January 18th, 2013 (updated January 19th, 2013)
Blair Jenkins, chief executive of the Yes Scotland campaign, today claimed that Scotland “might very well not have had a financial crisis” if it had been an independent country. This is a ridiculous claim which further undermines the credibility of the ‘Yes’ campaign, especially where business, finance and the economy are concerned.
For a start, apart from one or two very significant oil and gas exporting countries, I cannot think of a single country in the world which “avoided” the global financial crisis which started in July 2007, and whose full force started to be felt after the bankruptcy of Lehman Brothers in September 2008. Even Australia and Canada, which initially rode out the crisis because of their better-regulated banking sectors, are by no means out of the woods. The claim is doubly farcical because of Jenkins’ naive assumption that, if Scotland had been an independent nation in the build-up to the global crash, its banks would somehow have been better-regulated or immune to the chaos, panic and fear that engulfed the financial system at the time.
Asked by the BBC’s Douglas Fraser about how Scotland would have handled the financial crisis and the failure of Royal Bank of Scotland (the largest bank in the world by assets at the time), and HBOS (which was rotten to the core by the time of its September 2008 collapse), if it had been independent, Jenkins said [it starts at 23.30 minutes in to the video] :-
“We might very well not have had the financial crisis had Scotland been independent. I think it’s a key point that’s not made often enough that all of us in Scotland were depending on the UK government and the UK financial regulator to be doing their jobs, and not to have allowed what did happen to happen.
“What I’m saying is everyone in Scotland, whatever their view was — and they might not have known the detail of what the banks were up to, the casino banking that we now know about — but I think what all of us in Scotland were entitled to assume was that the UK government and the UK financial regulator were looking after our interests. Now it turns out they were actually asleep at the wheel, and we did have the financial crisis of several years ago.
“And Scotland is still paying the price for negligence at a UK level, we are still paying the price in Scotland in terms of jobs being lost, services being cut many of the hardship measures that are being through now… are as a result of the fact that our interests were not being looked after by the UK government and the UK financial regulator.’
“… my point remains, Douglas, that we were placing our trust in the UK government and the UK financial regulator, who did not look after our interests and I believe that had Scotland been independent as a smaller country we would have been paying greater attention
There is clearly some truth in Jenkins’ answer. Yes, the FSA was an utterly useless regulator. It was not just ‘asleep at the wheel’ but effectively ‘captured’ by the UK’s and Scotland’s unethical banking sector for most of 2002-08. Yes, it bears a huge amount of responsibility for the UK banking crisis — for example by ignoring the extent to which RBS had weakened itself by building towers of leverage on a wafer thin capital layer, and for its complicity in the burial of numerous frauds at HBOS — and yes, Scots were entitled to assume that the regulator would be doing its job.
However the idea that Scotland’s banks — RBS and HBOS, whose combined assets were 21 times Scotland’s gross domestic product at the time of their near collapse (for the sake of comparison, Irish banks’ assets were 4.4 times Irish GDP at point of their October 2008 collapse, and Icelandic banks‘ assets were 9.8 times times Icelandic GDP) — would have been better-regulated has Scotland been independent is wide of the mark.
One symptom of “small country” syndrome is that, when an economic sector is punching above it weight internationally, as Scottish banking seemed to be doing in 2000-07, the country’s politicians and regulators invariably become the sector’s cheerleaders. Politicians take pride in having a national champion that’s taking on the world on their doorstep, and the country’s interests get conflated with the player’s interest.
We saw this in Ireland in 2002-08. As the country’s property bubble stretched to bursting point thanks to massive infusions of cheap and poorly supervised credit from the nation’s banks, a wilful blindness set in in Dáil Éireann. Anyone who dared question what was happening, including learned economists like University College Dublin professor Morgan Kelly, was denounced as a traitor. We saw further instances of a bloated banking sector being cheer-led by naive politicians in other small countries such as Switzerland and Iceland in the build up to the global financial crisis. There’s no reason to believe that Scotland would have been any different.
As Jeremy Warner put it in a Telegraph blog (Scotland would be as bust as Iceland if it had been independent):
The idea that had the Scot Nats been in charge, these two banks would have been better regulated, is an interesting theory but also completely fanciful. The Edinburgh financial and political elite is, if anything, even more defined by cronyism than Dublin’s. Puffed up with its own sense of self importance, the hubris would very probably have been worse still.
Even as they hubristically drove themselves towards the edge of the abyss in 2007, the SNP leader Alex Salmond showed no sign of wanting to rein in Scotland’s banks, or to promote greater conservatism at Scottish-headquartered financial institutions. Quite the contrary. Instead Salmond accused the FSA of being too tough on the banks! Perhaps influenced by bankers (FiSAB members?) who, as we now know, are not the best of guides on such matters, Salmond was promising an even lighter touch!! In an interview with the Times published on April 7th, 2007, a soon-to-be-elected first minister said:
“We are pledging a light-touch regulation suitable to a Scottish financial sector with its outstanding reputation for probity, as opposed to one like that in the UK, which absorbs huge amounts of management time in ‘gold-plated’ regulation.”**
So let me get this straight. Salmond thought the UK authorities and the FSA in particular, were being too tough on the banks in 2007? He felt Scotland would be better off with ‘lighter touch’ regulation? He felt that Scotland’s banks had ‘an outstanding reputation for probity’. Heaven help us. It seems Salmond is even more detached from financial reality than Jenkins.
Just as a reminder, here is the letter that Salmond wrote to Fred Goodwin when the latter was RBS chief executive, in May 2007. Salmond wished Goodwin ‘good luck’ with his attempted €72 billion takeover of the Dutch Bank ABN Amro adding ‘it is in the Scottish interests for RBS to be successful’. The takeover is now recognised as one of the most disastrous in corporate history and contributed to the massive losses which caused RBS to fail and require a £45.5bn government funded bailout.
Speaking to the BBC on February 1st, 2012, the day after Goodwin was stripped of his knighthood, Salmond sort of admitted the letter had been a mistake:-
“If we all had our time again we’d look at things differently. I think there are very few people who can justifiably say that they anticipated the full extent of the financial collapse – the financial crisis. I mean I know some people claim they did but I think if you examine the record you’ll find there’s very few people on the planet – and I am certainly not one of them – who anticipated it. So, yeah, of course, if we had the benefit of hindsight we’d do things differently and I am sure that is true of lots and lots of people.”
The pro-independence organisation Yes Scotland aims to convince Scots to vote in favour of separation from the rest of the UK in a referendum scheduled for October 2014. However if it’s going to use economic arguments as feeble and misleading as these, it isn’t going to stand much of a chance.
** Douglas Fraser did try to rein in Jenkins, a former head of news and current affairs at BBC Scotland, by reminding him of Salmond’s remarks and and 2007 manifesto pledge, but Jenkins brushed him aside.