Wasting a Crisis? Democracy and Markets in Britain after 2007

8/9/2019 Wasting a Crisis? Democracy and Markets in Britain after 2007

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Wasting a Crisis?

Democracy and

Markets

in Britain after 2007JULIE FROUD, MICHAEL MORAN,

ADRIANA NILSSON ANDKAREL WILLIAMSA crisis is too good an opportunity to waste(popular Japanese saying)

The current crisis of financial marketsand institutions calls into question theway economic life, and especially financial

markets, have been governed in thiscountry. In this article we examine whatthe crisis is doing to the way markets are

governed, and how it could be donebetter to enhance democratic control offinance. The article ends with somepractical

suggestions for banking reformswhich would not only broadenparticipation,

but would open up debate about ademocratic agenda for what financecould and should do in economy andsociety. It is from this point of view

from the present failure to have such a

debatethat the current crisis is beingpolitically wasted.

The first section of the article arguesthat the post-Thatcher settlement from1979 to 2007 was marked by a particularrelationship between markets and

democraticgovernment in Britain: it involved amostly successful attempt to insulate

markets from democratic politics. Thenext two sections explore a paradox: theimmediate impact of the crisis was to

disrupt that settlement and open a window

of opportunity for increased democraticcontrol over markets; butsubsequent developments have combined

to begin closing this window, sothat official reform proposals are timid, aswe demonstrate in an analysis of the 2009

White Paper on financial reform. Ourarticle then explains the closure of thereform window, and notes that this closure

reflects long established historicalfeatures of the government of markets

and of the business community in Britain.This leads to an analysis of the tropes andmemes that are the intellectual capital ofpresent day financial and political elites.

Their invocation of arms length controland shareholder value is, we argue, notan enabling resource but a limitingrepertoire.In the absence of rule of experts,regulatory commonsense at the Treasuryensures that dramatic policy shifts like

bank nationalisation do not have radicaleffects. The official narrative of the crisis,and the workings of the key agency of

crisis management, United KingdomFinancial Investments, reproduces business

as usual in the relationship betweenthe markets and democratic politics.

Insulating markets from

democracyThe great economic crisis in Britain of the1970s produced profound changes in thepolitical economy but their chief political

function was to insulate markets from theinfluence of democratic government.There were four signs of this. First, there

were major changes in ownershiprelationships,

most obviously through ambitiousand far reaching privatisation,

especially of the utilities in the UnitedKingdom, which shifted whole industriesout of the domain of the public into the

realm of markets. Second, the language ofthe public sector was changed so that# The Authors 2010. Journal compilation # The Political QuarterlyPublishing Co. Ltd. 2010

Published by Blackwell Publishing Ltd, 9600 Garsington Road, Oxford

OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA 25The Political Quarterly, Vol. 81, No. 1, JanuaryMarch 2010 DOI:10.1111/j.1467-923X.2010.02069.x

public service delivery was representedas a market-like exercise; this was then

performed by use of private contractorsthrough a variety of outsourcingmechanisms.Third, there was a wide programme

of deregulation, the effect of which,likewise,was to shift control over economic

life from public institutions to the privatesector. Fourth, there was created a whole


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new generation of regulatory institutionsthat were designed to be nonmajoritarian

in character. Majones workon the European regulatory statesystematisesthe argument that the complexities

of modern market regulation werebeyond the capacities of the institutionsof majoritarian democracy, and requiredinstead a Madisonian system that insulateddecision makers from majoritarianpressures.1 As in the case of privatisation,the United Kingdom led the way in the

creation of these new regulatoryarrangements.There were parallel changes in financial

regulation and financial markets afterthe Big Bang of 1986. The rise of central

bank independence was an importantinstance of this shift to institutionalinsulationfrom democratic politics. The erasaw the creation of newly powerful central

banks (notably the European CentralBank) designed to pursue prescribedobjectives

sympathetic to financial markets(notably constrained inflation) independentof political control. In the UnitedKingdom throughout the 1990s the system

edged towards more central bank

independence, culminating in the creationof the Monetary Policy Committee

with its control over short-term interestrates in 1997. This institutional changeitself reflected a discursive shift thatbecame particularly pronounced under

New Labour after 1997. It amounted to akind of naturalisation of financial markets,in a world where public policy and

institutions had to accommodate to theplay of market forces. It committed toshaping economic management in the

interests of fostering market sentiments,and, more concretely, to shaping both themonetary policy regime, and the regulatoryregime established after 1997 under

the Financial Services Authority, as lighttouch, based on broad regulatory principlesrather than close control or adversarial

relationships. These policystrategies were supposed to be a key to

securing Londons comparative advantageas a global financial centre.

The political regime governing marketsestablished in the aftermath of the 1970scrisis in the United Kingdom wassimultaneously

particularly powerful, and particularlyunstable, because it was rootedin longer established British conditions. Itwas particularly powerful because theeconomic crisis that afflicted all advancedcapitalist economies after the end of thelong boom took an especially virulent

form in the United Kingdom: Britaincombined weak economic performance,jarring stop-go policy shifts and a primitive

corporatism. She suffered most in thecrisis, and of the leading capitalist nations

responded with most radicalism onissues like privatisation and outsourcing.Yet the effect of new policies, whichinsulated markets from democratic control,was in turn assisted by their congruence

with long established patterns ofbusiness regulation in the United Kingdom.The historical conjuncture of the

development of business institutionsand democratic institutions in Britainmeant that business already benefitedfrom a particularly powerful ideology of

regulation when democratic politics was

first established. When formal democracyand a state with powerful interventionist

capacities first developed during, andimmediately after, the First World War,business was already well organised as aseries of lobbies, and there was already in

existence a well elaborated ideology ofregulation. That ideology stressed theimportance of self-regulation and, where

self-regulation was not deemed possible,cooperative regulation, which involvedavoiding any adversarial confrontation

26 Julie Froud, Michael Moran,Adriana Nilsson andKarel WilliamsThe Political Quarterly, Vol. 81, No. 1 # The Authors 2010. Journalcompilation # The Political Quarterly Publishing Co. Ltd. 2010

between regulator and enterprise. It wasunder this established, hegemonic

regulatoryrubric that the great economic andinstitutional changes of the last two decadesof the twentieth century were implemented.


