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September 14, 2009 11:36 pm
This is an edited transcript of an interview with Alistair Darling, chancellor of the exchequer, given on September 14 2009.
Financial Times: Chancellor, the City: has it learnt the lessons of the past year and to what extent do you share the view that the financial service industry has simply got too big for the country?
Alistair Darling: Well, there’s two separate issues there. I think that many of the lessons from the collapse of Lehman’s are being learnt, but I’m afraid there are still people out there who’ve got still more to learn.
A year ago, the world truly was looking into a financial abyss, and if governments hadn’t taken action very decisively and quickly, we could have been looking at an absolutely catastrophic outcome, with the world’s financial system coming crashing down.
Now that didn’t happen because of the action that we took, but I think it’s important that we learn the lessons from what happened, and I think there are three of them. There’s capital, liquidity, there’s also dealing with the complexity of banks, especially should they get into difficulty. In relation to capital, it is absolutely essential that banks need to be adequately capitalised, and the more risky their activities, the greater capital buffer they need.
Now, I think, as an example, that is a lesson learnt, but is it a lesson fully implemented yet? No, it’s not, because there are some countries that whilst they will accept that it needs to be done, they are perhaps taking longer than we’d like to make sure that we see it through.
FT: Are these mainly European countries?
AD: There are countries in different parts of the world. I’m not going to single anyone out for particular treatment, but it was interesting at the G20 meeting a couple of weeks ago, everybody said yes, of course we need more capital, but I think there is still some resistance to actually see that through.
FT: Have we reached the point yet when banks should be building up capital?
AD: I think there’s not a set date – if you like, a fixed point – but as banks start to resume their trading, they’ve got to make sure they’ve got adequate capital to do that, and that clearly is something, and you’re asking about other countries, it is something that no one country can do alone because all the banks, the important banks, traded right across the world and have many subsidiaries and they’re structured in such a way that you’ve got to make sure that this capital is around in different parts of the world and not just in one country.
But I’ll just finish on this point. There’s a liquidity point where I think Northern Rock was perhaps the earliest example of what happens when you become totally reliant on one source of finance, and when that finance dries up, you really are in difficulties.
And the third element is the whole question of complexity and resolving matters if banks get into difficulty. Here there is a very, very big public interest, because we’ve seen the pain that has been inflicted on the wider economies, you’ve seen in different parts of the world taxpayers have been asked to put their hands into their pockets to bail out banks.
It is not in the public interest, but we have a situation where there are some banks that are clearly large in size, complex in their operations and straddle several different jurisdictions, and that’s why I think the whole concept of the living will, which I set out in both [the] Mansion House speech but also in that white paper we published just before the summer recess is important. It isn’t just important for us, it’s important for other countries too, and whilst the FSA has got the power to do that, we are considering whether or not we need to make that more explicit, and in particular, I think we need a timetable. This is something you can’t just allow to drag on, because you can see situations where people say yes, yes, we must do something about it, but not yet.
Now, inevitably, this is going to involve discussions with other countries because, I’ll come onto your second point about the financial industry, but London is I think the pre-eminent financial centre now. I want that to remain the case, and that means we are probably more conscious than many countries about the fact that whatever you do here, you’ve got to make sure it is matched by action being taken elsewhere.
But what I do say is that when people have been saying, on this first anniversary, have the lessons been learnt, the answer is I think, you will say in principle, everybody says yes, we mustn’t let this happen again and yes, we must take the action we all know we need to do, but I’m afraid in practice, there are still rather more examples than you would like, where people say yes, we know all that, but this isn’t quite the time to do it, or it’s all quite difficult. Now, we just can’t do it, we can’t allow ourselves to get into a situation where you lose the moment. Things move on, and then suddenly, it’s maybe some years down the track, something will blow up and people will say well, why didn’t you fix this back in 2009/10? And that’s going to be in the front of our minds.
FT: That sounds like something you want to do this side of the election.
AD: We’re considering the options that are open to us, but when people, and there’s very little disagreement about this, [when] complex organisations do pose a risk that has to be dealt with, but a risk that can easily be dealt with, and then they say yes, we’ve got to do something about it. Then when they start saying yes, but not me or not yet, then I think that the public, and a lot of these banks have got to remember that even the banks that didn’t receive direct help, or perhaps just took advantage of, like the credit guarantee schemes, or... The banking industry as a whole would not be standing here if it wasn’t for the taxpayers in this country, in America, in Europe, in the Far East, and those taxpayers are quite rightly saying, okay, we understand why this had to be done, we’re still pretty unhappy about some of the things we’ve seen, but at the same time they’re going say, but if things need fixing then fix them. Don’t just talk about it, fix them.
