Inflation targeting, or what Arsene Wenger and Mark Carney have in common

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Matthew Robertson 1.36pm

  • May 2004: Arsène Wenger hailed as Arsenal go entire season undefeated to win the Premier League
  • December 2012: Arsène Wenger under increasing pressure as Arsenal lose to League Two side Bradford City in the Capital One Cup
  • October 1992: for the first time monetary policy in Britain would be based on an explicit target for inflation
  • December 2012: Mark Carney, the incoming Governor of the Bank of England, has suggested abandoning inflation targeting


"When the facts change, I change my mind". A quote that has long been attributed to the father of modern economics, John Maynard Keynes. It is a belief that policy should be implemented to tackle the world as it is today, not as it was yesterday.  

The position of an English football team and the comments of the Governor of the Bank of Canada may not seem interlinked but they do shed light on whether it is beneficial to adapt to changing circumstances or to maintain the current strategy in total belief that it is the correct way.

One of the great success stories of modern economics is the taming of inflation. As Mervyn King, the departing Governor of the Bank of England, stated in a speech in October:

"Over the previous twenty years (1972-1992) inflation had been the single biggest problem facing the UK economy, peaking at 27 per cent a year in 1975. Over the subsequent twenty years (1992-2012), inflation, as I mentioned earlier, would average only 2.1 per cent."

The key to this success was controlling inflationary expectations and the key to that was inflation targeting underpinned by an independent central bank. Exiting the European Exchange Rate Mechanism freed Britain to set their own monetary policy, which culminated in Bank of England independence in 1997.

A target would be set and it would be free of political interference. As long as the target over the long term was met, the expectation was anchored as any deviation would be expected to return to the anchor. This was the case for most of the past twenty years.

This policy was a reaction to the economic difficulties of the time and has been reproduced in many countries over the world. Inflation is well above expectation at the moment but inflation between 2.5 per cent and 5 per cent is low by historical standards and the reason is that the inflationary expectation is still around the 2 per cent mark.

The footballing philosophy of Arsène Wenger when he first arrived in England was equally as successful. His devotion to ‘pass and move’ football led to five trophies in six seasons as well as the first team in 116 years to go a league season unbeaten.

However, times have changed both for the economy and for English professional football. The financial crisis of 2007-2008 precipitated a new thinking in central banking theory. The Bank of England ignored concerns about inflation and reduced interest rates to almost zero per cent in an effort to enhance liquidity and reduce borrowing costs. The greater concern for the Bank at the time was economic output and preventing the economy stagnating into a long term liquidity trap. There were numerous inflationary concerns regarding world food prices at the time but the Bank, quite rightly, decided that the crisis needed urgent, unorthodox central banking. This was further reinforced by a period of quantitative easing where the Bank of England purchased financial assets from commercial banks to inject money into the economy.

In a speech on 23rd January, Mervyn King argued that pursuing a two per cent inflation rate target throughout the financial crisis, would have worsened the recession:

"To bring inflation down ‘would have meant driving down wages by creating a deeper recession, even higher unemployment and lasting damage to the job prospects of many young people."

The question now is whether inflation targeting should be abandoned for nominal GDP targets, something the new incoming Governor, Mark Carney, has suggested. A deeper question is whether the economic circumstances of the economy have altered significantly to warrant a change in approach.  Are the economic conditions so benign that there will be insufficient demand to produce growth without active interference from a central bank?

Central bankers will need to factor in these conditions along with inflationary expectations to assess which approach to take. The history of the 1970s suggests that active GDP targets don’t work but that might have been for a different time with contrasting conditions.

Whatever route is taken it raises the question of whether to change one’s mid when the facts change. The arrival of Roman Abramovich and latterly Sheikh Mansour altered the nature of English football completely. Chelsea and Manchester City have the ability to outbid and outspend any club to attract the best talent from around the globe. There is growing doubt as to whether Mr Wenger’s prudent approach of developing youngsters and buying affordable players can be successful in today’s Premier League. Despite constant criticism, Arsenal’s manager has remained dogmatic about what he considers the correct method.

Is this appropriate when the facts change? We shall see when Mark Carney takes over the helm in the summer.

By that time there may even be a trophy in that Arsenal cabinet.