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Yet if long established practices andinstitutions made the post-1979 regime

of market government particularlypowerful, they also made it particularlyunstable. Part of the instability wasinscribed in the very histories of market

government. What was being attemptedwas the exclusion of democratic forcesfrom market government, especiallyfrom the government of financial markets.However, since the government ofthose markets demonstrably hadconsequences,

both for the macro economy andfor individual citizens as savers, investorsor consumers, democratic forces kept trying

to break in. The most obvious pointsof intrusion happened in crisis and scandal.

From the great secondary bankingfailures of the 1970s, to the Baring collapseof the mid-1990s, there was a historyof crisis, scandal and regulatoryfailure, which drew the regulation of

markets to the attention of democraticactors. The signs of this were the successionof laws, and the succession of new

regulatory bodies, designed to control themarkets. Legislation and the creation ofregulatory institutions with legal powersplainly threatened the capacity of markets

autonomously to control their own

affairs. Autonomy in these conditionscould only be preserved by a mixture of

constitutional mystification and convolutedinstitutional design. The signsincluded the short-lived self-regulatoryregime administered after the passage of

the 1986 Financial Services Act by theSecurities and Investments Board, whichinvolved a labyrinthine series of licensed

self-regulatory bodies; and the complextri-partite system of coordinationbetween the Treasury, Bank of England

and the Financial Services Authority,which was created in 1997, and whichso spectacularly came to grief in 20072008. It was this powerful, but congenitally

unstable, system of economic government,especially in financial markets,which entered crisis from 2007; the rest of

our article is an examination of the impactof that crisis, and how it has been managed

to limit reordering of market governmentin Britain.

The return of politicsThe most distinctive feature of theregulation

of markets after 1979 was the attempt

to remove politicsfor which read thepublic politics of democracyfrom the

process. The immediate effect of crisiswas to repoliticise regulation, and in theprocess to create a moment of great dangerfor the established regulatory system.

There opened a brief window ofopportunitywhen radical reform appeared

possiblea window, that as we showlater, is now closing. The crisis had fourimmediate political effects: It repolitcised

the terms of regulatory debate; itwidened the domain of state ownership;it fused parts of the elite of the coreexecutive with parts of the financial elite;

and it created popular narratives of scandal,incompetence and illegitimatereward.

It repoliticised the terms of

regulatory debateFinancial regulation under the system

created by New Labour after 1997belonged to a domain of low politics

of technical operations and bureaucraticmanoeuvring between the responsibleagencies. That was exemplified by theworkings of the Standing Committee,

which coordinated the Financial ServicesAuthority, the Bank of England and theTreasury. Nominally chaired by principalsfrom high politics, like the Chancellor,

in practice until the crisis itsmeetings were only attended, andDemocracy and Markets in Britain after 2007 27# The Authors 2010. Journal compilation # The Political Quarterly

Publishing Co. Ltd. 2010 The Political Quarterly, Vol. 81, No. 1

chaired, by the technicians of regulation:in the decade after 1997 it met only oncewith the principals present.2 With the run

on Northern Rock in September 2007, thesight of depositors queuing to withdrawdeposits shifted both the terms ofregulatory

argument and the arenas where ittook place. The issue suddenly was of the


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highest priority for the Prime Ministerand Chancellor. Institutionally the sign

of the change was the transformation ofthe role of the Standing Committee,which from the Northern Rock crisisonwards drew the principals into

attendance.3 The systemic crisis of October 2008deepened the transformation, for itwidened the range of regulatory issuesnow commanding the attention of electedpoliticians at the apex of the core executive,beyond questions about the stability

of particular institutions and thearrangementsfor depositor protection to the

macro-stability of the whole bankingsystem.

Moreover, the combination of thecollapse of particular institutions likeNorthern Rock and the systemic crisispulled in a wide range of other democraticactors: the most significant, because

it succeeded in generating wide publicityabout its activities, was the House ofCommons Treasury Select Committee,

which from 2008 published a series ofreports on the unfolding crisis.

It widened the domain of state

ownership

The great privatisation movement hadbeen a key to depoliticisng the regulation

of markets. Yet the crisis now not onlytransformed the terms of debate aboutregulation; it dramatically reversed one

of the great achievements of the precedingthree decades. The initial response ofpolicy makers was to dither and resistpublic ownership: in the months

immediatelyafter the collapse of NorthernRock, millions were spent on consultants

in a failed attempt to off load the stricken

bank. However, in November 2008 theauthorities were obliged to establish United

Kingdom Financial Investments as avehicle for managing public ownership ofa huge tranche of the banking system. ByJuly 2009, UKFI owned 70 per cent of the

voting share capital of Royal Bank ofScotland, and 43 per cent of the LloydsBanking Group.4 Or as John Kingman,

UKFI Chief Executive, put it in morehomely terms in introducing UKFIs first

Annual Report: Every UK householdwill have more than 3,000 invested inshares in RBS and Lloyds.

