Labour needs to stop fiddling and get on with the big stuff



Picture courtesy the brilliant @GeneralBoles

The opportunity for Labour to score party points against the Tories on the economy is clearly diminishing. While that is difficult rather than disastrous, our reaction is important.

Last week, FT’s Janan Ganesh tweeted a characteristically shrewd observation: influenced by campaign groups, Labour seemed to have furthermore abdicated responsibility for forming a competing macro policy. It had therefore embarked on a series of eye-catching micro initiatives with social aims – intervening in energy markets, stopping payday loans and so on – but had gone quiet on the economy at large.

While many of these measures are fully respectable and positive in themselves, they are hardly a substitute for a robust macro policy, clearly distinguished from the coalition’s. And the obvious danger is that while the coalition looks strategic, we look, to put it bluntly, like tinkerers rather than players.

The culmination of all this micro thinking came last Friday, with Miliband’s statement on banking reform.

Now, banking reform is important and, on the face of it, an ideal place for Labour to make a difference. Why? Because we know (i) that it needs reform, and (ii) that the Tories will soft-pedal on anything which affects City friends and donors – that’s the reality. So far, so good.

But this noble end doesn’t mean that this is the right means. Because, here’s the thing: Labour has straight-facedly announced that the centrepiece of its solution is to create not one, but two new high street banks.

When it comes to critiquing this idea, one’s immediate instinct is to return it to the oven, just to complete the other half of the baking.

Let us not even quietly note, as John Rentoul did on Saturday that, even though better regulation is clearly required in general, the specific case against banks as uncompetitive quasi-cartels is “not proven”. Or that, as the British Bankers’ Association fairly pointed out, customers might not actually want be forced to go through the hassle of changing providers.

Let’s think about what such a policy might mean.

Banks are not generally “new” businesses. Some businesses are bricks and mortar, or plant and machinery, but banks are not. Banks trade off assets, yes, but some of them are not as tangible as you might think.

They are built up from intricate collections of relationships, people and transactions, usually over long periods of time. You do not create a new bank overnight; they are invariably created from older ones (for example, the “new” megabank ING was born out of a merger of two older Dutch institutions over twenty years ago, whose original constituent parts are mostly Victorian).

It is one thing creating an empty bucket, into which you can throw assets such as branches; it is quite another to create a bank.

They are the culmination of years, sometimes centuries, of building up trust and reputation, off which they trade. Now, arguably reputations have suffered a bit of a battering in recent years, but the idea that you can just “create” a bank is bizarre. You cannot just buy a building, stuff it with cash, and try to get people to walk in the door. You will still need to get someone to take it on who knows what they are doing, and a set of existing relationships. You may even have to entice another bank to create it, at your own cost.

So, we are still light on detail, but it seems the mechanism would be forced divestment of branches by the existing big banks to new “challenger” banks. As the FT also points out, Lloyds and RBS “were forced to offload branches following their 2009 government bailouts, both struggled to find buyers for the new businesses and have so far each racked up more than £1bn in costs splitting them out.”

So, a pretty inspiring track record, then. Even experienced banks couldn’t manage to do what they were being asked, let alone new ones.

What is entirely beyond doubt is that you cannot just magic up a new bank or two and expect it to work. Indeed, the crowning daftness of this idea comes from the fact that these new banks would undoubtedly require some kind of government handholding not just at the beginning, but in their ongoing management for some considerable time until they settled down.

And what does the government – especially a Labour government, all but bereft of real-world experience of business, let alone banking – actually know about running a bank? All right, the last government took over RBS as a last-ditch response to an international crisis, and gave itself a massive headache to sort out in the process. But why would you do that to yourself voluntarily?

Furthermore, if this does not signal a return to the Labour’s disastrous 1970s record on dubious state-backed enterprises, it is difficult to see what does. Indeed, in another FT piece, Jim Pickard notes the “spooky” similarities between Labour’s recent policy and agenda and its 1979 manifesto, where the much-trumpeted “cost of living” agenda also featured heavily. Gulp.

No, the net perception to any casual observer is of just another example of how we have ceded the “serious” ground of macroeconomic policy to the Tories, to concentrate on a raft of measures which amount to a lot of well-meaning tinkering. And all in a pre-election year, just at the point when it seems that the government’s macro strategy is doing a good impression of finally coming good.

As we pointed out three years ago, it matters not a jot that our strategy would have been better; “yes, the recovery may have come but we would have done it more quickly” is hardly a convincing rallying call. As the City wags say: Harry Hindsight, the greatest trader of them all.

If this sounds a little bad-tempered, that’s because it is. This comes across not as economic policy, but a self-indulgent wander up Wonk Lane by people with considerable experience in the academic theory of finance and none in its practice.

The economy is still the only story which matters, which means the big stuff. And while our modest poll lead is burning away, we, like Nero, are fiddling.

This post first published at Labour Uncut