There hasn't been a proper parliamentary grilling on the financial crisis since the hearings on Northern Rock and the private equity industry last year. First up a trio of academics from the London School of Economics: Professor Willem Buiter, Professor of European Political Economy, Professor Charles Goodhart, Professor Emeritus of Banking and Finance and Dr Jon Danielsson, Professor of Accounting and Finance. Later, some real business folk.
9:51am: Chairman John McFall kicks off well, asking the pointed question: what is banking for?
9:56am: This is not complicated, concludes the committee: people have been highly paid for relatively little value.
10:03am: If everybody refuses to make loans now, we're all in trouble, points out Charles Goodhart: "What is sensible for the individual banks makes no sense at all for the system as a whole."
That seems to be nub of the current crisis.
10:03am: Up now, my favourite doomster Willem Buiter.
10:07am: There is no such thing as a safe bank, says Buiter. They only survive if they have an implicit or explicit guarantee from the ultimate source of liquidity: the central bank. So we need to make sure we don't require all banks to prepare for the worst scenario. Liquidity is a public good.
Sounds scary, but actually quite a good thought if you're a banker.
10:15am: Buiter offers support, but an important piece of advice to Brown & Darling: "Zero interest rates and quantitative easing will have to be emulated here as they are in the US, but the reluctance to ring fence bad assets is something to be avoided."
Perhaps we need a bad bank after all?
10:19am: You've got to love the matter-of-fact delivery of these academics.
Here's Professor Charles Goodhart again: "There were lots of early warning signals. The problem was the lack of willingness to do anything about it. In a boom, everyone loves it, and the idea of a regulator saying you are not allowed to do things runs counter to interests of the lenders, borrowers and virtually every politician. It is not a popular activity."
Too true.
10:25am: Do we need regulation or will the market learn its own lessons? What do you think?
Buiter is scarily precise: For three years they will withdraw, that is the half life of memory in financial markets.
10:32am: Brown comes out of this much worse than Mervyn King, despite attempts by the MPs to pin the blame on the Bank of England.
"I would not fault the Bank (of England) at all for warning about moral hazard," says Buiter.
10:36am: Why don't we end over-the-counter trading of derivatives and put everything through regulated exchanges?
Dr Danielsson replies: Banks have an incentive to make things complicated. They lobbied hard to make sure no one understood what they were doing.
For some reason, the MPs are losing their temper at this suggestion. (where is your evidence for this? etc) It seems a good summary to me.
10:48am: Suddenly the dry language of finance comes alive when the MPs quote back Buiter: "Banks that don't lend are useless: like tits on a bull."
Should this mean the government needs to force banks to start lending again?
The answer from Goodhart and Danielsson is no. The one thing worse for allocating capital than the banks is the government.
No tits in Downing Street then.
10:50am: Buiter disagrees: "There is nothing wrong with making the banks pay a very high price for government support; after all, they failed. Banks need to be given targets for total lending."
11:04am: Goodhart tips his hat to Gordon Brown: The bank bailout was extremely well done. Only the cost of support to banks was too high.
Buiter thinks the banks should have been completely nationalised. Instead, different parts of the government now have different priorities eg. more lending vs repairing profits.
11:06am: Buiter wraps up the first session with characteristic bluntness. Asked about his gloomy prediction that the banks will be at it all over again in three years, he replies: "that's the way the world is. it's been that way ever since banking was invented."
Er, ok.
11:08am: Now some business figures and commentators. Richard Lambert, Director General, CBI, and Jon Moulton, Managing Partner, Alchemy Partners, and Will Hutton, Chief Executive Officer, The Work Foundation - and, of course, our very own Observer columnist.
11:09am: "A grotesque failure of every regulation there is" - says Jon Moulton. "The basic thing wrong with the banks is they got too damn complicated."
I sense he is going to compete with Buiter for pithy soundbites.
11:13am: Hutton goes one step further in summing up the crisis: "It went beyond regulatory failure. We actively fanned the flames."
11:15am: The CBI's Lambert is already feeling the heat: "It's important to keep things in scale. It is possible to overstate the importance of the financial system."
11:21am: Are hedge funds to blame?
Lambert thinks not: "My total preoccupation is with the supply of credit to the economy". Hedge funds are a sideshow
Hutton is not so sure. $2 trillion in assets. They contributed to the asset bubble. Their collapse is hitting the banks. It's outrageous that we (I assume he means taxpayers rather than the Guardian Media Group) have emerged as guarantors of bank lending to hedge funds.
Moulton insists UK banks were not big lenders to hedge funds.
11:27am: Can the regulators keep up?
It cannot be done, says Moulton. We need trustworthy banks or they need to stay in national ownership forever. It doesn't mean we stop innovation, but we have to go back to a simpler model of banking. It is not an accident that this all happened after we liberalised banking regulation.
Pretty strong stuff, even for Moulton
11:30am: Hang on a minute says Lambert: "We shouldn't conclude from all this that regulation is impossible. We need to focus on capital adequacy and liquidity. Supervision is very important too."
Moulton insists: A large bank with 30 or 40 business lines is too big and complicated to be regulated.
11:34am: More questionable sexual metaphors!
Moulton suggests the problem with lending is like the problem with one woman on a desert island; you have to take what's available.
Lambert rescues the embarrassing silence with a joke about Moulton's private equity industry not always turning things into gold. (Moulton's firm is called Alchemy, geddit?).
11:43am: Moulton delivers a devastating critique of what is wrong with banking regulation. Lambert calls for new international agreements to control how much capital the banks have to hold. Will Hutton calls them all utopian.
How the world has changed. Who would have thought they would each have assumed these roles a year or two ago?
11:49am: The old question of how the media covered this returns.
Lambert restates his worry that we don't get carried away and cause bank runs. Hutton says we were all pretty responsible and could have been louder still.
I'll pass on this one in the interests of neutrality.
12:04pm: An interesting culture clash moment between business and Westminster:
The panel cannot understand why the bail-out for banks had such punitive lending conditions attached. The MPs respond by pointing out that their constituents would happily lynch bankers from lampposts and giving banks apparently free bail-outs is about as popular to the ordinary person in the street as offering them cyanide.
Hutton concludes by saying we need a Marshall plan for the banks and Nuremberg trials for the bankers. It might be a bit more feisty than this relatively tame select committee hearing. Where are the teeth? Where is the anger?