It fused parts of the elite of the core

executive with parts of the financialeliteOne of key principles of the system forgoverning markets that evolved in the

decades after 1979 was to establish a clearseparation between the roles ofdemocraticallyelected politicians and financial

regulators. Creating the FSA; strengtheningthe independence of the Bank ofEngland; operating the coordination of

the tri-partite system as a domain

dominatedby regulatory technicians: allserved that purpose. However, the crisis

broke this system, and reordered therelations between the elite in the coreexecutive and the financial elite. Fusion

between the two elites began with thevery act of crisis management. The storyof crisis management, both in respect ofNorthern Rock and in respect of the

management of the systemic crisis in2008, was one involving intense, often

difficult, face-to-face negotiationsbetween the ministerial figures (notablythe Chancellor and the Prime Minister)and leading bankers.5 The (as it transpired,

disastrous) takeover of HBOS byLloyds happened in part because of aninformal deal struck on a social occasionbetween the Prime Minister and the

Lloyds chairman guaranteeing Lloydsexemption from competition regulation.628 Julie Froud, Michael Moran,Adriana Nilsson and

Karel WilliamsThe Political Quarterly, Vol. 81, No. 1 # The Authors 2010. Journal

compilation # The Political Quarterly Publishing Co. Ltd. 2010

In the depths of the crisis in 2008 thebanking industry had to turn to thedemocratic state for the resources andauthority to prevent systemic collapse;but the complexities of crisis managementalso drove the democratic stateinto close cooperation with the financial

elite. Apart from instances like the


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Lloyds-HBOS deal, the most public signwas the hurried recruitment of City

grandees into the government via theHouse of Lords: the appointment ofPaul Myners as City Minister on 3 October2008, and the appointment of Mervyn

Davies, Chairman of Standard Charteredas Trade Minister in January 2009. Thecomplexities of managing the aftermathof the crisis, we shall see shortly, alsodrove United Kingdom FinancialInvestments(UKFI) into the arms of the financial

elite.

It created popular narratives of

scandal, incompetence andillegitimate rewardProtecting financial markets from

democraticcontrol in the decades before 2007depended heavily on naturalising their

functionsthat is, on depicting the marketsas responding to forces born ofquasi-scientific laws. The legitimation of

doctrines like shareholder value, and ofthe huge gap between the rewards of thefinancial elite and the mass of employees,depended critically on the claim that

markets were responding to impersonaleconomic forces, and that fund managers

and wholesale bankers were performinguseful functions such as allocating capitaland marketising risk. Yet during the crisis,and in the Parliamentary postmortems,

a narrative developed thattraced the crisis to pathological featuresof the banking industry: to a system thatproduced excessive rewards, and

stimulatedexcessive risk taking, by a bankingelite driven by the search for huge

bonuses. Opinion polls also showed thatthese perceptions were widely shared bythe public at large.7 This was a moment ofgreat danger, for it precisely rejected the

assumptions of naturalisation, tracing thecrisis to a combination of institutionaldefects in markets, and cultures of human

greed. That phase probably culminated intwo events: the arraignment of severalformer heads of the stricken banks before

the House of Commons Treasury SelectCommittee, which was accompanied by

wide broadcasting of selected clips fromtheir cross examination on mass televisionnews, and headlines in the tabloidpress such as Scumbag millionaires, in

the Sun on 11 February 2009; and theextended campaign against Sir FredGoodwin, which focused on the hugepension he had succeeded in negotiatingas a price of departure in the crisis-riddenweekend in October 2008 that saw therescue of RBS.

The immediate political effects of thecrisis merit some scrutiny because theywere complex and many sided, and in

this complexity lie many clues in explainingwhy the potential reform opportunity

has been wasted. On the one hand, thecrisis produced a reform moment, onewhen the style of market governmentbuilt up over the preceding decades wassubjected to potentially seismic forces. All

the leading groups involvedpoliticians,regulators, even bankersdisavowed thelight touch, market friendly regulation

which had characterised London for solong. The enforced extension of publicownership on a huge and rapid scalemade it impossible to avoid new questions

about the banking industry, such as

how far it was to be treated as a closelyregulated, part publicly owned, utility

(rather than an instrument of globalcompetition).The great moment of crisiscame after Lehman Bros went under in

the autumn of 2008, and a domino collapseof banks and markets was in prospect.At that point, the official response in

the United Kingdom is striking for itsdecisiveness and creativity. New Labour,Democracy and Markets in Britain after 2007 29# The Authors 2010. Journal compilation # The Political Quarterly


the Treasury and the Bank of Englandtore up their neo-liberal scripts and in avery un-British way began to deliver a

new deal via banking nationalisation,Keynesian-style reflation, cuts in interestrates and quantitative easingall ofwhich represented a willingness to think

the unthinkable, and do the undoable.


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These developments were accompaniedby a wave of popular hostility to bankers

one that briefly made media stars ofsome parliamentary critics of the precedingregulatory regime, like John McFall(chair of the Treasury Select Committee)

and Vince Cable, the Liberal Democratsfront bench finance spokesman.Yet the new politics of financial regulationdid not just open the markets to theinfluence of democratic actors. What hadseemed like the very peak of a democraticassaultthe ferocious criticism of

Goodwinalso turned out to provide a keyform of defence against radical reform: in

scapegoating Goodwin it allowed thedevelopment of a narrative separating

bad and good bankers. It opened thevery highest reaches of the core executiveto members of the financial elite, in theform both of ministerial appointmentsand in the shaping of institutions like

UKFI in the image of a part of the Cityelite. Above all, serial bank failure andhigh mass unemployment had only been

avoided by huge public expenditures.The IMF8 estimates that some 289 billionwas spent by the United Kingdomgovernment

on buying banks and injecting

capital, while the total cost of bailoutincluding undrawn guarantees and

contingentliabilities is more than 1,200billion. All this raised the United Kingdompublic sector deficit from 3 to 13 per

cent and both major political partiesagreed that this would in due courserequire large cuts in public expenditure

and employment. The political elite hadbailed out the financial elite withoutimposing any conditions and without

any plan for what to do next. We cansee some of the consequences, if we turnto the state of present official proposalsfor reform.