Follow Matthew on Twitter @FlatFootTory

General Anti-Tax Avoidance Principal offers a new judgement-based approach tax

Matthew Robertson 10.39am

"The hardest thing in the world to understand is the income tax." - Albert Einstein

The list is never-ending:

  • May 2012 - 2,000 senior public officials on more than £58,200 were found to be paid “off payroll”, which could minimise their tax bills, according to a leaked letter obtained by Exaro, the investigate website and the BBC’s Newsnight programme.
  • November 2012 - A tax avoidance scheme, marketed by Ernst & Young, that claimed to license newspaper mastheads to avoid tax, has been thrown out by a tax tribunal.
  • November 2012 - Amazon, Google and Starbucks accused of being “immoral”, “manipulative” and of “practising tax avoidance on an industrial scale”.

It is difficult to find someone who doesn’t have an opinion on tax,  a meritocratic society relies on the idea that everyone pays their fair share yet there must also be incentives for individuals and companies to create wealth.

This dilemma has troubled governments for as long as tax has existed and the above examples show that they are not always successful. The onslaught of globalisation and multinationals has further hampered the ability of national governments to tax efficiently as the question of residency becomes less clear.

The constant attempts to avoid tax by individuals and corporations has created a behemoth of tax legislation with some rules dating back centuries. In 2009, Lexis Nexis revealed that the UK’s tax code has more than doubled in size since 1997, going from 4,998 pages in 1997, to 11,520 in 2009, making UK tax code the longest in the world.

Many have called for HMRC to have more powers and better resources to tackle tax avoidance as government initiatives have failed to prevent both individuals and corporations from ‘bending’ the rules. The implementation of IR35 is a prime example of misplaced tax legislation. It took effect in April 2000 and was designed to eliminate the avoidance of PAYE and National Insurance contributions (NICs) by ‘contractors’ who for all intents and purposes are employees.

As the BBC example above illustrates, IR35 has not delivered on its promises and moreover, it has had a negative impact on some businesses as clients become reluctant to engage with some professionals for fear of them being liable for PAYE on their fees. Furthermore, in some instances the legislation is unfair on certain freelancers as employer NICs at 13.8 per cent need to be paid as well as employee NICs and income tax of up to 50 per cent. IR35 has been found out to be unworkable and there is no evidence that it raises any income for the Treasury.

The failure of IR35 is similar to why Albert Einstein could not understand income tax but could comprehend quantum physics. That is, applying a rules-based approach to tax is always likely to fail as rules are open to abuse by their very nature. Rules cannot be applied to individuals in the same way that the laws of physics can be applied to atoms. The wording of any rule can be interpreted to have been complied with or not and it is because of this that many have been able to work within the rules to minimise their tax liability.

The Institute of Chartered Accountants in England & Wales (ICAEW) realised this a while ago and adopt a principles based approach to ethics:

"The ICAEW pioneered the principles-based threats and safeguards approach to Codes of Ethics in the accountancy profession internationally. We believe that this approach is flexible but robust because it focuses on the spirit of the guidance and encourages responsibility and the exercise of professional judgement. The guidance can be applied to the infinite variations in circumstances that arise in practice and can be adapted to rapid changes of the modern business environment."

Professional judgement is the key; HMRC should be able to analyse the economic substance of transactions to determine whether the behaviour represents the true nature of the business or whether it is merely avoiding tax. It is encouraging to see the ‘General Anti-Tax Avoidance Principal’ Bill being debated in Parliament on Friday. Richard Murphy, one of the main contributors to the bill, makes a good case for how successful a rule such as this could be.

One of the main ways Starbucks was able to make a loss in the UK was to pay a 6 per cent royalty to another Starbucks company for the use of intellectual property attached to the brand.

Murphy argues: “The profit stays within the group, and it cannot be justified as commercial since no one would pay a royalty for thirteen out of fourteen years to make continuing losses.”

In other words, economic substance has nothing to do with actual trade and is merely being pursued to avoid tax. An anti-tax avoidance principle would allow HMRC to apply a greater degree of professional judgement instead of following set rules.

Furthermore, it would dampen the obsession of creating more and more rules to close ever more elaborate loopholes. There is nothing inherently wrong with individuals and businesses managing their affairs to minimise their tax liabilities; no one would argue that investing in an ISA is immoral tax avoidance.

Nevertheless, there is a difference between arranging your business in the most tax-efficient way and creating transactions that merely exist to avoid tax. The complexity of the tax system is emblematic of such efforts to create loopholes, it is time for a new approach, one that allows more judgement to be applied.

Finally, I gave him the first word, so I shall give him the last.