FT: But part of that complexity is to do with tax avoidance.
AD: I do worry when an organisation is structured for tax purposes rather than for the efficiency of its business and the strength of its business, and then perhaps this is something else that, when people sit down and have their boardroom discussions, they need to ask why they’re structured in this way. It was obvious from the problems we’ve had. If you look at RBS, for example, it manifestly did not understand the risk to which it was exposed. It’s quite clear that a casual look around ABN Amro before they’d been bought might have been very instructive, because it was clearly complex, it was clearly opaque and it was clearly a bit of a mess.
FT: Are you prepared to do this? I know you say we need to discuss this with our partners and take into account the competitiveness of London, but is this something you would be prepared to take a lead on unilaterally?
AD: There are two issues there. Yes, we are certainly prepared to take a lead on it, but the point I was making to you is that a lot of our institutions are actually spread around the world, so I am ready to take action, but what’s important is to make sure it’s practical and actually works, and that’s why the Americans are important, the Europeans are important, it’s important that the Far East and Hong Kong and Japan, Singapore, all countries are actually moving in the same direction, and that’s why, I’ve said before, the G20, it may have its imperfections but it’s actually proving a useful vehicle to pursue these things.
So it’s not a question of you either do this at home or you do it abroad. I’m afraid you’ve got to do both, but what you can’t do is stand on the sidelines, wringing your hands, saying something needs to be done but actually nobody is willing to step forward and make sure it actually happens.
FT: Would you be disappointed if, in a year’s time, you hadn’t got some of this through international negotiation?
AD: Yes, because I think it is important. You need to strike while the iron’s hot. Memories are very short. I remember two years ago, before any of this came along, speaking to a banker who said there’s not many people who work for our bank who remember what a crisis is. Well, there’s a very large number of people who remember what a crisis is, but in 15, 20 years’ time, the risk is the corporate memory fades.
FT: Is it fading already?
AD: I think there are still more people than I would like who would like to think the whole thing is behind them and they can just carry on as if nothing had happened. Now, that is not the case. We just simply can’t allow that to happen. This comes onto your second question, if you like... London, as I said, is the pre-eminent financial centre in the world. I want us to retain that position. I want to retain it because a million jobs depend upon it here at home, most of them actually outside London.
So it’s important, and it’s not just banking, it’s insurance, it’s pensions, it’s the lawyers, the accountants, all the things that make the critical mass here. But we will remain that pre-eminent centre, provided we ensure that where there have been mistakes made, they’re put right, where there are weaknesses, they are identified and the system is strengthened, and where we’re not afraid to say, well, change may be necessary.
One of the strengths of London should be, this is a good place to do business, so strengthening the system should not be seen as a weakness and it shouldn’t be seen as people saying, well, somehow you’re putting us at a disadvantage. Because I think in years to come, when people are looking where to put their money, where they’re looking where to make their investments, they will ask themselves, well, what’s the supervision like there? Has somebody got a handle on what’s going on? Now, I think that’s very important.
Coming back to the industry being too big, I’ve always thought, we don’t sit down and say, well, is our manufacturing too big or have we got too many tourists coming here; we don’t do that. It’s the wrong question to ask. The right question to ask is, you’ve got this industry, is it adequate, have you got adequate protection against risk? That’s why the answers to the questions that I put earlier are very, very important to that.
But I think there’s a lot of countries in the world who did enough to get a slice of the action in London and I cannot for the life of me see why we’d want to give it up. But we’ll only keep it, we’ll only attract people here if people can see, yes, this is a place that welcomes investment from overseas, this is a very international market, but yes, we run a tight ship here and when mistakes happen we deal with it and we deal with it precisely.
FT: Another anniversary this week is the Lloyds-HBOS takeover. A year on, do you regard that deal as still being of interest, given the concentration there’s been in the banking sector? Could you just give us a flavour of the way things are going on the negotiation over the asset protection scheme? Are you happy with the idea of Lloyds pulling back a little from the original deal?
AD: That’s something that Lloyds are considering and of course we’re involved in those discussions for very obvious reasons, but those discussions are continuing and I don’t think there’s anything I can add to it.
On the merger, if you like, that was a decision that the shareholders took. The process, although announced in September, the true anniversary is at the end of January when the vote went through, and plenty happened between September and December so that people had a long time to think about it.