Reforming financial marketsThe White Paper of July 20099 details theTreasurys present proposals for reforming

the institutional architecture of financialregulation. The White Paper is not the

only guide to, or source of, reform. Wealready have on the statute book the 2009

Banking Act, which is essentiallydesigned to rewrite the rules for futurebank rescues, while the Financial ServicesAuthority, especially since the appointment

of Adair Turner as Chair, has beenattempting to rewrite its rule book and itsmode of operation in the wake of thesupervisory fiasco revealed by the crash.Not only is the White Paper thus onlypart of the picture; like any White Paper itis provisional. Given the palsied state of

the Brown government, and the strongpossibility of a Conservative victory inthe 2010 general election, it is nearly

certain that government will start allover again with different reform proposals,

ones where the Bank of Englandplays a much larger role. Yet the WhitePaper is nevertheless of great importance.After nearly two years of banking crisis itrepresents the best summary we have of

what the official mind thinks about financialregulation: it is a distillation intoofficial conventional wisdom of the

debates about the substance of change,and struggles for institutional turf, thathave been conducted now for two years.And, as we shall see, while it was widely

criticised as timid, that timidity is

symptomaticbecause it grew out of a consensus

fashioned among the regulatory elite.Viewed in this light the White Paper isremarkable, less for its words than for itssilences. Faced with the greatest banking

crisis for a century, the authorities haveproduced proposals that are limited andcautious. Three aspects of this caution are

particularly striking. The first is that theTreasury has decisively rejected any30 Julie Froud, Michael Moran,Adriana Nilsson and

Karel WilliamsThe Political Quarterly, Vol. 81, No. 1 # The Authors 2010. Journalcompilation # The Political Quarterly Publishing Co. Ltd. 2010

move to reshape the structure of theindustry and, specifically, to break uplarge, complex banking conglomerates.

It reasserts, in language that could havebeen used at any time in the last thirtyyears, what it calls the pivotal (p. 18)role of the City and of finance in the


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economy. It rejects any GlassSteagalllikemeasures separating investment

and retailing banking (p. 75). That rejection,in turn, means that the White Paperdisavows the suggestion of the Governorof the Bank of England that allowing the

development of banks that are too big tofail creates problems of supervisory controland moral hazard; the problem is tobe dealt with only indirectly by rules oncapital requirements, not by interventionin banking structure.10Second, only the most marginal

changes are proposed to the institutionalarchitecture of regulation itself. TheTreasury Select Committee investigation

ofThe Run on the Rock, and the internalauditors report on the FSAs supervision

of Northern Rock, demonstrated twothings: that the Authority had practisedan almost bizarrely permissive form oflight touch regulation; and that in the keyearly stages of crisis management the

system designed to coordinate the rolesof the FSA, the Bank and the Treasuryhad been a considerable hindrance to

managing the crisis. Yet the White Papernot only proposes to maintain the FSAsdominant position as regulator; it envisagesmerely the most marginal changes

in the coordinating institutions. The old

Standing Committee will be replaced by astatutorily based Council for Financial

Stability. Early discussions of the Councilsuggested that it would be an analogue ofthe Monetary Policy Committee of theBank of England. It will indeed publish

minutes in the manner of the MPC, butthere is one critical difference: membershipwill be restricted to the three authorities,

depriving it of a key element thatdistinguished the MPC, the outsidemembers

(p. 49). And while there will be anannual report to Parliament, the WhitePaper commits only to the vaguest moveto more democratic control: it announces

that the authorities will discussmechanismsfor increasing the democratic accountability

of the (Council) (p. 50).The third and final cautious feature of

the White Paper concerns the exit strategyit proposes for disposing of the

public ownership of the banking systemacquired in the crisis. The White Paper isinsistent both that ownership is atransitional

stage, and is not to be a prelude toany long-term reshaping of the bankingsystem. The terms of exit are describedin entirely orthodox tropes aboutmaximisingvalue for the taxpayer as ashareholder in the publicly owned

institutions:to protect and create value forthe taxpayer as shareholder (p. 136).

The White Papers caution can in partbe traced to contingent factors. In the

weeks before its appearance it becameapparent (for instance, from theGovernors Mansion House speech) thatthere were significant differences withinthe regulatory elite about how to

reconstructthe system.11 The differences inturn can partly be ascribed to bureaucratic

turf struggles, as the Bank soughtto reclaim some of the regulatoryjurisdictionwhich it had been obliged to

surrender in the reforms of 1997.

Moreover,as the views of columnists in publications

of the financial and regulatoryelite, like the Financial Times, show, therewere considerable differences over justhow radical the new system should be.

The White Paper therefore is in part anattempt to navigate between competingviews. It is also probably the case that

some even more immediate forces wereat work: a Chancellor of a naturallycautious temperament; a Prime Minister

conscious that he was the author of theregulatory system that had so disastrouslyfailed, and thus engaged inblame avoidance; and an exhausted

governmentstruggling to survive after fierceinternal disputes about the PrimeDemocracy and Markets in Britain after 2007 31# The Authors 2010. Journal compilation # The Political QuarterlyPublishing Co. Ltd. 2010 The Political Quarterly, Vol. 81, No. 1


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Ministers authority and right to continuein office.