‘We can’t solve problems by using the same kind of thinking we used when we created them.’ – Albert Einstein.

Follow Matthew on Twitter @FlatFootTory

Is being green worth its weight in gold? Or will moral credit leave you bankrupt?

Sara Benwell 11.03am

Ethical investment is seriously hot right now. Last week was National Ethical Investment Week, the week where everyone is encouraged to put their money in funds that will save the world, or will at least not outright harm it.

There’s a broad range of ethical investments: from those focusing on being environmental, sustainable or just generally socially responsible, to those simply avoiding funds that might be considered ethically dodgy, such as weapons, alcohol, pornography or gambling.

The Government has been pushing social investing over the last two years, supporting 'impact investing', and launching Big Society Capital, an initiative designed to take an estimated £400 million from dormant bank accounts to help develop the social investment market. It is also launching the world’s first Green Investment Bank to provide financing for low carbon investment projects (see Alex’s previous coverage of it here).

It’s not just the Government. There is strong evidence of increasing consumer demand for greener investments. In fact Triodos, a bank specialising in ethical investments, has seen a 78 per cent increase in people wanting to open savings accounts. It has also doubled the money coming into its accounts each year. Furthermore, according to Eurosif, the Brussels-based European Sustainable Investment Forum, the amount of money in the UK invested in a “sustainable and responsible” manner has reached an estimated £275 billion.

The obvious reasons behind these funds are morality-based, but an investment needs to make money too or it’s just a waste of time. Yet can ethical investments offer real returns?

They are somewhat subjective, insofar as they depend on what any particular individual considers to be morally important, and the process is far from straightforward, but that doesn’t mean there’s not money to be made. Ethical investments, bank accounts, pensions and mortgages are now available to most consumers.

However, renewable energy has been a disaster for ethical investors recently, with wind and solar power systems companies being among the worst-performing stocks in the last few years.

For instance, the Guardian reported that Vestas, the Danish wind turbine maker, had cost investors almost 95 per cent of their money. The article also reported that the BlackRock New Energy Investment Trust has fallen 49.9 per cent since 2007. Furthermore, negative screening of so-called ‘sin funds’ mean that investment products are less diversified and there is less recourse to defensive funds, which can lead to volatility. These are just some amongst a multitude of examples, illustrating why many people are wary when it comes to ‘being ethical’ with money.

Nonetheless, there is some evidence that it’s possible to be ethical and still taking care of your money.

One theory is that companies on the right side of the ethics debate are less likely to fall out with regulators, end up in expensive court battles or face strikes or boycotts of their products from consumers. All of these can impact reputation and even share price, so ethical companies should look like good long term prospects.

This is illustrated in the pensions industry, where an increasing number of funds are declaring support for the UN-backed Principles for Responsible Investment (PRI), an institutional investor initiative for ethical investment. The number signed up has jumped by over a quarter in the last two years.

Furthermore, there are those out there who believe a carbon-based economy is unsustainable, for obvious reasons. This too suggests that forward looking ethical investments are likely to do well in the long term.

Another thing to consider is as public opinion shifts, and we care more and more about everything from whether our eggs are free range to whether we invest ethically, it seems likely that the value of companies who can prove to stakeholders that they have sustainable values will rise.

It is important that the Government continues to support ethical investments, and it is encouraging that the public is beginning to demand how their money is made and at whose expense.

However, there must be further support and ambition from both the Government and the financial services industry if ethical investment can be sustainable. Meanwhile the Coalition should be wary about throwing money behind schemes that may leave people worse off, especially in a financial crisis. It’s all well and good being “ethical” but it will backfire if it costs people their pensions.

There are ethical funds that perform well, so perhaps the government should think about putting its money towards education, so that people are equipped with the knowledge to do the right thing – whilst also putting the pennies away for the future.

Follow Sara on Twitter @sarabenwell

Robbing the retirement fund to house the young - are you mad?

Sara Benwell 1.43pm

Another day, another bonkers financial plan from Nick Clegg.

At the Lib Dem conference in Brighton, Mr Clegg announced his nascent “pensions for property” scheme.

How would it work?

The scheme aims to enable first-time buyers to tap into their parents’ or grandparents’ retirement savings and allow them to take out a deposit.

It is as yet hazy on details, but it seems that parents would be allowed to sign an agreement with their child’s mortgage lender promising that a lump sum will be allocated towards the child’s home financing costs.

