Peter Jones: Some fine ideas, but Vince Cable does not have all the answers

RARELY have so many of Scotland's financial movers and shakers turned out to hear a Liberal Democrat speak as were at Reform Scotland's dinner on Monday night to listen to Vince Cable.

The LibDems' Treasury spokesman spoke with characteristic honesty and forthrightness. But as to whether he is quite the politician who alone saw the looming financial crisis, and has the solutions to stop it happening again, there is room to doubt.

Nevertheless, first impressions were extremely good. Indeed, I remarked to Tavish Scott, the Scottish LibDem leader, that I didn't much care who formed the next government, so long as Mr Cable was the chancellor. I heard similar comments from others. On reflection, let me amend that to suggest he would be probably as good a chancellor as is Alistair Darling, whose relative honesty and strength of character is a light I think Labour is mistakenly keeping hidden.

Whether Mr Cable will be chancellor is still a bit unlikely. He was asked about that and replied to the effect that the question of post-election coalitions and alliances was open to speculation. As to himself, he insisted he was part of team LibDem and, unlike footballers, politicians should not change teams.

This, in his case, isn't entirely true. He was a Liberal while studying economics at Cambridge University, but switched over to Labour while earning his doctorate at Glasgow. He was the unsuccessful Labour parliamentary candidate in Glasgow Hillhead in 1970 and also became a Glasgow Labour councillor.

His abilities were spotted by one Gordon Brown, who persuaded him to contribute a chapter to The Red Paper on Scotland in 1975, a radical manifesto for what the Scottish left should do in the face of rising Scottish nationalism. Mr Cable's contribution – on what should be done about Glasgow, given the onset of industrial decline and the rising oil industry on the east coast – contains the frank (and in Labour circles, highly politically incorrect) assessment: "Scotland could, in all probability, expect in the 1980s to be more prosperous as an independent country."

But in 1981, Mr Cable decided his political fortunes would prosper better if he joined the breakaway Social Democratic Party, later to merge with the Liberals to form the party which he adorns today.

His reputation is high because people believe he foresaw the credit crunch that started biting in 2007. At the dinner, I saw at least three knights of the realm, plus one veteran business journalist jubilantly securing his autograph. Even the big banks, which he has been flaying, turned up, sitting sullenly in the darker corners of the Signet Library.

What he actually forecast – in November 2003, in a question to Chancellor Gordon Brown – was this: "Is not the brutal truth that, with investment, exports and manufacturing output stagnating or falling, the growth of the British economy is sustained by consumer spending pinned against record levels of personal debt, which is secured, if at all, against house prices that the Bank of England describes as well above equilibrium levels?"

There is a whole lot of truth in that question, which Mr Brown dismissed as alarmist and without substance. Mr Cable also warned about the dangers of demutualising the building societies and converting them into banks. Time has proved him right about that: every single one has either been taken over or has failed and been nationalised.

Since the majority of Britons were thrilled by the apparently ever-rising values of their homes, and excited by the windfalls of money from building society demutualisation, to complain about these matters was highly unpopular – always a good position from which to move to being a lauded prophet.

But neither of these things were at the root of the financial crisis. That was based on a decade of low inflation and low interest rates fuelling a rise in the availability of credit, which was pumped up even further by Wall Street's invention of financial derivative products.

The most obvious symptom of this tidal wave of cheap money was inflated asset prices, of which the house price bubble was a big part. This bubble did not burst in Britain however, until it had exploded in the United States. Mr Cable has been candid enough in interviews to admit he knew little about the US economy and to say: "The honest view is that I, and many other people, never understood the sheer magnitude, scale and speed with which the disaster has unfolded."

At Monday's dinner, he was also honest enough to say that he does not have a complete answer about how this disaster might be prevented in the future. He was clear that the Labour government has taken the right policy steps, even if it did take some weeks to catch up with his view that Northern Rock had to be nationalised.

His partial solution is to separate out the retail and business banking business (on which you and I depend and ultimately guarantee with our taxes) from the "casino" investment banking operations (which have gone bust so spectacularly and which should not be underpinned by taxpayer guarantees).

But this is a long way from a whole answer. Neither Northern Rock nor HBOS ran casino operations, but both failed. In the US, Lehman Brothers did not do retail or business banking, it was allowed to fail with no taxpayer liability, and that nearly brought the whole system down. The problem is the inter-connected nature of the banking system, which means that one failure threatens a domino effect of failures. Mr Cable has not proposed a solution for that.

Mr Cable also thinks the banks that are left should do more business lending. But how would he cause that to happen? Tell the banks to relax their lending criteria and give money to businesses that may well go bust irrespective of whether they have credit or not? There is no satisfactory answer to this question.

I still think Mr Cable is an admirable politician, more honest than most. But while his feet are not made of clay, neither are they made of untarnishable marble. Let's not put him on a pedestal – which, in any case, he would not want.