Jeremy Warner: Is Balls the right man to replace fall-guy Darling?

Alistair Darling may not have been much of a Chancellor, but from the moment he delivered his first, disastrously framed, pre-Budget report in the autumn of 2007, when he stole Tory ideas on inheritance tax and non-doms in support of a snap election that was never to be, he was only obeying his master's orders.

In any case, there are few Chancellors who have been dealt such an overwhelmingly poor hand. Any failings are not so much his as those of his predecessor, now the Prime Minister. It is Gordon Brown's legacy that Mr Darling is being forced to grapple with, not his own, and the highly visible hand of the PM lies behind the Chancellor's every initiative.

In a rare moment of candour, Mr Darling once admitted the recession was likely to be the worst in 60 years. This was said to have infuriated the Prime Minister, even though it turned out to be 100 per cent true. It was Mr Darling's only moment of true independence. To hold him responsible for the calamities that have occurred during his two-year reign at the Treasury is like blaming the ventriloquist's dummy.

Is the man most widely tipped as his successor, the Children's Secretary Ed Balls, likely to be any better? Whereas Mr Darling cannot be held responsible for the present mess, Mr Balls most certainly can. For the first six years of Labour's rule, he was chief economic adviser to Mr Brown and he is directly credited which some of the Government's most controversial policy initiatives from that time, including the decision to split banking supervision from the Bank of England and vest it in a newly created Financial Services Authority.

Many now attribute the failings in regulation that led to the banking crisis directly to that decision. George Osborne, the shadow Chancellor, said yesterday that Mr Brown is now the last person left in Britain who thinks the tripartite system he created to ensure financial stability has worked well and needs no fundamental reform. In this he appears not to be quite correct. Surely there are two who believe it: Mr Brown and Mr Balls.

That they are alone is confirmed by another couple of scathing reports on the arrangements, published today. The House of Lords economic affairs committee squarely cites failure in macro-prudential supervision as one of the contributing causes of the crisis and recommends that responsibility for such supervision be returned to the Bank of England as a matter of urgency, and it is vested with the right tools to counter the banking sector's pro-cyclical characteristics. In a pamphlet for the Centre for Policy Studies think-tank, the City grandee Sir Martin Jacomb goes even further and demands that the FSA be made a subsidiary of the Bank of England.

This, to my mind, would be a step too far, for part of what has gone wrong at the FSA is the combination of retail financial regulation, or investor and consumer protection, with wholesale supervision. The FSA came to believe it was abuses in retail financial services where attention should be focused, while beyond a few basic principles, wholesale markets could be relied on to look after themselves.

Banking has always been very much a part of the economic cycle, and in the way credit is expanded and contracted, can even be said to determine it. The Bank of England is better placed to understand and control this process than the FSA. But to make the Bank responsible for the nitty gritty of investor protection, enforcement and discipline would only undermine its credibility as a macro economic policymaker.