Essentially, a retired (or nearly retired) parent with a £60,000 pension pot could promise that a chunk of this (around £15,000) would be used as a deposit on a child’s first home.

The scheme will be targeted at parents who have built up a pension fund worth around £40,000 and are nearing retirement. Lib Dem officials have estimated that as many as 250,000 households could fit these criteria, including public sector workers such as teachers and nurses. Those with more valuable pensions would be able to use the scheme, but ministers have argued that they are likely to have other financial assets that they can use to help their children.

Why is it bonkers?

There are two reasons that this scheme doesn’t make sense. The first is that it won’t solve the problem that it sets out to solve; the second is that it may cause further problems in a pensions industry that is already riddled with them.

Why it won’t solve the problem

We have an alarming lack of affordable housing for young people. It is nigh on impossible for most of us in their twenties and many in their thirties to buy their first home. Particularly in London. I’m a twenty-something and it’s depressing to consider the amount that I throw away on rent and that at this rate I’m unlikely to be able to save enough for a deposit and get a mortgage until I’m about 55 years old. Nevertheless, Mr Clegg is mad if he thinks that stealing from pensions will save the young.

This scheme will only make a difference to a relatively small group of people with a pension pot of a certain size.  Furthermore, it seems likely that a lot of people who will be able to swap part of their pension for their child’s property may have other methods of helping their children out. Those whose pensions sit below this threshold will not be able to join in the fun, and those with a pension pot of significantly higher than the 40k mark are unlikely to take this route anyway. Also remember that at 55, most people will be able to access this tax free sum anyway and do with it what they wish – be that go on a cruise or help their children to buy a house.

If you believe (how could you not?) that we have problem with unaffordable housing for the young, how can you possibly think that a scheme which will change the fortunes of so few will solve the problem? If the problem is that houses are too expensive, allowing the vast minority of the populace a potential solution won’t make an iota of a difference to the fact that houses are too expensive for the majority.

What we need is more affordable housing, which would allow people to buy property that is within their means. If anything, this scheme is likely only to make houses more expensive, as it pushes more people into putting up deposits for houses they can’t afford.

Why it might make the pensions crisis worse

Firstly, one has to question how a scheme like this would actually work. Would it apply to all pensions schemes? How can lenders assess the risks involved if a pension scheme were to go bust? It seems likely that lenders would be very cautious when it came to lending to occupational pensions schemes, for instance.

One must also ask how well this policy would sit with other pensions policy and regulation. If changes are made to the access that people have to their pensions or to the tax-free lump sum entitlement, where will this leave the scheme? It seems that if this is even to get off the ground it needs to be more fully integrated with wider pensions policy.

The biggest problem is that this could leave retired people short of funds when they eventually come to giving up work. Already, the country is faced with a problem where not enough people are saving adequately for retirement and various schemes such as NEST are being implemented to try to change this. Guaranteeing this money as a deposit for a child’s home could mean that when it comes to retirement people are left with insufficient funds. What we don’t need is a system where people aren’t left with enough money to retire on.

Otto Thoresen, director general of the Association of British Insurers, told the Independent: ”Pensions are designed to mature into a decent retirement income, not for other purposes. Any scheme which uses pensions as a guarantee must ensure that it does not inadvertently make the saver worse off when they retire.”

One also wonders how this scheme will work amidst a move towards defined contribution pension schemes, when annuity rates are falling as a result of QE and falling stock markets.  How can you guarantee a lump sum of your pension when you don’t know how much it will eventually be worth, and if the downward annuity rate trend continues you’re likely to have a much lower retirement income than expected?

It’s all very well saying that we’ll help parents to help their children get on the property ladder, but this is all for nothing if it comes at the expense of increasing the problem of Britain’s underfunded retirement system. It seems bizarre that when we already have a pensions crisis caused by people not saving enough for retirement, Mr Clegg seems to think that we can use people’s pensions to try and solve the problems of unaffordable housing for the young.

Let’s only hope that this idea gets shelved in that cupboard of bizarre Lib Dem economic policies before we worsen the pensions crisis without helping the mortgage finance problem at all.

If by some miracle it does go ahead, I’m looking forward to the look on my mother’s face when I tell her she has to give up part of her retirement fund so that I can buy a house…

Follow Sara on Twitter @sarabenwell

House of Lords reform is a risible Lib Dem distraction from getting proper things done

Craig Barrett 10.16am

I wrote last week about how Ed Balls and Ed Miliband have correctly gauged the public mood on bankers and are setting the running on the way in which banks should be investigated.

