Jeremy Warner's Outlook: Too late, Darling acts over Rock debacle

Secrets of success at John Lewis; Carphone gets hedge fund treatment
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The Independent Online

Politicians are only fighting the last war when they seek to address supposed regulatory failure with a whole new panoply of rules and procedures. Thus it is with Alistair Darling's well-meaning set of initiatives to prevent a repeat of the Northern Rock fiasco, bizarrely announced through a newspaper rather than to Parliament as promised.

In so far as they go, the proposals are a perfectly sensible carbon copy of the mechanisms used in the US for dealing with failed banks. Instead of faffing around with attempts to prop them up with Government-funded lender-of-last-resort facilities and the like, Mr Darling proposes to give the Financial Services Authority powers immediately to seize the endangered deposits and place them with other banks.

There is also to be a better deposit insurance scheme, though this becomes largely irrelevant if retail deposits are made to rank at the top of the list of creditors in the manner proposed. Nobody is going to disagree too much with these measures, even if there is quite a lot of fleshing out of the detail to be done. Some will also take issue with the wisdom of giving the FSA, a regulator that plainly failed in the case of Northern Rock, a greater role still in crisis management.

Even so, if this isn't a case of slamming the stable door after the horse has bolted I don't know what is, and it is a racing certainty that the next big financial collapse will raise a whole new set of issues which will not have been addressed by these measures.

Mr Darling has been plainly rattled by allegations of Government dithering during the Northern Rock collapse, and is implicitly highly critical of the arrangements that were in place for dealing with banking crises at the time. Yet he cannot in truth blame anyone but his own Government. Virtually every element of the crisis management system that was found so wanting was introduced by Labour itself.

The Government also seems to have been reluctant to make the parliamentary time necessary to introduce a safer set of arrangements. The upshot is that Britain's reputation for surefooted financial regulation has been all but destroyed and the taxpayer is on the hook to the tune of 25bn.

The wider question not addressed by Mr Darling in his Financial Times interview is whether there is a need for more root-and-branch regulatory reform to deal with the causes of financial crises as well as their effects.

This is much more difficult territory, for, in the end, markets make less dangerous decision makers when it comes to the allocation of capital than politicians and regulators. That hasn't stopped the call going up on both sides of the Atlantic for action to curb the exuberance of credit markets, and thereby prevent the boom and now bust of the consumer and property economies we have witnessed over the past five years happening again.

Vince Cable, the Liberal Democrat Treasury spokesman, has long argued for the reintroduction of the old "banking corset", a mechanism whereby the Bank of England could control the amount of credit in the economy by obliging banks to deposit varying amounts of capital with the authorities. The more the corset was tightened, the less scope there would be for lending.

These days, the Bank has only one tool for economic management at its disposal interest rates. These are used mainly for the purpose of controlling inflation. When it comes to credit, they have proved a blunt or even counterproductive instrument.

Exceptionally low rates of inflation in combination with the massive capital flows coming out of Asia and the Middle East have enabled central bankers to keep interest rates depressed, which, in the absence of other inhibiting mechanisms, has encouraged the growth in credit and the accompanying bubbles in property and other asset classes. Like nature, capital abhors a vacuum. When it's cheap and plentiful, it will always find a home somewhere, however high-risk.

Yet I'm not sure I can join in the present enthusiasm for de-liberalisation of credit markets. The democratisation of credit has been one of the great economic boons of the modern age, enabling an unprecedented level of prosperity, property ownership, consumerism and economic stability down through the ranks of society. Do we really want to return to mortgage queues and credit rationing? I don't think so.

It is easy to see why some politicians believe that the price banks should be made to pay for support with public money is a greater degree of public accountability and control, but this would be an equally regressive approach to the problem in hand.

Banks are treated differently from other commercial organisations only because they are already highly regulated and it is therefore reasonable for depositors to think their money is publicly underwritten.

The banking system also acts as the main arteries of economic activity, making a banking collapse a much bigger threat to the economy as a whole than that of even a very substantial manufacturer.

But that doesn't mean banks and their lending practices should be publicly controlled. We know that command economies don't work. Stagnation, misery and political corruption are their defining characteristics. Against these horrors, the occasional financial crisis seems but a small price to pay for the wealth-creating power of economic liberalism. Regulation that chips away at the edges of these freedoms, however well-intentioned, is unlikely to serve us well.

Secrets of success at John Lewis

Rival retailers can only look on and weep at the apparently booming sales of John Lewis. Of course, we don't know quite how profitable those sales were yet. John Lewis is a partnership, and therefore doesn't have to abide by the same reporting disciplines as publicly quoted companies.

Competitors say the sales performance is being achieved at least in part through heavy discounting, particularly of white goods. Even so, at a time when many retailers are struggling to show any top-line growth at all, the latest figures look extraordinarily impressive.

In all kinds of ways, John Lewis has turned the textbooks on their heads, demonstrating that to succeed you don't have to be big, either in food or general merchandise retailing, and that access to the capital of public markets isn't a prerequisite either. It's easy to say that the secret of the company's success is its appeal to middle-class England, but, if this were a formula so easy to achieve, then why hasn't anyone else been able to replicate it?

Charlie Mayfield, the chairman, puts it down in part to the company's partnership structure, which enables long-term investment in training, refurbishment and expansion that might be considered profligate in companies driven primarily by the immediate interests of outside shareholders. You can take it as read that perennial stories of conversion or sale are still a long way wide of the mark.

Carphone gets hedge fund treatment

Ignore speculation yesterday that Carphone Warehouse is about to receive a takeover bid from either Vodafone or Best Buy. Reports of bumper sales over Christmas, helped by heavy demand for the iPhone, may be nearer the truth, but still don't tell the real story.

Actually, what this was about is rumour spread by hedge funds to get the price up so that it can be more profitably shorted ahead of the company's trading update on 18 January. Much the same ploy was used, with some success, at DSG International ahead of this week's profits warning.

The Financial Services Authority claims to have got a handle on market abuse. Certainly it's got a rule book as long as your arm for the purpose. Yet as far as I can see, stock-price manipulation is more rife than ever.

j.warner@independent.co.uk

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