Other than Iraq, one of the biggest accusations made about the Labour governments of 1997-2010 was their alleged failure in the deregulation of banking. In fact, history shows that deregulation happened on Margret Thatcher’s watch, and that there were two big deregulations – the “Big Bang” in 1986, which deregulated the City of London, and the 1987 Banking Act, which de-regulated banks, building societies and insurance companies.
Big Bang dismantled the barriers between separate functions in the City: for example reversing the former system whereby market makers used to belong to a separate firm from stockbrokers and financial advisors, which created the risk of one part of a business to be pressured to distort the market for the benefit of another part. This was a risk which had not existed hitherto.
The 1987 Banking Act then removed further barriers – notably retail banks could now operate investment arms and insurance arms. This led to their investment arms speculating ever more wildly because they could count the capital from the retail arm as theirs, when formerly this had not been the case. The result was more speculation and therefore greater risk to retail customers.
The 1987 Banking Act also allowed for the de-mutualisation of building societies, and indeed incentivised such moves by requiring that the new banks would need to hold less capital than if they remained building societies. The result of this was clear to see in the failure of Northern Rock.
So the question is whether Labour, elected in 1997, could have done anything about these risks – to which even the most hostile answer is a tentative ‘maybe.’
A key difficulty was that there was only had a two-year window between after the election of May 1997 in which to do so. In those two years, American bankers were agitating and lobbying Congress about how London had an unfair advantage. In early 1999, they succeeded in having parallel legislation passed into US law in the form of the repeal of Glass-Steagall Act. After this, Labour was not able to unwind the UK deregulation because our system would have been at a disadvantage to the Americans.
It is also alleged that Labour should have predicted the world economic crisis. In fact hardly anyone did, and it has been established that worldwide the number of people who predicted the crisis was 12 (twelve) only. The list is: Dean Baker, Wynne Godley, Fred Harrison, Michael Hudson, Eric Janszen, Steve Keen, Jakob Madsen & Jens Kjaer Sørensen, Kurt Richebächer, Nouriel Roubini, Peter Schiff, Robert Shiller.
Notably in UK political terms, this list does not include George Osborne or Alex Salmond or Vince Cable, any more than it does Gordon Brown or Alistair Darling.