The Labour party’s amnesia about its past behaviour appears to be contagious, at least as far as the public at large is concerned. That party’s poll ratings continue to soar, yet just one senior figure seems to be trying to take the fight to them.

George Osborne should be commended for his valiant attempts to paint Ed Balls as the villain of this piece, even if it now seems doomed to failure. On Sunday morning, Andrew Marr allowed Mr Balls virtually free rein to give a party political broadcast; more worryingly, Marr’s tendency to savage in the manner of a dead sheep allowed Balls to become almost credible. Perhaps he has digested the results of those opinion polls about why the public dislike him. Not even Mr Balls is financially illiterate enough to fail to understand the logistical nightmare but his simple idea of keeping one’s account number when shifting banks is a neat little soundbite. Gone is the man of “neo-classical endogenous growth theory”, and all credit to him for that. It is vote-winning stuff. But again, George Osborne aside, nobody seems willing to take Labour on..

There exists a worrying complacency in the Government. This is most evident in the unedifying spectacle of House of Lords reform.  After their failure to convince the population at large of the benefits of PR, the Lib Dems seem hell-bent on saving something from the wreckage of their failed flagship policy. Worse, they are attempting to blackmail their Tory colleagues by putting at risk the proper equalisation of parliamentary constituencies.

We are being told to dispose of a system which, despite many obvious faults, has proven time and again to work both in terms of its expertise but also its ability to restrain over-enthusiastic governments. All manner of articles are written about the amazing diversity of background and experience in the Lords but it is surely worth pointing out once again that at a time when there is a general complaint about lack of life-experience in our politicians, surely it is folly to remove from the political system those whose unique position means that their experience is the widest? From the academics to the businessmen, from the disability campaigners to the charity workers, from the “luvvies” to the (yes, indeed) retired politicians and civil servants - the House of Lords is a diversity co-ordinator’s dream.

Yet MPs are being asked to replace them with a majority of seasoned party workers, paid less than their lower house counterparts but elected for longer terms. Never mind that parts of our country already have up to eight layers of elected officials, the Lib Dems seem determined to create more.

Sadly, it is very obvious to all concerned that they are acting less out of a genuine desire to make lasting, sensible change but rather out of a determined self-interest to get PR by the back door. Alan Clark described the Lib Dems as “over-promoted local councillors” – if they get their way on Lords reform, that is what our historic House of Lords shall become.

Back to the economy and banking, the further danger is that at a time of genuine concern about the state of our country, to spend time on a policy that the Prime Minister has categorised “third term” risks perpetuating this image that the Tory party is out of touch with people’s desires.  It is a gift to Labour. I urge all Conservative MPs to do all they can to block this Bill.

Follow Craig on Twitter @mrsteeduk

Gordon Brown and the Labour party are the unashamed architects of this banking balls-up

Craig Barrett 10.08am

It comes as no surprise to me that Ed Miliband is calling for a full public inquiry into what has been going on at Barclays regarding LIBOR.  In the absence of any contrition for the devastating effect that his Labour party’s policies had on the British economy, and in the apparent absence of any serious policy for economic recovery, Mr Miliband and Mr Balls seem to think that a public flaying of hate-figures is the only way to get back to power.

Conveniently, they forget that the phone hacking scandal, for example, actually occurred under their watch; worse still, the Barclays / LIBOR issue arose under a regulatory model of which they were the architects.

The danger is, however, that they are onto something. With nothing but bad news about the economy, there is a pervasive and wider belief that the public seem intent on baying for the blood of anyone who can be deemed culpable of anything.  With journalists, this isn’t the case. Most people, assuming that such things as phone hacking have gone on for years anyway, are uninterested in Murdoch et al, the story being kept alive only by the non-Murdoch press and the increasingly blinkered BBC.

With bankers, on the other hand, the public are very interested. Logic goes out of the window and the Labour party has been able to manipulate matters to the extent that bankers are now deemed up there with paedophiles and sheep rapists in terms of human evil.

The fact is that 99 per cent of bankers aren’t evil and the remaining 1 per cent are probably, at worst, misguided.

Most bankers are simply getting on with their jobs. One-tenth of tax revenues come from banks, while bankers’ bonuses, because of the different rates of corporation tax and income tax, are actually a more efficient way of getting money into the hands of the government.