Yet this is only part of the story, and theless important part. What makes theWhite Paper especially significant is thatits approach to the regulatory system is

not idiosyncratic; it reflects a consensusabout the design of the regulatory system,and the meaning of the banking rescue,that has come to unite both regulatoryand banking elites. The Conservativeopposition, for example, is more radicalabout scrapping the FSA and rearranging

regulatory responsibilities betweenagencies,but the Conservatives agree entirely

about not changing industrial structureby breaking up the conglomerates. This

cross-party consensus has cultural andinstitutional foundations that have beenshored up in the years since the crisisbegan. Moreover, the effect of thisconsensus

is to reassert key political featuresthat marked the government of marketsin the decades before the onset of crisis: in

other words, the insulation of theregulatorysystem, and banking markets, fromagents of democratic politics. If anything

like the consensus reflected in the White

Paper is enacted, it will be business asusual not only in an economic sense, but

also in a political sense. This outcomedoes not depend on the final shape ofreform by an outgoing Labour or incomingTory government because it is already

being enacted, as we shall now see: byUKFI, which operates under the old rubricagainst a back drop of expert ineffectuality,

and by the contributions of theregulatory elite to the debate about thereconstruction of the regulatory system.

Wasting the crisis: UKFI andarms length managementThe unstable 19792007 settlementinsulatedregulation from the forces of democraticpolitics by combining new and old

elements: the FSA fused a new kind offormal, proceduralised rule of expertregulatory technicians with traditional

light touch, cooperative regulation betweenenterprises and regulators. The

crisis threatened the expertise representedby the FSA and the Bank of England,both of which, with appropriatesymbolism, are headed not by bureaucrats,

or politicians, or money makers,but by an elite consultant (Turner) andan ex-academic economist (King). Theregulatory technicians respondedineffectuallyby asking for new and more (effective)knowledge, which they could not

immediately deliver. Meanwhile, theTreasury mobilised the old tropes andelite City personnel to ensure that bank

nationalisation was a policy reversal thatdelivered more of the same.

The paroxysm of crisis required animprovised policy response that, as wehave noted, worked through highdemocraticpolitics and involved Chancellor

and Prime Minister in nationalisingNorthern Rock and managing the systemiccrisis of 2008. Afterwards, there

was a return to normal politics. Thiswas an opportunity for a few key figuresat the Treasurynotably the civil servantJohn Kingman, who created (and managed

for its critical early months) the new

post-crisis agency of UKFI. The principleof non-interference by politics in banking

matters was at this point reestablishedby inserting old tropes andmemes into UKFIs mission, and byrecruiting senior City figures with nonexec

experience of delivering shareholdervalue. From 1 November 2008, UKFI wasthe holding company responsible for

managing the government-owned Britishbanks and the government minoritystakes in banks that had been acquired

faute de mieuxin the crisis. UKFI hasbecome the single most importantinstitutionin the public sector concerned with

managing the aftermath of the crisis. Theorganisation is marked by three particularlystriking features: its view of its

relationship with the state; what forwant of a better word we can call its


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32 Julie Froud, Michael Moran,Adriana Nilsson and



sociology; and its definition of its mission.

The position of UKFI is ambiguousbecause it is a creature of the Treasury

but claims to operate at arms length fromgovernment. UKFI was set up andheaded by John Kingman, probably themost successful career civil servant of hisgeneration (he was Second Permanent

Secretary in the Treasury before the ageof forty). UKFI occupies a small numberof offices in the Treasury building, and its

operational budget is negotiated with theTreasury.12 Yet, from the very beginning,Kingmans message as chief executive

has been that UKFI operates at armslength from government. That was thetheme of an op. ed. in the Financial Timesplaced by Kingman and UKFIs first

chairman early in its life, and again inKingmans own account to the TreasurySelect Committee of the relationship

between government and UKFI.13 Thenew agency is thus inserted into an oldpattern of institutional arrangementsbetween agencies and the democratic

state in Britain. As Flinders recent studyshows,14 the doctrine of the arms lengthrelationship has been a central feature of

constitutional rhetoric in Britain and akey device insulating the workings ofagencies with delegated functions fromaccountability pressures of the democratic

state. Thus, from its foundation,UKFI has sought to reassert the establishedundemocratic pattern of financial

government that was characteristic of thelonger history of the City and of the post-1979 settlement.The constitutional cliche about armslength control was performed sociologically

by the way UKFI was from thebeginning closely integrated with elite

networks and institutions in the City.The way in which the organisation wasput together meant that established

mechanisms of search, advertisementand selection were sidestepped. The firsttwo chairmen of UKFI were both retiredCity grandees who had subsequently

made reputations as City friendlynonexecutives

of major public companies.Before he departed to chair RBS, the firstchair of UKFI was Sir Philip Hampton, anex-finance director of Lloyds Bank turned

non-executive chair of Sainsburys. Hewas succeeded by Glen Moreno, aninvestment banker who became chief

executive of Fidelity International andthen retired to become non-executivechair of Pearson. Morenos account ofhis recruitment illustrates well how, in

the press of crisis, the Treasury turnedinstinctively to the tiny elite networks ofthe City with which it had connections:What happened was that I volunteered toserve as UKFI non-exec, for obvious reasons,because I think this is the worst financial crisis

we will ever face and, if we blow it, we aregoing to lose a generation of prosperity, and I

have had a lot of experience of prior bankingcrises and downturns. What happened wasPhilip Hampton went to RBS, and I was with

my wife on a brief holiday in Malta and I got aphone call, saying, Will you do this? and of

course I said yes.15

Morenos seat has now been taken bySir David Cooksey, appointed in August

2009 at the same time as John Kingmanannounced his imminent departure. TheOxford-graduate engineer, considered an

outsider in banking circles, is neverthelessa well-known name in the City: hisAdvent Venture Partners, establishedback in 1981 and a strong investor in life

sciences and technology, is one of the firstprivate equity houses in Europe. Theboard serving under him, on the other

hand, consists mainly of insiders: withthe exception of the Treasuryrepresentative,the four remaining members havespent together 110 years of employment

in blue chip banks and fund managementcorporations from both sides of the Atlantic,

with CVs including Citigroup, MerrillLynch, Barclays and Warburg.The doctrine of the arms length

relationshipand the close integration intoCity networks then fused with the tropesof shareholder value to close off the possi-


