Sean O'Grady: Caution, not recklessness, is the problem now

The economics

It would be easy to dismiss the threats by President Sarkozy to wreck the G20 summit with a Gallic walkout as a typical piece of French chauvinism. After all, Nicolas Sarkozy falls neatly into a long line of French leaders who seem to enjoy saying non to the British. In fact, it's worse than that. M. Sarkozy might even be right about demanding concrete results from the gathering on banking regulation, tighter supervision of hedge funds, credit rating agencies, tax havens and the rest – but he is badly missing the point about the priorities for the G20.

M. Sarkozy, indeed, has more in common with the anti-capitalist vandals who ran amok around London than he might appreciate. The vandals, like M. Sarkozy, want to scapegoat banks and bankers – "Thieves", "Built on Blood" and all that.

Yet the bankers are not the real issue. When the world economy faces meltdown, banking regulation ought not detain M. Sarkozy and the G20 for long: M. Sarkozy is throwing a tantrum about the architect's plans for his new dream home while his existing residence is still on fire.

Yes, the banks did make mistakes. They lent too much money to the wrong people, and they funded too much of their lending from borrowings from other financial institutions rather than savers. Some were exceptionally foolish and collapsed. There were lavish rewards for failure. Case proved?

No. It's a bit like the fable about the frog who gives a scorpion a ride across a river. The scorpion allays the frog's initial misgivings, but as they cross, the scorpion stings him and they both drown. Before their demise the frog asks plaintively: "Why did you do that?" The scorpion replies: "I'm a scorpion; it's my nature." Well, chasing profits is what banks do; it's in their nature. We ought to blame the regulators and governments for failing to curtail the credit boom which created all that money for them to play with. That is where M. Sarkozy has a point; but the problem right now is excessive caution by the banks rather than recklessness: regulation is irrelevant.

Think again, too, about how things might have been. Think back to 2003 or 2006 say. How popular would the Government have been if they had then restricted mortgages to, say, three times earnings and a loan to value ratio of 75 per cent? Could the Bank of England have realistically ramped up interest rates to – well, what? 8 per cent? 10 per cent? 22 per cent? Simply to choke off a housing bubble at the price of mass unemployment? If you'll pardon the expression, there'd have been a riot.

The uncomfortable truth is that we all enjoyed the party far too much to query where all the booze was coming from. Now we seem intent on lynching the barman for letting us get drunk and attacking the Government for letting us get a hangover. M. Sarkozy is only one of many to make the mistake. At least he didn't spray paint the Bank of England.