Yet we see that Stephen Hester has foregone his bonus this year, thanks to an IT glitch for which he cannot have been responsible, but which undoubtedly the Labour party would have demanded regardless. Despite having written his contract, those Labour party figures who remain are conveniently forgetting that an agreement was signed – just how much do they think Mr Hester should be paid? If you want a loss-making business turned around, it’s going to cost more to hire the best.

And now that Bob Diamond has resigned - one suspects for reasons of peace and quiet rather than any admission of guilt or otherwise - it does seem that the Labour party shall not stop until they have hounded out every competent manager in Britain.

This aside, calls for a banking inquiry show that the Labour party is driving the agenda and this Government is on the back foot.  An inquiry will only keep open the wounds and, given that the public associates the City with the Conservative party, will do us no favours at all. It’s doubtful whether it would even get to the bottom of the LIBOR scandal. The inquiry that is to be headed by the fiercely independent chairman of the Treasury Select Committee, Andrew Tyrie, must focus on the dramatic failings of the FSA and the tripartite regulatory system that Gordon Brown and Ed Balls created, because it is entirely clear to me that this is the root of the troubles.

When these issues were debated by the House of Commons in 1997, it was obvious to the Tory benches that Gordon Brown’s regime was not going to keep the City in check.  The new Chancellor’s motivations were less about regulation and more about his obsession with inflicting iconoclastic changes on fully functioning extant systems that he viewed as brimming with enemies.  Mr Brown hated the City and hated the Bank of England, so he sought to transfer powers to a new quango of his choosing.  A couple of choice lines from Peter Lilley, then Shadow Chancellor:

“We know that funding policy is an intrinsic part of monetary policy, and the Bill will leave the Bank as a one-club golfer without even a putter left in the bag. How will the Treasury, the Bank and the new board co-operate to handle monetary policy? If they need to get together, why is it necessary to separate them in the first place?

“The coverage of the FSA will be huge: its objectives will be many, and potentially in conflict with one another. The range of its activities will be so diverse that no one person in it will understand them all. Its structure will be as complex as those of the organisations that it replaces, if not more so.”

Like so much of what Mr Brown ‘achieved’, it was borne of the clunking hatred that drives him and his desire to complicate matters to such an extent that the Government becomes all powerful, even if it itself does not itself comprehend its own role.

The FSA, or ‘Fundamentally Supine Authority’ as Private Eye rightly called it, was destined to be a disaster - something foreseen by the Conservative party. The separation of roles was a creation of Gordon Brown’s loathing of an establishment that he perceived as Tory-leaning. The Labour party’s role in the LIBOR scandal becomes all too clear when you realise that it was their system of regulation that failed. It is that which should be the focus of an inquiry, not simply a digging around the files at Barclays bank.

The Labour party cannot be allowed to claim that this is somehow the Tories’ fault. For once, I am prepared to let Gordon Brown have the last words, after a fashion, from two Mansion House speeches, in 2007 and 2004:

I congratulate you on these remarkable achievements, an era that history will record as the beginning of a new golden age for the City of London … I believe it will be said of this age, the first decades of the 21st century, that out of the greatest restructuring of the global economy, perhaps even greater than the industrial revolution, a new world order was created.”

In Budget after Budget I want us to do even more to encourage the risk takers.”

As ever, re-reading his utterances, I find myself wondering what planet the man was on.

Follow Craig on Twitter at @mrsteeduk

Britain does need a banking inquiry

Michael Economou 10.30am

The late historian Ronald Syme wrote, “In all ages, whatever the form and name of government, be it monarchy, republic, or democracy, an oligarchy lurks behind the façade.”

It is difficult to argue that twenty-first century Britain is any different. Recent revelations in public life have begun to unveil a network of power, privilege and wealth that exercises a disturbing control over our country.

Politicians of all parties toady to media moguls and millionaires, trading policies for good stories and donations, while cabals of journalists and bankers abuse the system for profit.

The twisted mask concealing this state of affairs has developed cracks, through which we have glimpsed the true face of institutionalised corruption and an esurient elite. Cash for honours, the parliamentary expenses scandal, phone hacking, endless tax avoidance tales, and now the scandal of rate fixing among our major banks - these are all symptoms of the same disease, an economic and political culture built on cronyism and deceit.

The solution has never been reactionary leftism, anarcho-capitalism or any other sinister ideology pedalled by fringe politicians. The cure is sustained, old-fashioned One Nation conservatism that genuinely tries to end the frightening gap between the rulers and the ruled.