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Democracy and Markets in Britain after 2007 33# The Authors 2010. Journal compilation # The P olitical Quarterly


bility of any radical answer to the question

of what should be done with theholdings acquired in the crisis of 20072008, and how they should be managed

in the meantime. The nationalisation ofthe banks was operable for Kingman andMoreno if nationalisation was conceived

as an interim stage governed by onesimple principle: the taxpayer is ashareholderin failed banks, which must be

first managed and then sold off in a waythat maximises shareholder value. AsUKFI elaborated its role and mandate, it

increasingly offered, not so much thenationalisation of the banks, but the

privatisationof the Treasury as a new kind

of fund manager. The FrameworkDocumentof March 2009, which sets out the

rules of engagement for the UKFIorganisation,is crystal clear:[T]he Company should . . . develop and

execute an investment strategy for disposingof the investments in an orderly and active

way through sale, redemption, buy-back orother means within the context of an

overarchingobjective of protecting and creatingvalue for the taxpayer as shareholder.16

UKFI thus acquires the identity of anengaged, responsible, large institutionalinvestor whose relations with company

management are governed by itsinvestmentobjectives. There is to be no interferencewith day-by-day management

decisions or second guessing of businessstrategy. Yet UKFI, as an engaged investor,does monitor pay for performance

and will meet with senior managementto check on progress with value creation.The way this works is well illustrated bythe controversy in the summer of 2009

over the remuneration package ofStephen Hester, chief executive of RoyalBank of Scotlanda package that

attracted widespread critical commentbecause it offered huge rewards. For

UKFI, however, this was pay forperformance

because the long-term incentive of a6.9 million payment was conditionalupon a doubling of share price. Moregenerally, to check on progress, UKFI

organises a round of meetings with themanagement of the companies in which itholds investments: in the monthsbetween March and July 2009, forinstance, it held over fifty investormeetings.UKFI is thus an active institutional

investor, which has the banks by thescruff of the neck and is energeticallyshaking them to extract every last copper

of value for the taxpayer as shareholder

Wasting the crisis: regulatory

technology and the suppressionof politicsAll this was originated at the Treasury

where the old low intellectual tropes andmemes about arms length andshareholder

value survived the crisis. Internalopposition within the governmentapparatuswas limited because much high

intellectual capital had been destroyedin the domain of the regulatory technicians

at the Bank of England and the FSA.Queen Elizabeths reproachful question(Why did nobody see it coming?)illustrated

how the experts were blindsidedbecause they had misrecognised the bubblethrough the categories of mainstreameconomics and finance, whose

intellectualismhad legitimated light touch regulation.After autumn 2008, their immediate

problem was that it was technicallyimpossible to reinvent expert knowledgeand devise a new management technologywithin the space of a few weeks or

months. Hence the experts produced aguilty discourse about the limits ofknowledge.

In this revised expert world view,politics is again suppressed ormarginalised.


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The failures that led to the crisisare seen as essentially technical in

character,deficiencies in the soft technologyof regulation. They are held to arise fromthe failure of the regulatory system to

match innovation and adaptation inmarkets.Thus, the problem is one of knowledge,which is to be solved by more34 Julie Froud, Michael Moran,Adriana Nilsson and



intelligent understanding of markets, and

more discriminating surveillance of theiroperations.Here, for instance, is the summary of

the root cause of the crisis offered by theWhite Paper. After reviewing a series offailures of appreciation by bankers andregulators, it concludes: In short, the

central lesson of the financial crisis isthat, around the world, these issueswere not sufficiently well understood

(p. 4). It is plain that the White Papersview of the crisis was in turn stronglyinfluenced by Lord Turners Reviewconducted

in his role as a new, reformingchair of the Financial Services Authority.17 As one might expect of a kind of

intellectual with a background in elitemanagement consultancy, he emphasiseseven more strongly the significance ofregulatory technology. Here he is on the

critical failures of understandingcitingKeynes and Minsky, he writes that thecrisis raises important questions about

the intellectual assumptions on whichprevious regulatory approaches havelargely been built(p. 39). From this analysisflows the most important of

Turners recommendations: more

investmentin properly skilled regulatory personnel

by the FSA, and more intensivesurveillance of markets and institutionsby these personnel. The new approach

must be more intrusive and moresystematic(p. 88).What are the new intellectual

assumptions that could underpin thismore intrusive approach? The FSA

report and other official documentsoffered the big new idea of macroprudential regulation, but that beggedthe question as to how this new macro

domain should be conceived and howappropriate control technologies couldthen be devised. The answers to thesequestions depend on a prior exercise inheresthetics, which structures the worldintellectually so as to shape the terms ofany solution. The most radical attempt

has come from Andrew Haldane, theBank of Englands Executive Directorfor Financial Stability, who proposes a

fundamental shift in the terms of argumentand explanation of the banking

crisis. He suggests that banking regulatorsshould think of the world they haveto regulate as a complex, fragile systemof a kind familiar from ecology andepidemiology. Understanding the crisis,

and designing a more effective system,involves learning from the study of(allegedly) analogous physical systems.

Seizures in the electricity grid, degradationof ecosystems, the spread of epidemicsand the disintegration of thefinancial systemeach is essentially a

different branch of the same network

family tree.18 Or as he puts it in aseparate paper: If there is a unifying

theme, it is informational failure.19In Haldanes world, the kind ofcommonsensefailures and solutions in

Turners review (for instance, moreintensive surveillance) are no longercentral.