But on the question of competition, as I said in my CBI speech a couple of weeks ago, and bear in mind that HBOS, had it not been taken over, was hardly going to be in a condition to be an active challenger given that the losses had racked up, which is tragic for HBOS given the fact that it had come from being a solid, if not always spectacular bank – both Halifax and the Bank of Scotland were two good, sound entities. But I made the point that I want to see more people, more new entrants. When the government comes to sell off the shares it has and all the financial institutions that we have one of the things in the front of our minds will be, how do we get more competition in, because it is not good for the system that you’ve got half a dozen big providers and that’s not good in any industry, never mind the banking industry, and more competition means more choice.
Now, we’ll have to wait and see who comes along, but I think we should be aggressive on the need for more competition. Competition matters and it matters particularly in this industry.
FT: Has the European Commission done the work on competition for you?
AD: In all the state aid discussions that’s one of the things the Commission looks at, but it’s something that I feel that you’ve got to look ahead at from beyond today’s problems – what are the problems we’re going to be looking at down the line. Given the withdrawal of the Icelandics, Ireland has got its own problems, it’s dealing with a lot of the Europeans that have gone back home, as it were, we’ve got to make sure there’s enough competition.
Part of our problem, if you look at the SME sector, for example, where lending is still an issue, it is not good to have that concentrated in the hands of very few banks. The best lever of a bank and the best encouragement of a bank isn’t the threat of a government minister having them in for a chat; it’s actually the thought that somebody else is going to try and get that business off them.
FT: Just very quickly on the disposal of the shares, what do you think of this idea about the retail sale of some the shares?
AD: I’m in favour of the widespread share of ownership. I’m not sure people at the moment could be rushing to buy the Bank of Scotland. Remember, there’s a lot of employees and sometimes people forget it’s very easy for people to concentrate on the bosses at the top. An awful lot of people working for RBS and for HBOS were paid in shares instead of a pay rise. I know a lot of my constituents are in that position and who are now holding shares that are worth a lot less than when they got them, so of course I’m in favour of widespread share ownership.
One of the things we will look at is how we can encourage that, how we can encourage more employee share ownership, and I think equally importantly I think you’ve got to have an overall view. Remember, any individual buying shares can, no doubt, come to sell them and if they sell them back to one of the big institutions and you don’t get what I think is important and that’s more competition in the system.
FT: When you look at the state of the British economy, it did seem to be starting to grow around the end of June.
AD: Well, look, I’m sticking with my prediction, which is the economy will turn; we’ll begin to see growth around the turn of the year. Just as the day after the budget, there were a whole lot of people who said what you’re saying is wildly optimistic and it won’t happen. Some of the same people had said 12 months ago that when I said that we were heading for a deep and prolonged downturn they said that wouldn’t happen either. I’m sticking to my guns on that. I think you just have to be careful.
On the positive side, I think people are more confident now than they were at the beginning of this year. There are encouraging signs; it’s good that we see Germany and France and Japan coming out of recession, but we have to be very cautious about one month’s figures, just as we should be cautious about one month’s set of predictions.
So I think there are a few obstacles to negotiate yet, there are still a lot of risks out there, there’s still a lot of uncertainty, but what I’m very clear about is that I think the concerted action that countries took across the world at the end of last year and the beginning of this year is making a difference.
I think the confident signals that were sent around the world after G20 at the beginning of April, for which Gordon Brown deserves a great deal of credit, has also helped boost confidence. But let’s just bear in mind that a lot of what is happening at the moment is being driven by the public sector in terms of stimulus in different parts of the world. What we’ll be looking for as we go forward is evidence that the private sector is beginning to come in behind that. But there’s all the more reason to maintain that public sector spending which most other countries, in fact, just about every other country believes, which I think the Tories are utterly wrong because they were wrong to oppose it last year, they were wrong to suggest now that this is the time you start cutting public spending because I think that would choke off the recession before it even had had a chance to get a hold.
So I think maintaining it is very important, but I’m naturally cautious. But given that you have got one of the deepest downturns driven off the back of a financial sector crisis I think I’m right to be cautious, and I’m right to say that I think the government has got to be vigilant and ready to see this thing through.
FT: Britain is the only country in the G20 that’s planning to tighten fiscal policy, thanks to you. You’ve been making a big point of saying now is not the right time to tighten, but we’re going to start tightening before anyone else. Are you confident that’s the right thing to do?