The Government should embrace calls from across the political spectrum for an inquiry into the British banking industry. The Governor of the Bank of England, Mervyn King, has argued against such a step on the grounds that “there must be many people who work in banking today who know that they are honest, hard-working and feel they have been let down by some of their colleagues and indeed their leaders.”

But this is precisely why we need an inquiry. The actions of a few rotten bankers are destroying the reputation of an entire industry. Just this year, banks have been attacked for mis-selling PPI, fixing Libor rates, and mis-selling interest rate swaps to small businesses. It is unlikely to end there.

What should we expect from a banking inquiry? Hopefully enough information for the Government to carry out the sensible reforms needed, rather than the futile and punitive tax rises that the Tories and the Labour party have used to get one over each other, and which act merely as punishment rather than rehabilitation.

Moreover, fish rot from the head down. If we don’t insist on better leadership from those at the top, then Britain shall sink under its own cynicism and disillusionment. Of course, a banking inquiry would only be a relatively small step, but it is necessary for us to fix thoroughly the banking system, build a new conservative consensus, and make sure that the British people don’t turn in their (entirely justified) revulsion to the sort of political movements that can only make things worse. It is time to smoke out the rats and put our economy in order.

Follow Michael on Twitter @MichaelEconomou

The financial and Eurozone crises have changed the face of politics forever

Sara Benwell 6.45am

Economic policy has always been important in politics, and people have always cared about fiscal policies that affect them directly, but not such a long time ago broader economic strategy only made up a small percentage of the issues that mattered when people decided who to vote for.

Essentially, voters cared if their taxes were going up, but when it came to broader economic strategy the issues were sidelined compared to other policies that had more obvious effects on people’s lives. Moreover, much of the banking world and financial terminology remained a complete mystery to the majority of the electorate, so as long as things were going well, economic policy was seen to be less important. Everyone presumed that the government and the bankers knew what they were doing.

Then came recession and the onset of the Eurozone crisis - and everything changed.

Now more people have a better working understanding of finance. Almost everybody I meet has an opinion about Greece, about Spain, about whether the Eurozone will break up and most importantly about whether or not the Government is doing the right thing to deal with the financial crisis or whether now is the right time for a credible plan B, or even C.

People don’t merely care about the areas of policy that effect them; they now care about the broader economic strategy. The space allocated to business and financial news - not just in the broadsheets but also in the tabloids - is increasing and is reflective of a growing public interest. These days it’s rare you’ll see any business stories in the national press that don’t have a direct link to finance and the economic situation; more often the stories will reflect job creation or losses, financial results, or economic indicators.

While the economic crisis is clearly not a good thing, it’s arguable that the increase in public knowledge and awareness has to be the silver lining to the debt crisis cloud. How many people fifteen years ago knew about monetary policy decisions, about inflation and about quantitative easing, let alone had a good working understanding of these terms as well as an opinion on them? Wider comprehension has to be a good thing.

There has also been a shift towards people wanting their financial institutions and their government to be held accountable. Now that everybody has seen the impact of the poor financial policies of the last labour governments and the problems that can arise when the bankers are given a free rein with little or no fear of retribution, there is an increasing focus on making sure that somewhere somebody is held responsible.

This has been reflected by the recent ‘shareholder spring’. While I think this is an exaggeration, and the term is used too widely and too often, there is no denying that the recent spate of chief executives like Sir Martin Sorrell being denied their bonuses would have been unthinkable a few years ago and reflects growing popular demand for more accountability in the business world.

Furthermore, policies like the ring-fencing of the banks, which I have written about here before, illustrate a move by the Government to introduce financial legislation designed to protect the electorate. This policy has recently been watered down, but that doesn’t change the fact that political parties have recognised the importance of bringing in policies to ensure that an increasingly aware voting public are sheltered from having to bail out the banks once more.

One can quite easily argue that the Coalition will stand or fall on the success of its economic policies. And it is increasingly clear that you cannot spend your way out of a recession, despite what the Labour party might claim.

So the question confronting us now is whether the Coalition Government has enough time left for its economic policy to come good, or whether ministers need to be considering a new plan.

Rest assured that whatever the answers to those questions, the British public is no longer ignorant about economics. And if the Coalition partners, particularly the Conservative party, wants to win the next election, they shall need to prove the credibility of their economic strategy.

Follow Sara on Twitter @sarabenwell