a result of Government policy, including emissions trading costs. All that Darling’s ill-judged foray outside his own remit can achieve is to undermine confidence in the UK regulatory regime. The implicit threat of intervention risks spooking investors, thereby pushing up the cost of capital for the industry. That would create higher prices for consumers.
The UK economy is in deep trouble and faces enormous challenges, as Brown himself has acknowledged. It needs a steady hand on the tiller to steer it through the storms. On the evidence of this week, it is not clear that this damaged Chancellor, with his reckless efforts to drum up a favourable headline, is the man to provide it.
Philip Richards’ long shot at the Rock
Talking of Northern Rock, one has to admire Philip Richards of RAB Capital which holds 7% of the shares – he looks to be fighting a fearless campaign to secure the best possible deal for shareholders from the mess. When I saw Richards shortly after he made his investment, I thought he was mad to do it (and he is now sitting on a huge loss), but I also saw that he was motivated in part by a belief that Northern Rock had been wronged and that the authorities had an obligation to allow it to recover.
No doubt he was also motivated by a more cynical calculation: he is clearly betting that, forced to make a choice, the Government will prop the bank up indefinitely rather than pull the rug in a way that might cost jobs and realise losses. Richards’ efforts to persuade shareholders to support a resolution at next week’s AGM is designed to force the Government to make such a choice by pushing the Rock into the hands of Sir Richard Branson’s Virgin.
It’s a long shot – but one of the kind that Richards specialises in. He has made his fortune investing in mining companies before they’ve even dug a hole in the ground, a strategy that has delivered spectacular results. You can’t help thinking his luck is bound to run out one day – perhaps the credit crunch will do the job. But if I had £100m, I might give him £1m as a gamble.
Simon Nixon is executive editor of Breakingviews.com