Between the lines - Can Darling escape the cartoon rogues' gallery?

Published on Tuesday 7 October 2008 21:10

ON MONDAY night, as the financial situation went from crisis to catastrophe, I was at Number 11 Downing Street sharing a glass of white wine with the a seemingly very relaxed Chancellor of the Exchequer and his wife, Maggie.

Number 11 has the ambience of a rundown, second-rate seaside hotel, including the dim lighting. I don't say this as a criticism – in these troubled times it is good to know the Treasury is not wasting our money on designer furniture. On the stairs up to the first-floor reception room are hung tiny prints and fading photographs of previous Chancellors, most now largely forgotten. Unlike the rogue's gallery of Prime Ministers next door, the display in Number 11's exhibits a sense of humour, though of the gallows variety.

For at the top of the stairs you find a wonderful selection of original newspaper political cartoons by some of the greats of the profession, including Lowe and Garland. The final cartoon shows an insouciant Norman Lamont with the Grim Reaper of Recession sneaking up behind him.

However, on Monday night, despite the global economic inferno licking at his ankles, Alistair Darling looked and sounded like a man in control of events. That morning, banks were tottering around the world, forcing the Chancellor into make an emergency statement to Parliament promising the government would do "everything necessary" to maintain a functioning financial system. In the circumstances, I'd half expected the little Number 11 press gathering to be cancelled. But as one of the Treasury PR staff explained, that would only have caused more rumours to circulate.

Darling was in full crisis-dampening mode. He does this quite well: neither sounding too stupidly laid back, in the Jim Callaghan style ("Crisis? What crisis?"); nor pouring out incomprehensible technical solutions to the market meltdown, which hard-bitten journos would consider nave.

Darling worked the floor for 90 minutes, artfully deflecting difficult questions. I do believe he was enjoying himself. There is a point in any crisis where some politicians have a nervous breakdown and others get an adrenalin rush – Darling is one of the latter.

However, exuding confidence while artfully not saying anything to spook the markets is very different from having a concrete plan to keep UK banks in business. In his Monday statement to Parliament, Darling had been suitably Baldwinesque but he did not actually say what he was going to do next. I put it to him there is a difference between being willing to do anything it takes to save a bank, once it is seen to be in trouble, and taking pre-emptive action to deal with the systemic cause of the crisis.

The Chancellor claimed he was doing both, referring to the nationalisation of Northern Rock and the liquidity support being provided by the Bank of England. I pushed him further, suggesting that a true systemic solution would require recapitalising the banks using public money. He grinned and advised me to read his statement to Parliament more closely. I took that as code: the Treasury is prepared to take a stake in the big banks, in order to shore up their capital ratios.

The obvious question arises: why not just announce this? For all his grace under fire, Darling and his Treasury eggheads are moving with glacial pace. I began to suspect that Darling's ice cool stance is akin to John F. Kennedy ostentatiously going to the theatre with Jackie during then Cuban missile crisis in 1962: a brilliant act, perhaps a necessary act, but an act nevertheless. Indeed, it transpired that as soon as we'd departed Number 11 on Monday night (circa 8:30pm) Darling had a meeting (at his own request) with the heads of RBS, Lloyds TSB and Barclays on precisely the subject of a public injection of capital. But the meeting ended inconclusively, which seems to have precipitated yesterday's bloodbath in bank shares.

I have a horrible feeling that the Chancellor and the Treasury (which has been around since 1126 and thinks it has seen it before) are feeling too pleased with themselves. They have been given carte blanche by the Prime Minister to use whatever measures necessary to intervene in the banking system, and that is a heady brew. That is why Darling is sounding so confident. But while power (especially the power of the Treasury printing press) is a great aphrodisiac, the crisis desperately requires action not reaction.

With this in view, I asked Darling what he meant by saying there was the need for international co-operation to prevent a similar financial crisis from occurring? Did that mean new institutions? No, the Chancellor was sceptical that agreement could be found for cross-border regulation on a global scale. OK, but surely regulation – on reserves and leverage – could be enforced in the EU? No, again the Chancellor thought that would take 20 years to set up. Instead, he wants "greater transparency" and "colleges" of national regulators to police given financial institutions.

I was underwhelmed by this intellectual approach. We have already created greater international transparency through the Basel II Accords. The problem of the last six years is not that individual financial transactions were deliberately hidden but that we constructed a global machine for parcelling out risk in quantum amounts. The risk on each package was quantifiable to the institution that held it, and was minimal. That encouraged excess lending and excess leverage – with the necessary liquidity coming from Asian trade surpluses secured by pegged exchange rates. The meltdown came when the sea of money market liquidity started drying up at a macro level, triggering massive and chaotic de-leveraging worldwide.

I don't see how you stop that happening again without fierce regulation of capital reserves, institutional leverage and mortgage lending ratios. When is the Chancellor going to fess up to that? And unless there is some new international mechanism to eliminate excess trade surpluses pumping liquidity into global markets, there will always be the making of the next credit bubble. Such a reform may require removing the US dollar from being the sole international reserve currency. How you do that without another Bretton Woods agreement, I don't know.

Unless Darling, a lawyer to his fingertips, sheds some of his courtroom coolness and takes pre-emptive action to save Britain's banks, he is assured of a place in the next cartoon to adorn the stairs of Number 11.