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Scottish Parliament Speech: Banking and Financial Services (June 2010)

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A side effect of this remarkable report was the table talk that we encountered. Chatham House rules are the British version of the Catholic confessional and the Economy, Enterprise and Tourism Committee found itself the priest. Particularly after an excursion to London, we know the who and the where, and we can guess at the why, but we cannot tell people.

We have rarely heard such frankness, which left the orthodoxy of "more perfect markets" in tiny fragments. The history leaves me sceptical of anything but the most drastic reconstruction, after what one gentlemen who ought to know told us was the worst crash, not just since 1929 but ever.

RBS, notably, experimented like someone possessed with credit derivatives, but we learned that only a couple of people in the whole outfit, with a gold-star board of directors, knew - or did not know - how they worked. The bank went ahead and took over ABN AMRO, whose valuation was based on derivatives, validated by outright guesses from credit ratings agencies.

HBOS got bored with boring housing finance and wanted to punt on commercial property. The FSA thought that that was daft at the top of the market, but, under light-touch regulation, it could not intervene so it consented.

Would either of those things have been possible under today's systems of control? As taxpayers, we are paying for this most unequal system to continue towards what my friend and former school fellow, Professor John Kay, sees as a twofold disaster. We have not yet encountered the second section of that, but members who were not totally preoccupied with the election on 6 May might have seen in the Financial Times a day later that equities had fallen on the New York stock exchange almost as severely as they fell in autumn 2008. In other words, the British election - believe it or not - buried bad news.

What is our chance of guiding speculative investment into innovation and technical training and why should that be done? We should do that to achieve two fundamental aims: living in a smaller carbon footprint in efficient, warm and comfortable housing - the housing boom failed to produce much of that; and generating the capital that is necessary to undertake a new revolution in infrastructure and manufacture. Otherwise, climate change and peak oil will make us behave in a far different and not particularly impressive way.

In the 1990s, finance firms tried to wriggle out of providing honest, salary-related pensions and of guaranteeing house purchase. Instead, banks speculated on housing in the naive belief that housing prices would always go up and that such cash could be magically made liquid. A cult of buy to let and of doing it up and selling it on grew up and has never departed from British television, although the market has changed.

However, there was nothing new about derivatives. Since the dawn of capitalist trade, merchants have accepted as cash equivalents IOUs, which have been bundled together and sliced and diced with other forms of credit. What was new was that the trades were based on poor-quality housing stock, multiplied on a vast scale with immense velocity and were running synchronised. John Authers's articles in the Financial Times show how little it was possible to hedge against such speculation.

As early as 2004, reports came from America that speculative housing was in trouble and that prices were falling by up to 40 per cent. Worse, the value of such housing was being driven up artificially, partly by mortgage fraud. Organised criminals used house purchase by the likes of Homer Simpson - in a curious way, he was the colossus on which the remarkable edifice was erected - to launder their gains, particularly from drug dealing or carousel fraud.

As the US clamped down on speculation, that risky finance exited to London with the Sarbanes-Oxley refugees in 2002, who did not fancy what the Securities and Exchange Commission had in store for them. The Americans do that spectacularly, with handcuffs and everything. The financial journalist Nick Kochan and I have written a bit about that.

How do we, as owners of the banks, put the situation right? We do so first by specifying what we need banks for; secondly, by raising the quality of their assets; and thirdly, by establishing a reliable and enduring basis for value, in the evaluation of energy. Marginal utility was swamped by speculators' leverage, until that description had no validity. We must return to the labour value of Adam Smith's day but see that labour as embodied energy. North Sea renewables need that investment and can provide the benefits from it.

Against that, UKFI says simply that the status quo should be restored. Other members have referred to Edinburgh, which still leads in associated financial services - insurance, investment trusts, asset management and organisation software. Marine renewables will provide a valid basis for positive organisation. Through that, we can preserve relationship banking, as Clydesdale Bank has. However, one bank sector should remain in state hands to perform the analytical and informed role that the British National Oil Corporation once did in the oil industry.

We need a blueprint and a timetable for financing renewables and modernising housing. We need to work out the appropriate commercial and savings banking system to deliver that. That should be based in Scotland and will grant us much of the economic control that we need. Otherwise, we will have the double-dip recession that we do not want.

 
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