Jeremy Warner's Outlook: Here come the politicians seeking reform

Nationalising Rock would be pointless; ITV is not out of the woods quite yet
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The Independent Online

You'll be pleased to know that Gordon Brown plans to make it his business to reform the "global financial architecture" so that it is better adapted to the modern world and to cope with crises of the sort that has engulfed credit markets. The British Prime Minister wants better co-ordination, the creation of early-warning systems for the global economy, and more robust mechanisms for heading off difficulties. Well, that's a relief. Mr Brown is on the case.

Regrettably, he's in no position to preach. As things stand, Britain's record on financial stability can be summarised in just two words Northern Rock. Just to borrow from one of Mr Brown's favourite expressions, overseas regulators will take no lessons from Britain when it comes to controlling the wilder excesses of the banking system.

There is something wearily familiar about the vocabulary which is again in common parlance of early-warning systems, reform of the global financial architecture, credit rating agency bashing, and so on. Every time there is a crisis in the capital markets, the politicians leap on their high horses to insist that something must be done by way of public policy response. Because markets are these days global, the focus is on the need for cross-border policing and co-operation.

Exactly the same things were said by the likes of Robert Rubin, the former US treasury secretary, in the wake of the emerging market crises of the late 1990s. Heads were knocked together, worthy international discussion groups were set up and for all we know a crisis early-warning system may even have come into being. If it did, it failed to provide any warning at all of the crisis we are now in.

This is not because regulators were completely unaware of the way market euphoria had caused risk to become mispriced, or even that they chose to tolerate it. Rather it is because nobody appreciates a party pooper when the dance is in full swing. It is not just difficult, but almost impossible to prevent or to curtail the excesses of a fully blown boom.

One of Mr Brown's proudest boasts is that he had laid the foundations for economic and financial stability in the UK economy. In fact, many of the institutional arrangements he has put in place to ensure stability have been found wanting. Markets are ingenious mechanisms. Whatever barriers the politicians put in the way, they will always find a way round them. As the opportunity for older forms of excess are closed off, newer ones are invented to take their place.

Mr Brown didn't refer to the International Monetary Fund by name, but it is plainly right to assert that this is an outdated organisation designed for a post-Second World War world that no longer exists. It is both unrepresentative of the developing world and completely ill-equipped to deal with the vast capital flows of the modern, global economy. Yet even if greater progress had been made in reform of the IMF, it seems somewhat doubtful that it could have prevented the present banking crisis.

When even national supervisors are unable to defuse a ticking bomb such as Northern Rock, is it really at all likely that some monstrous global financial services authority would be any better at it? Just what are these early-warning systems that Mr Brown is so keen to see developed? And even if they were blessed with perfect vision of the future, could they command authority in today's viciously competitive global economy? At best, Mr Brown's suggestions are just political posturing, and at worst, little more than old-style interventionism in modern form.

No doubt there is some limited scope for reform of the credit rating agencies, widely seen as a key part of the mischief in the present crisis because of the triple-A ratings they assigned to high-risk mortgage-backed securities. The first rule of investment is never buy something you don't fully understand, particularly when designed by clever investment bankers. The triple-A ratings of the agencies made investors believe they didn't have to understand what they were buying to be safe. There is also plainly something wrong with an industry that is paid by the very issuers it is required to credit rate. Lack of competition among agencies, with just three players granted authority by the US Securities & Exchange Commission, is another key structural fault.

Yet it would surely be wrong to regulate these agencies in the manner Mr Brown seems to suggest. If that were to be the case, governments themselves would become responsible for the ratings, thereby politicising the whole business of credit. No doubt Mr Brown would very much like that degree of control, but it would also be a subvention of the free-market process.

Transparency is the only truly useful safeguard against excess in markets. If governments confine their reforms to creating more clarity, then that would be no bad thing.

Unfortunately, it is intervention, not disclosure, that politicians tend to like best. And even a more transparent world is never going to stop the propensity of markets eventually to come down in flames. As the boom times roll, investors become oblivious to risk and, in a process which Wall Street veterans call reaching for yield, take themselves into ever more dangerous situations. It's the way of the world. If Mr Brown thinks he can stop it, he's being naive.

Nationalising Rock would be pointless

The Government is being urged by the Liberal Democrats and others to nationalise Northern Rock. Only by this method, they insist, can taxpayers' interests be properly looked after. I can't agree. As a backstop against the failure of the mooted private sector solution, nationalisation obviously has to be held in reserve.

Certainly it would be preferable from the Government's point of view to administration, in which the Government would have to take its place in the queue of creditors along with everyone else and would also have to honour its guarantee of deposits.

Yet it is hard to see the point of it as long as there is still a viable business still there to be salvaged. Even after yesterday's kitchen sinking of SIV and sub-prime exposures, Northern Rock would still appear to have book value of more than 4 a share, and although the company is widely thought to be a basket case, it also appears to be trading profitably.

Now that the Bank of England has performed its volte face, and agreed to lend to the banking system at a non-penalty rate, Northern Rock should perhaps avail itself of the new facility and thereby start to pay off the 25bn lender-of-last-resort loans that everyone is so worried about. With the stigma of having to pay a penalty rate for the B of E's largess removed, virtually all the big British banks are planning to participate in next week's auction. The Government, through the B of E, will become a creditor of Royal Bank of Scotland, Barclays and HBOS as well as Northern Rock. Does Vince Cable, the acting leader of the Liberal Democrats, want to nationalise them too?

Quite apart from anything else, it would be a disaster for Britain's image abroad to nationalise Northern Rock. What with the Led Zep revival, parallels are already being drawn between the 1970s and now. Nationalisation would confirm beyond doubt that we've travelled back in a time machine to that miserable decade.

ITV is not out of the woods quite yet

The main thing ITV has got going for it in a fast-fragmenting media landscape is that it is still the only commercial broadcaster around capable of delivering mass audiences to advertisers. Yesterday's news that ITV1 has stabilised viewing performance after years of decline is therefore very welcome.

Yet the future is fraught with dangers. Most broadband access is still incapable of streaming TV-quality video, but it is only a matter of time before this kind of instant video on demand becomes a reality. If ITV thinks it has already seen the worst of the fragmentation process, it has another thing coming.

j.warner@independent.co.uk

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