Fat cats, rogue traders and the holy grail

Fat cats, rogue traders, the death of the mutually owned building society and insurer, utility regulation, merger mania, EMU and most controversial of all, a glimpse (possibly illusory) of that great holy grail of economic management, non-inflationary growth; these are the issues that have dominated the headlines during my two and a half years as Business Editor.

Given Kenneth Clarke's increasingly perilous position in Cabinet, it seems only proper to deal with the last one first. On most conventional measures Mr Clarke's performance as Chancellor has been a remarkable one; unemployment and interest rates have fallen steadily, growth has picked up nicely and inflation has stayed in abeyance. The only apparent blot on the landscape is the Government's inability to get to grips with spending and borrowing, though even here Britain's performance is no worse than anywhere else, possibly a little better.

More questionable is whether Mr Clarke is right to claim it as an economic miracle, the best economic backdrop for a generation. Is this just electioneering, or has Britain indeed broken through to the high ground of economic management, where growth persistently outstrips inflation?

The first thing to point out is that the record only partly bears out what has now become generally accepted as fact. Since Britain left the European Exchange Rate Mechanism (ERM) in 1992, growth has risen faster than inflation in only two years, 1994 and 1995. This year inflation will once again be higher than growth. All the same, it is certainly true that the Chancellor has achieved a substantial reduction in unemployment without any notable increase in inflation.

Mr Clarke naturally attributes this happy state of affairs to 17 years of Conservative reform. In particular he points to deregulation of labour and capital markets, and to privatisation. Luck has also played its part, however. The Government has made a virtue out of the collapse of the ERM, but it scarcely needs saying that this was not government policy at the time. Furthermore, it is not just in Britain that inflation is low. Almost everywhere that counts has a low inflation rate at present. Indeed, to believe that the present state of affairs will persist in Britain much beyond the election requires a tremendous leap of faith.

The markets, certainly, are going to take a lot more convincing. After all, the economy at the moment is not so dissimilar to the way it was in the mid-1980s - strong growth and low inflation - and look how that ended. Despite the present bull market in bonds, long-gilt yields continue to reflect quite high medium-term inflationary expectations, and this is without factoring anything in for what the Chancellor might do in the Budget next month to pump-prime the economy for the election.

As it is, Mr Clarke insists he is not going to do very much, to the dismay of Tory backbenchers and some of his Cabinet colleagues. In part this may be a reflection of the Chancellor's pro-European views, another area of policy where he finds himself out on a limb, for it is hard to see how Mr Clarke could both deliver meaningful tax cuts and meet the Maastricht criteria for European Monetary Union (EMU). To the John Redwoods of this world, he therefore becomes a bogeyman twice over. On the one hand he won't cut taxes, a fiscally prudent stance which on the other can in part be laid at the door of nasty European bureaucrats.

As with most important issues, business has been split down the middle by EMU. On the whole big business is for it, with smaller, entrepreneurial business, or anyone that might be adversely affected by the social disciplines of Europe (a minimum wage and the like), against. Until quite recently, it has been possible to avoid the issue, for there was good cause to believe that EMU wouldn't happen at all. In some shape or form, however, it now seems virtually certain it will. In or out, it will profoundly affect all our lives, probably in ways we hardly yet suspect.

Privatisation has been a political hot potato for almost as long as I've been in financial journalism, but during the past two and a half years, regulatory uncertainty, fat cat salaries and questionable standards of service have conspired to make these companies hate institutions. This is in many respects a great shame, for privatisation has brought enormous benefits to Britain.

Moreover, the price-cap form of economic regulation that Britain pioneered for its privatised utilities, has, on the whole, been a great success, bringing rich rewards for both customers and shareholders and hugely improving the efficiency of these one- time state-owned dinosaurs. It has been all too easy to forget these underlying truths in the cut and thrust of more recent debate.

None the less, it is plain from the events of the last few years that the system is no longer working as smoothly as it should. On the one hand regulation is accused of being too lax, as in the case of Professor Stephen Littlechild's review of electricity distribution charges, on the other too harsh, as with Clare Spottiswoode's review of British Gas's TransCo charges. So fundamental was the management and regulatory failure in one case, that of Yorkshire Water, that the company was unable to guarantee supply.

Some degree of reform is clearly required if public confidence in our utilities and in the system that regulates them is to be restored. In so doing, however, it is important that the baby shouldn't be thrown out with the bath water. The windfall tax on utilities proposed by Labour seems to me to be a highly retrogressive step. It is arbitrary, unfair and doesn't address the problem. A formalised system of profit sharing between customers and shareholders would be a rather better approach, though even this is not without its drawbacks.

In the end, however, the best solution may be the simple and undramatic one of institutional reform. Regulators clearly need to be made more accountable, transparent and co-ordinated in their approach. To make them so may require changes in the law.

Whether anything can, or indeed should, be done about fat cat salaries and perks is another question. The privatised utilities have come to symbolise a much wider pattern of corporate excess in Britain. Sir Richard Greenbury's committee on executive pay tried to address the problem and, perhaps predictably given its make-up, utterly failed.

True, executive pay is more transparent than it was, but this seems to have done nothing to shame directors into paying themselves less. Top salaries continue to motor ahead at a pace of knots. Out went the Greenbury incorrect executive share option scheme, in came the Greenbury approved "El Tip" - the surprisingly apt acronym (well nearly, anyway) for the long-term incentive plans which are now a part of every self-respecting executive's pay packet.

Not much in the way of performance is required to hit the jackpot in a great many cases. Most of us don't expect any more than our salaries for doing our jobs. Once in the boardroom, it seems, just getting out of bed in the morning is enough to earn you a big fat bonus on top. Don't you just love being in control?

World capital markets have continued to boom and mushroom throughout the 1990s; derivative markets are now bigger by a factor of many times than the underlying physical markets they piggy back on. Many believe the process to be out of hand and out of control.

The very fabric of the world's financial system is threatened, some believe, by free-wheeling investment bankers and their antics. This may or may not be alarmist nonsense. The test will come during the next big crash.

What is certainly true is that the progressively more complex and global nature of these burgeoning markets has made it much harder for banking supervisors and regulators, as well as the organisations who drive the markets, to keep pace.

One of the effects of this has been the advent of the rogue trader, the consummate and fraudulent gambler who deliberately sets out to hide the extent of his trades from the prying eyes of regulators and superiors. Since I've been Business Editor we have had three notable examples: Nick Leeson at Barings; Yasuo Hamanaka at Sumitomo; and, more recently, Peter Young at Morgan Grenfell.

Though all very different, there is a common theme to these scandals. All have involved varying degrees of failure in management control, supervision and regulation. And although they may all be more symptomatic of negligent management than systemic weakness, they have none the less played a significant role in undermining public confidence in these vast and largely unfettered global markets.

Nick Leeson succeeded only in bringing his bank down, with containable knock-on effects. Who knows? The next one might involve rather more extensive damage.