When would you have stopped the boom? Key Bank of England official says 2004/5
“As long as the music is playing, you’ve got to get up and dance. We’re still dancing,” were the words of Chuck Prince, the boss of the world’s biggest bank a year before its credit-crunch collapse. The music had blared since the 1980s when controls on credit were scrapped. A tidal wave of credit from the City went into houses, skyscrapers, holidays – all on the never never.
So this week Britain regains the powers to take the punchbowl away from the party, a committee that can turn off the music.
So the obvious question is when would it have stepped in, in the past? 
The Bank of England’s Andrew Haldane told me: “The judgement’s tremendously difficult which you’d expect me to say that sort of thing coming from a Central Bank. I think the tell tale signs will be too much leverage in the system, too much debt whether on the balance sheet of banks or of households and companies. It will be that debt, that risk taking being broadly based.
“It isn’t the FPC’s job to spot particular problems, particular risk-taking in particular products or institutions. It’s when that risk taking becomes generalised and too toppy that the FPC is meant to step in. If I think back to 2004/2005 that was the point where bank’s balance sheets were spinning – if not out of control then much faster than was the economy, then hopefully with hindsight at that point we’d have raised a flag and perhaps even backed up the raising of the flag with a pressing of the brake.”
Well that is remarkable. If the FPC had a time machine, it would have “pressed a brake” in 2004/5, and not just on consumer credit.
“It’s very telling that much of the growth in the balance sheets of banks wasn’t lending to you or I or indeed to small business but it was banks lending to each other. So one of the biggest checks in principle we might have wanted to impose back in 2005 would have been on lending between banks rather than to households and companies,” he added.
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The banker, Chief executive of Standard Chartered Peter Sands has no illusions about this.
“I think [these powers] would have made a huge difference, whether they would have completely prevented [the credit crisis] I don’t know, but they certainly would have made it far less damaging than it was,” he said.
But just imagine what that means in practice. The Bank of England stepping in as the housing boom took off, at exactly the time that one HBoS banker pronounced to me: “Credit is being democratised in this country and that is a good thing”.
The BoE stepping in before the 2005 election, when the feelgood of rising house prices drove Tony Blair to a third election victory. Is this right? Does the Bank’s team of internal and external technocrats have the democratic legitimacy to deal with this?
Former MPC member Willem Buiter (who is now chief economist of the bank whose ex-boss uttered “we’re still dancing”) thinks not, and believes that the Chancellor should chair the FPC.
Remember that Tony Blair was writing letters to the FSA boss Callum McCarthy at this very time saying that the FSA was being too restrictive on the poor old banks. It’s fair to say a whole sweep of people, hundreds of thousands, would not have got mortgages. House prices would have fallen back, as they did in Hong Kong last week after it instituted compulsory 50 per cent deposits on expensive property. What about Chinese style limits on second homes? How about Indian limits on commercial property?
If the private sector recovery gets going, and the full powers of this new FPC kick-in in 2013, then the decisions of this new body in early 2015 could be rather interesting – economically and politically.
Follow Economics Editor Faisal Islam on Twitter: @faisalislam