A robust cure for human frailty

Written by Chris Huhne MP and published in Financial News on Mon 25th May 2009

We have had disgraced bankers, and now disgraced MPs. The links between parliament and the City of London go deep. The City was a parliamentarian redoubt during the Civil war: City merchants did not want arbitrary taxes from wanton Kings, and were desperate for the solid predictability of the rule of law. Oliver Cromwell could always rely on City money to fund his campaigns.

It was also the City that was indirectly responsible for the last sacking of a Speaker of the House of Commons more than three hundred years ago. Speaker Sir John Trevor - a Tory, so Labour Speaker Martin's ousting makes it honours even - was found guilty of a "high crime and misdemeanour" in 1695.

Speaker Trevor, a Welsh judge best known for ferreting out and impeaching Catholics, took the princely sum of 1,000 guineas from the City corporation to expedite an Orphans' bill on their behalf. That is today's equivalent of £1.6 million, which makes all the tawdry tales of the last fortnight look like very small beer. What is more, he was allowed, despite his conviction, to keep the money.

The real parallels between City and parliament, though, are about rules, morals and why human beings take collective leave of their senses, and become lemmings. In both the City and parliament, the behaviour that led to the trouble - wilful overclaiming of expenses by MPs, negligence of risks in pursuit of bonuses by bankers - had become the culture of their peer group. Too much money was being made for anyone to want to rock the boat.

Behaviour that would have looked bizarre had it been displayed to an outsider - out of order expense claims, 120 per cent mortgages - was seen as perfectly normal within the group. Spurious internal logic was provided with fuel by sky high financial gains. The plaintive cry of the morally weak prevailed: everyone else was doing it, and it was within the rules, so it cannot have been wrong.

In these circumstances, it always takes intellectual and moral courage to say that the group has got it wrong, and you should behave differently. City contrarians try it, but there are dreadful warnings. Remember Tony Dye, the notoriously bearish investment manager at the then Phillips and Drew. By getting it right too early, he was out on his ear.

The safe position, if you think the consensus is wrong, is to be just outside it: not actively blowing whistles, but more right than anyone else if the roof really does cave in. As a result of this sort of behaviour, groups adjust their collective wisdom only slowly. They can make large and persistent mistakes.

In the case of MPs, the corrupt culture began in earnest in the eighties. Prime Minister Margaret Thatcher refused a pay increase in the then low salary of £14,000 a year on the grounds that it would encourage the rest of the economy to forego pay discipline too. In order to persuade her MPs to bite the bullet, she told them that they could take the money in allowances instead, and claim to the hilt.

This seems to me to be a large part of the explanation for some of the outrageous claims we have seen in the Daily Telegraph for phantom mortgages, second homes that are really first homes, duck houses, moat clearing and chandelier hanging. Even the Government's Chief Whip was at it: Nick Brown put in repeated claims for food and odd jobs just short of the £250 where the fees office would require receipts. He was paid out thousands of pounds in cash, no questions asked.

MPs were not alone. When I began work on Fleet Street in 1980, we were paid something called the Night Entertainment Travel and Maintenance Allowance (NETMA), which had been introduced to get around an incomes policy. Like many other such goodies, it was eventually swept away on the insistence of the Inland Revenue which decided to tax it as income.

MPs, though, had no such external check, because they voted themselves an exemption to income tax for their own allowances. Here is another parallel with the City: self-regulation does not work. The temptations are too great. The peer pressure is too intense. The personal loyalties are too strong.

Systems need to be constructed that do not need good people, but are proof against bad ones. That was, after all, the lesson that eventually gave us central bank independence rather than the political setting of policy interest rates. Not surprisingly, Chancellors were never tough enough, particularly around elections. Now MPs have gone for an independent Parliamentary Standards Agency that will deal with all those financial issues that MPs have just so lamentably flunked.

In fact, it will probably prove unnecessary, just a way of shutting the stable door after the horse has bolted. The real dose of radicalism in parliament's case was administered by the Freedom of Information Act. As soon as it was necessary to publish every receipt - as the High Court decided - the revelations in the Telegraph were on the cards. If the Commons is anything like the Scottish Parliament, the net result will be a dramatic decline in expenses.

John Maynard Keynes was such a remarkable economist because he understood the human psyche, and particularly human frailty. "A sound banker, alas" wrote Keynes, "is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional and orthodox way along with his fellows so that no-one can really blame him.

"It is necessarily part of the business of a banker to maintain appearances, and profess a conventional respectability, which is more than human. Lifelong practices of this kind make them the most romantic and least realistic of men". Lord protect us from the conventional and the orthodox: they always get you in the end.

Chris Huhne, a former City economist, is Lib Dem MP for Eastleigh.