In the Financial Times earlier this week, Peter Mandelson wrote:
Sir, I was surprised by the unreconstructed tone of your editorial (”The umpire should not choose sides“, April 21) criticising our paper on a more active approach from government to equipping UK businesses and their employees to compete in a global economy. To be frank, it read rather like an Institute of Economic Affairs pamphlet from the 1970s, especially at a time when the catastrophic failure of laisser faire in the financial markets has required massive state intervention.
Just a couple of things. The pamphlets in the early 21st century are no less laisser faire and I am sure that there is much that Peter Mandelson could learn, for example, from the chapter in Prohibitions on the hand gun ban – adopted as a policy at the height of power of the New Labour spin machine for purely political reasons. However, the letter from Peter Mandelson does make one worry that we have a Business Secretary totally out of touch.
Mandelson believes that there has been a catastrophic failure of laisser faire in financial markets. He is clearly not aware of the statutory objectives of the Financial Services Authority which include “maintaining market confidence” and is also not aware of the hundreds of thousands, if not millions, of paragraphs of banking regulation generated by that institution. A laisser-faire environment would also not include deposit insurance, a central-bank lender-of-last-resort facility, the Basel Accord and the extraordinary amount of EU regulation of banking activities.
Indeed, the sure knowledge of a government bailout of banking institutions on the grounds that they were too big to fail made it inevitable that banks would become bigger and failure inevitable.
As Martin Wolf has pointed out, this expectation of government intervention makes it reasonable for free-market economists to differ on the extent to which we should have banking regulation. However, it is clearly wrong to suggest that we have laisser faire.