AD: Yes, up to a point. I mean, we are. A lot of the measures that I announced last November were quite deliberately designed to be time limited, to bring forward spending to 2009, because that’s precisely what you should do in a downturn. We’re putting a billion pounds a month into the hands of shoppers and retailers. If you take the scrappage scheme, if you take the capital programmes that brought public spending money forward … But remember, we set a public spending programme this current CSR [comprehensive spending review] period in 2007 and it will be putting more money into the economy next year, which again the Tories wouldn’t. It is very, very important that we see that through.
Now, like every single finance minister, the pre-budget and the budget, we had to take a decision on what’s necessary and what’s not, but I’ve always been clear that some things have been applied and will come off more quickly. Something like “time to pay” – I said at the budget we might let that run a bit further. This is where people can defer paying their tax, which incidentally has had one of the benefits which I think people hadn’t really focused on at the time. 95 per cent of what people promised to pay is coming back on time and actually, I think there’s quite good lessons to be learnt there in terms of how we manage what tax is due, because people, when they sit there and then agree to a timetable, most of them appear to be sticking to it. So we’re actually, although we’re giving people time to pay and that’s obviously a temporary loss, the fact that it’s coming in again is quite helpful.
FT: I just want to raise a point on the politics of this. You have made a huge point of saying the Tories would choke up the recovery by tightening policy in the next financial year, but that’s precisely what you are doing alone in the G20.
AD: No, that’s not right. I mean, the Germans and the French are both stopping their scrappage schemes. But overall, when criticised by the Tories here at home, our spending will increase by about £30bn next year and we are putting more public money in one way or another. You have to look at what we’re doing overall, but this is something that, like everything else in the pre-budget report and the budget, I will keep under review. Having said everything I’ve said over the last year, I have no intention of doing anything that will jeopardise our recovery. Getting the recovery is very, very important.
FT: In the pre-budget report it’s becoming clearer and clearer by the day that there has been an enormous political divide as we come to the election. Can you give us a sense of where your thinking is now and how much you think it’s right to tell the public before the election gets started?
AD: Well, I’ve been saying this for months, because I think the public is going to have to form a view as to which government it wants for the next five years and that government will shape the future of this country, not for five years, but for 10 and 15 years because that’s what governments do. As I said in Cardiff last week, my point is that we need to support the economy and see it through.
We also need to remember that just as we have a plan – I think we were one of the first to halve the deficit within a four-year period – we’ve also got to remember that public spending can shape the development of a country. For example how much you spend on education or science has a direct impact on the quality of graduates that you turn out, the need to maintain public expenditure on say Crossrail which will make a big difference to the City’s competitiveness.
I think the difference that has become clearer even in the last week or so is that the Tories appear to be using the present crisis as an excuse to do what they would have done anyway and that is to pursue this mistaken ideology that the government needs to be shrunk in size willy nilly. Now I think that is just the wrong approach. My argument is that public spending, properly focused, properly targeted with the right priority chosen, can actually make a difference to the shape of the country and as I heard one or two commentators saying at the weekend, we do have a plan to reduce the deficit. If we cut spending now, that would be absolute madness.
Yes, there has been an element that’s been added to because of the discretionary spending but it’s critical as we get the deficit down, which we must, that we do it in a way that has a very, very clear eye on what difference spending can make for our economy over the next few years and I think that is actually emerging as a difference. Coming back to your point, yes, that means if you set your priorities, if you set out where you’re going, then you need to tell people about it and what’s more, not in a reluctant way.
The broader political point here, I do think we as a government, we as the Labour Party, need to come out fighting. We have done a lot that has benefited this country in the last 12 years. Is it perfect? No, it is not. Is there far more to do? Yes, of course there is but I’m not prepared to simply stand back and hand it over to a political party which I think would take the country in a wrong direction and I and a lot of my colleagues think this is the time when you come out and say to people; this is what we stand for, this is what we believe in. Don’t get yourself into situation where people think, well, this is all somebody else’s fault and there’s nothing we can do. That is absolute rubbish. There’s a lot to fight for. The future of this country, of course it matters and we’re at a pivotal moment.
We’ve come through a hell of a shock to the system, as has every other country, all the more reason for us to be making sure that not only do we sort those problems out but we recognise there are huge upsides in a globalised world and we need to be there and we need to grab them.
FT: Have you got the political message co-ordinated now with the prime minister?
