Thatcher warned about “boom and bust” risk of deregulation

30th December 2014

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Former Prime Minister Margaret Thatcher was warned that the deregulation of financial services could result in a “boom and bust” cycle, secret memos have revealed.

The correspondence, which has been made public after 30 years, reveals the disagreements between policymakers over the easing of financial regulations known as the Big Bang, the Financial Times reports.

The policy opened up London to foreign banks and resulted in huge growth in UK’s financial services sector over the next 20 years and has been seen by some as the start of an unsustainable boom that ended in the crisis of 2008.

David Willetts, who would later become a Conservative minister, but who was at the time part of the Number 10 policy unit, told the prime minister in a 1985 memo that “some things were bound to go wrong” following deregulation, including the creation of a “boom and bust” culture.

Willetts warned that less onerous rules might lead City workers to “fraud or to unethical behaviour”. He said:“if it leads to scandals and liquidations it will be labelled the unacceptable face of unpopular capitalism”.

Former Cabinet secretary Sir Robert Armstrong wrote to a parliamentary aide to the Prime Minister expressing concern about the “way in which corners are being cut and money is being made in ways that are the least bordering on the unscrupulous”.

However, head of the policy unit John Redwood said: “The rapidly developing nature of banks and the banking system makes it all the more important to address these weaknesses speedily and effectively without at the same time hobbling British banks with excessive regulation.”

The documents also show Thatcher’s own concerns. She said: “Para 20 implied that the chancellor was sure that the Bank’s supervision of the remaining 600 banks was sound. This seemed to be a hostage to fortune.”

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