Above all, in this exercise in heresthetics,dimensions of systems mappingand expert decision about vaccinating

the super spreaders and such like displacedimensions of economic and politicalchoice. Politics is once again emptiedout of banking regulation. Yet Haldanes

displacement of the political is only amore subtle version of the commonsenseof the regulatory elite. Turners Review

puts it more crudely: Intellectual challengeto conventional wisdoms is therefore


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essential. But so too is freedom frompolitical pressure (p 86). And here is the

Governor of the Bank explaining why nospecial conditions were attached to thespecial facilities scheme, perhaps themost expensive and ambitious state rescue

of an industry in British economichistory: [T]his was a central bankingoperation which I think would havefailed if it had been thought that therewere hidden political agendas attachedto it.20Democracy and Markets in Britain after 2007 35# The Authors 2010. Journal compilation # The P olitical Quarterly


Reigniting democratic control?The argument so far is that crisis droveelected politicians to take radical measuresbut, in the aftermath, the undemocratic

habits of market government werereasserted by unelected civil servants andfinanciers. Thus the most likely outcomeis not radical reconstruction, butretrenchment via public expenditure

and service cuts. Yet this is only a missedopportunity if there are alternative agendasand political actors who could deliver

a more democratic form of government.In this section we explore these issues.Through a kind of thought experiment

we show that it is not intellectually difficultto break with established undemocraticmodes of thinking; but it is muchmore politically difficult to construct the

coalition of forces that would press for amore democratic agenda, against resistancefrom within government and the

distributive coalition around the City ofLondon.What might a more democraticapproach look like? It would surely

have to address two pathologies of theold system that came so spectacularly togrief after 2007. First, the national bias in

favour of more finance, and more financefriendly policies, must be challenged.This requires some kind of public interestinquiry into finances justificatory narrative

about the social benefits of wholesaleactivity, and about the Citys contributionto the United Kingdoms economic success.

Before 2007, this narrative provideda kind of higher order rationale for light

touch regulation, low taxation and limiteddisclosureall of which supposedly

improved the competitiveness of theCity of London. The Bischoff and Wigleyreports on the future of internationalfinancial services in 2009 updated this

narrative with new empirics on taxespaid and jobs created; while Bischoffadded a promise that finance can,through new products, meet every socialneed.21 However, the City narrativegreatly overstates these benefits. Retailand wholesale together have never

employed much more than a millionworkers in the United Kingdom and thecosts of bailing out the banking system

must now be offset against taxes paid.After considering finances share of GDP,

the Governor of the Bank of England hasalready concluded that the finance sectorin the United Kingdom has become toobig. A public interest inquirynot justthe kind of partisan special pleading of

Bischoff and Wigleymust scrutinise thebias of policy towards finance, and addressthe difficult question of how far

finance needs to shrink.Second, in terms of the political process,participation in decision makingabout financial regulation must be

widened and scrutiny of public policy

must be made more effective. Classicdemocratic remedies need to be applied

to the enclosed, elite-dominated andunaccountable processes we have describedin this article. The narrow circleof decision makers, executives, non-execs

and advisors needs to be broadened in allthe relevant agencies so that differentvalues and calculations about finance

are represented. Under Conservativeand Labour governments since 1979,there has been a shameful narrowing of

the voices heard. On inquiries and advisoryboards on finance, from the MacmillanCommittee in the 1930s to theWilson Committee in the 1980s, there

was representation for non-financialbusiness,trade unions, academics and elected

politicians. All these groups plusnongovernmental


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organisations (NGOs) couldand should be represented in advising a

holding company like UKFI; any Councilfor Financial Stability should includeoutsidemembers appointed through a transparent

process. Official agencies likeUKFI should not be largely staffed witha cadre of ex-bankers as executives andnon-execs. Beyond this, parliamentaryscrutiny should be strengthened by makingall finance policy makers accountable36 Julie Froud, Michael Moran,Adriana Nilsson and

Karel WilliamsThe Political Quarterly, Vol. 81, No. 1 # The Authors 2010. Journalcompilation # The Political Quarterly Publishing Co. Ltd. 2010

to a new specialised Select Committee onBanking and Finance. This would learn

from what the Treasury Select Committeehas achieved and what it cannot yet do;so the new banking committee wouldhave proper staff resources and the

exceptional power to make bindingrecommendations when, as with bankerspay in mid-2009, different agencies are

passing the buck.If the bias for finance is challenged, andif representation is broadened andaccountability

is increased, then it shouldbe possible to have an open democraticdebate about the shape and regulation of

finance. The big issue here is what apolitically governed finance could andshould do as servant, not master, ofeconomy

and society; and also how corporateforms and business models in bankingshould be reformed so as to make finance

fit for social purpose. Here we can indicatenot policies, but some preliminary,relevant questions for debate. On wholesalefinance after the crisis, what is thescope for mandating shorter, robust

transaction chains in processes likesecuritisation

because long circuits are morefragile and increase intermediarydeductions?

On retail after the crisis, whatscope is there for structuring consumerchoice and redirecting financial educationso as to encourage prudent borrowing

and savingbecause financialliteracy programmes will never stop

predatorymarketing? On organisation, whatkind of mixed ecology of financial serviceproviders, including mutuals and

bondbasedbanks, should we encouragebecause shareholder value-driven publiccompanies are ill suited to the activity ofutility banking, and large, complex banksare riven by conflicts of interest? On allthese issues, the advice of regulatory

technicians and experts would berequired, on the understanding that thechoice is finally political.

It is not intellectually difficult to proposereforms that would increase participation

and accountability or to suggestthe issues for a new democratic agenda. Itis more politically difficult to find theactors who would press these issues.The old political forces are weakened,

but the new political forces have notmoved onto finance-related issues, exceptvia their connection with development.

