Thatcher and the Big Bang
By Howard Davies
Former Chairman of Britain's Financial Services Authority, Deputy
Governor of the Bank of England, and Director of the London School
of Economics
In the United States, for people of a certain age, Margaret
Thatcher was a superstar, and Americans have been surprised at the
sharply divided views on display in the Britain that she governed
for 11 years. But Britons were not astonished. Like Tony Blair,
Thatcher has long been a British product with more appeal in export
markets than at home.
All aspects of her legacy are earnestly disputed. Was she prescient
about the problems of European monetary union, or did she leave
Britain isolated on the fringes of the continent? Did she create a
new economic dynamism, or did she leave the United Kingdom bitterly
divided, more unequal, and less cohesive than before? Did she
destroy the power of vested interests and create a genuine
meritocracy, or did she entrench bankers and financiers as the new
elite, with disastrous consequences?
Indeed, one issue that has come under the microscope is Thatcher's
reforms of the City of London in the late 1980's. In 1986, her
government was instrumental in what is known colloquially as the
"Big Bang." Technically, the main change was to end "single
capacity," whereby a stock trader could be a principal or an agent,
but not both.
Before 1986, there were brokers, acting for clients, and jobbers,
making a market, and never the twain could meet. This system had
been abandoned elsewhere, and the reform opened London to new types
of institutions, especially the major US investment banks.
The first and most visible consequence was the demise of the long
lunch. Beginning with a gin and tonic just after noon, and ending
with a Napoleon brandy at three o'clock, lunch prior to the Big
Bang was often the most arduous part of a stockbroker's day. That
cozy culture ended soon after the thrusting, brash Americans, who
worked even over breakfast, hit town.
But some believe that there were downsides, too. Philip Augar, the
author of The Death of Gentlemanly Capitalism, argues that "Good
characteristics of the City were thrown out along with the bad,"
and that Thatcher's reforms "put us on a helter-skelter course
towards the financial crisis."
How justified is this charge? Can we really trace the roots of
today's malaise back to the 1980's? Was the Iron Lady an author of
the world's current misfortunes?
Nigel Lawson, Thatcher's Chancellor of the Exchequer at the time,
denies it. (Full disclosure: I was an adviser to Lawson in the
1980's). He points out that the reforms were accompanied by new
regulation. The Financial Services Act of 1986 put an end to the
pure self-regulation regime. Financial interests opposed it
vigorously at the time, viewing it as the thin end of a dangerous
wedge, though they could not have guessed just how thick that wedge
would eventually become.
It is also difficult to trace back to the 1980's the origins of the
credit explosion and the proliferation of exotic and poorly
understood financial instruments that lay at the heart of the
2007-2008 crisis. The most dangerous trends, including the upsurge
of global imbalances and the dramatic financialization of the
economy, accelerated dangerously from about 2004 onwards.
Thatcher herself was not an enthusiast for credit, once famously
saying, "I don't believe in credit cards." Indeed, she espoused a
rigorous philosophy about borrowing: "The secret of happiness is to
live within your income and pay your bills on time."
But perhaps there is a deeper level on which we can see some
connections between Thatcherism and the crisis. Her mantra, "You
can't buck the market," did contribute to a mindset that led
governments and central banks to be reluctant to question
unsustainable market trends.
Thatcher was referring specifically to the dangers of fixed
exchange rates, and can certainly not be counted as one of the
principal architects of the so-called "efficient markets
hypothesis." But she was a strong believer in the expansion of
private markets, and was instinctively suspicious of government
intervention. As the late economist and European central banker
Tommaso Padoa-Schioppa once put it, Thatcher "shifted the line
dividing markets from government, enlarging the territory of the
former at the expense of the latter." Padoa-Schioppa regarded this
as a factor contributing to the US and UK authorities' reluctance
to step in at the right time before the 2007-2008 crisis.
Thatcher was certainly no friend of central bankers. She remained,
to the end, hostile to central-bank independence, regularly
rejecting the advice of her chancellors to allow the Bank of
England to control interest rates. She feared that independent
central banks would serve the interests of their banking "clients,"
rather than those of the economy as a whole.
She was especially hostile to what she saw as the excessive
independence of the European Central Bank. In her last speech in
Parliament as Prime Minister, she attacked the ECB as an
institution "accountable to no one," and drew attention to the
political implications of centralizing monetary policy, accurately
forecasting the dangers of a "democratic deficit," which now
worries many in Europe, and not just in Cyprus or Portugal.
So, in the financial arena, as elsewhere, there is light and shade
in the Thatcher inheritance. Her Alan Greenspan-like belief in the
self-correcting features of financial markets, and her reverence
for the integrity of the price mechanism, do not look as
well-founded today as they did in the 1980's. So, in that sense,
she can be seen as an enabler of the market hubris that prevailed
until 2007.
On the other hand, it is difficult to imagine that a Thatcher
government would have run a loose fiscal policy in the 2000's. And
it is equally unlikely that, had she had her way, the eurozone
would be the camel - a horse designed by committee - that it is
today.
Copyrights: Project Syndicate