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Media Stories: 14/11/2007 - Ex-MPC man slates Brown on Rock 'shambles'

Ex-MPC man slates Brown on Rock 'shambles'

Gordon Brown must take a major slice of the blame for the Northern Rock "shambles", one of the Prime Minister's previous appointees to the Bank of England will claim today.

Ex-MPC man slates Brown on Rock 'shambles' Prof Buiter warns that the UK's 'light-touch regulation needs to be tightened up'

In his appearance before the Treasury Select Committee, leading economist and former Monetary Policy Committee member Willem Buiter will blame Mr Brown's decision to hive off the key regulation role from the Bank to the Financial Services Authority for creating the foundations for Northern Rock's downfall.

He will call for the Bank of England to be reinstated as the chief banking supervisor and regulator, and argue that the MPC should be made independent of the Bank.

Prof Buiter, who is now at the London School of Economics, also warns that the UK's "light-touch regulation has become 'soft-touch' regulation and needs to be tightened up in a large number of areas". In a submission to the Committee, he claims that not only was the new architecture of the financial system, put into place by Mr Brown when he became Chancellor in 1997, flawed but that the Bank acted indecisively, and that the crisis undermined its credibility. Northern Rock was not "too large to fail", he says.

However, it is the accusation of the Prime Minister over his part in the disaster that will attract most attention, since Prof Buiter was one of the first economists to be appointed to the MPC by Mr Brown in 1997.

His submission said: "The Tripartite arrangement between the Treasury, the Financial Services Authority and the Bank of England for dealing with financial instability is flawed. Responsibility for this design flaw must be laid at the door of the man who created the arrangement the former Chancellor and current Prime Minister, Gordon Brown."

He said the main shortcoming was that it separated the information about individual troubled banks from the agency with the financial resources to help them.

"It's clear this separation of information and resources does not work," he said.

He said that, in any case, Northern Rock should have been allowed to "sink or swim", but that the Government should have guaranteed all deposits. Instead, he said, two months after it was granted liquidity support by the Bank and customers' deposits were guaranteed, "Northern Rock is still on life support, having drawn over 20bn from the liquidity support facility just under 20pc of its assets. This is a shambles".

He said the authorities' actions meant "the UK has socialised all risk to both sides of the banking sector balance sheet".

He added: "It is hard to argue that the survival of Northern Rock is necessary to avoid a genuine threat to the stability of the UK financial system, or to avoid a serious disturbance to the economy. The bank is not 'too large to fail'."

He said it would even have been preferable to have taken Northern Rock into public ownership.

"The way the crisis unfolded damaged the prestige and international standing of the City of London the financial capital of the world more than the other leading financial centres," he said.

Prof Buiter also warned that ratings agencies had been subject to "multiple potential conflicts of interest" and questioned the wisdom the Federal Reserve's interest rate cuts.

He said that since the original credit crunch was partly caused by "ludicrously complex" debt instruments, regulators and investors would now have to demand simpler structures.

Daily Telegraph, by Edmund Conway, Economics Editor
13th November 2007