AD: I think you’ll see the prime minister making a speech, you’ll see tomorrow [Tuesday]. Peter Mandelson is speaking today. I think and as you know the political cabinet today, I think we are all in the same place here. The values we have, the approach we hold I think we are in a strong position but having got into that position we need to capitalise on it. We need to come out fighting. We can’t expect other people to argue our case for us. If we believe in fairness and responsibility, if we want to believe government can truly make a difference to our prospects, then we’ve got to make our case and we’ve got to make it very loudly indeed.
FT: Mervin King said in June/July that the deficit will still be extremely high level, 5.5 per cent of GDP in five years. What do you think about it?
AD: Well, when I set that target in the budget I made the point that at that time there was so much uncertainty around, that I thought it was important to give a very clear message of intent and of course as you’d expect this is something we all come back to, budget, pre-budget, is something that any finance minister would want to come back to. But I think there’s two things you need to be doing and you need to do them at the same time. It’s yes, you’ve got to make sure that you reduce the deficit because it is too high and needs to come down. And all countries face this, but you’ve got to do it in such a way as you don’t actually damage the prospects for recovery because if you do that, you’ll actually add to the problem, you won’t reduce it. Now that’s a judgment I’ll have to reach at the various fiscal events that we have and I’ve always said I’ll come back to these things. Nothing has changed since I said that in April.
FT: It’s quite difficult given the scale of our deficit in our public finances that when you are even under your current plan to halve it in five years, it’s clearly going to mean that public services and public spending are not going to be as they were and it’s going to be quite hard to sell it.
AD: Yes, but hold on, I think there’s a couple of things here. Firstly, I said in April, there’s always in any time unknowns and this time there’s far more unknowns than the usual and as the economy begins to grow we’ll have to make a judgement as to how much we’re going to grow by, what does that mean for our revenues but in terms of spending.
I think there’s a couple of points to make here. Firstly, if you take capital spending for example, you don’t need to build a new school, a new hospital or a new railway every year. We had a huge backlog of investment which we had to make up but part of what I’ve been saying, what Peter was saying this morning, and what Gordon will say tomorrow, is that you’ve got to decide at a time like this when yes, you’ve got this twin objective of cutting your deficit but also making sure that you preserve the fabric of the country in which we live, but you make sure that you choose your priorities, and that may mean there are some things you can’t do today, that you may have to put off. It may mean you have to be far more rigorous than you would otherwise be in terms of deciding what really matters to you, what really matters to the country and that I think is levelling with people. The idea that you can stand up in the next election and say you want it, we can do it, don’t worry, I think people do understand that a choice had to be made but equally it is a big mistake to think that somehow you’re going into some sort of an arctic winter where you can’t do anything and that there’s no hope for anyone. That’s a ridiculous position to get into. There may be some ideological purpose to give you that impression but I just don’t share that view. I think you can strike a balance and you can steer a course that makes sure that you’ve got a sustainable fiscal position, that you rebuild your strength but also there’s a lot of public spending that does make a difference as to whether the economy works or not.
FT: Do you want to be the first cabinet minister to say that amounts to the possibility of cuts?
AD: In the last spending review Gordon cut the budget of about half a dozen government departments because he wanted to spend the money on things that the public saw more directly, the front line, and certainly in terms of cutting costs, no one should baulk at that, but sometimes people play a game as to who can say “cuts” first or second or third or whatever. There’s some big issues here. I think, going back to your earlier question, there is an ideological difference. There is a difference in approach and I’m very comfortable with the approach that I think we will go into the election with.
FT: I was going to ask about your legacy. You’ve also got several months to go. How do you want to use the period in the run-up to the election? What is your mission?
AD: Our mission is to deliver on what we promised, to ensure we see the recovery through but critically make sure that we’ve got a secure platform to build a recovery in the future and that’s actually the biggest challenge, all the questions you’ve been asking, whether it’s banking, whether it’s the industry in the future, that’s going to make the difference to the future. Have we learned from the mistakes in the past? Have we put them right? Are we building a strong enough platform so that we can build on the future? I think people can see that what we did in the bank recapitalisation – and remember this has gone on since the Northern Rock business – what we’ve done in terms of the broad economy is making a difference.
It’s worth bearing in mind that the Tories were wrong on every single one of these issues. And I think they’re still against taking Northern Rock into public ownership so heaven knows what will happen to it in the meantime but the next election will be fought not so much on the last five years, but on the next five or 10 and I think we’ve got a good story to tell and the challenge for me and for everyone else is to make sure we tell it in a way that people understand and hopefully that people can support.
FT: Thank you very much.
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