Class-based organisation is in decline.The front benches of Conservative andLabour parties are in thrall to the City(and its financial contributions) partly

because their mass membership is dying.

After three decades of retreat, unions,especially in the private sector, are

weak: according to the WIRS survey,22two thirds of workplaces in the UnitedKingdom now have no unions. We have,however, seen the rise of the new civil

society groups, which include not onlymiddle-class voluntary associations likethe National Trust, but harder edged

pressure groups like Cafod and Oxfam.Yet their presence on issues ofdevelopment,

climate change or ethical drugpricing is strong while their expertiseand lobbying on finance is weak.The new landscapes of civil society

create problems in political mobilisationin finance, but they also createopportunities.

There are imaginative possibilitiesof putting together coalitions of old and


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new organisations, such as Unite plusOxfam plus the Consumers Association,

around the democratic issues in finance.Banking after the crisis could be therallying point for a coalition of losersbecause taxpayers, customers and the

retail workforce are all now losers fromshareholder value-driven banking. Unite,which organises one third of the retailworkforce, could join forces with NGOson issues like the high street banks payincentives for retail advisers to sell toconsumers; and the high street banks are

vulnerable as brands to direct action. Anew kind of politics of leafleting andboycotts outside high street branches

would not directly address the problemsabout wholesale banking, but it would

threaten the flow of savings and loanDemocracy and Markets in Britain after 2007 37# The Authors 2010. Journal compilation # The P olitical QuarterlyPublishing Co. Ltd. 2010 The Political Quarterly, Vol. 81, No. 1

feedstock from the retail branches ofconglomerates.

And meanwhile our politicaland financial elites should remember thatthe exclusion of democratic forces fromthe political processes of a plural society

generally results in the re-emergence ofdemocratic forces elsewhere in forms thatare less amenable to management and

negotiation.

AcknowledgementWe are grateful to John Buchanan for

comments on an earlier version of thisarticle.

Notes1 G. Majone, Regulating Europe, London,Routledge, 1996.

2 House of Commons Treasury Committee,Minutes of Evidence, Inquiry into FinancialStability, q. 11, 1 February 2007; available

online at: http://www.publications.parliament.uk/pa/cm200607/cmselect/

cmtreasy/292/7020101.htm3 Treasury Committee, Banking Reform:Seventh Report, Session 20078, HC 1008,

para 266.4 United Kingdom Financial Investments

Limited,Annual Report and Accounts20089, London, UKFI, p. 2.5 Treasury Committee, The Run on the Rock,

Fifth Report, Session 20078, Volume II, oraland written evidence, HC 56-II,

Chancellors oral evidence, 25 October2007, q. 748ff.

6 Treasury Committee, Banking Crisis: Dealingwith the Failure of UK Banks, Seventeenth

Report, Session 20089,HC416, paras 1245.7 See J. Glover, Voters blame bankersandeveryone else, The Guardian, 21 October

2008.8 M. Horton, M. Kumar and P. Mauro, The

State of Public Finances: A Cross CountryFiscal Monitor, Washington, InternationalMonetary Fund, July 2009, p. 28, note 12.

9 Her Majestys Treasury, Reforming FinancialMarkets, July 2009, Cm. 7667, London,

The Stationery Office.10 The Governors Speech at the MansionHouse, Bank of England Quarterly Bulletin,

Q3, 2008, pp. 3145.11 The differences continue. See C. Giles, UK

Governor calls for lenders break-up,

Financial Times, 21 October 2009.12 Following an announcement that Kingmanwould be departing for the privatesector, UKFI is now searching for a physical

location closer to the financial sector.13 P. Hampton and J. Kingman, A precise

mandate to protect taxpayers interests,Financial Times, 14 November 2008; TreasuryCommittee, Banking Crisis, vol. 1, Oral

Evidence, Session 20078, HC 114-I, q.2572ff.

14 M. Flinders, Delegated Governance and theBritish State: Walking without Order,Oxford, Oxford University Press, 2008.

15 Treasury Committee, Banking Crisis, vol. 1,Oral Evidence, Session 20078, HC 144-1, q.

2496.16 UK Financial Investments Limited,Shareholder

Relationship Framework Document,London, UKFI, 2009, p. 13.

17 A. Turner, The Turner Review: A RegulatoryResponse to the Global Banking Crisis, London,Financial Services Authority, March

2009.18 A. Haldane, Rethinking the Financial

Network,Speech delivered at the Financial

Student Association, Amsterdam, April2009, p. 3.19 A. Haldane, Small Lessons from a Big

Crisis: Remarks at the Federal ReserveBank of Chicago 45th Annual Conference,

Speech, 8 May 2009, p. 1.20 Treasury Committee, Re-appointment ofMervyn King as Governor of Bank of England,

vol. II, Oral and Written Evidence, TenthReport, Session 20078, HC 524-II, q. 90.


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21 UNInternational Financial Services: Thefuture. A Report from UK Financial Services

Leaders to the Government, London, HerMajestys Treasury, 2009; London: Winning

in a Changing World. Review of theCompetitivenessof Londons Financial Centre, London,

Office of the Mayor, 2009.22 B. Kersley, C. Alpin, A. Bryson, H. Bewley,

G. Dix and S. Ovenbridge, First Findingsfrom the 2004 Workplace Employment RelationsSurvey, London, Department of Trade

and Industry, 2005, Table 4.38 Julie Froud, Michael Moran,Adriana Nilsson and

Karel Williams

The Political Quarterly, Vol. 81, No. 1 # TheAuthors 2010. Journal compilation # ThePolitical Quarterly Publishing Co. Ltd. 2010

Documents

Wasting a Crisis? Democracy and Markets in Britain after 2007