Highly recommended Economist article: finance regs
Posted by Dave Bath on 2008-03-28
It’s well worth reading the nuanced article "The regulators are coming" (subheaded "Now that investment banking is backed by the state, it needs re-regulating. Carefully") in The Economist 2008-03-27.
Note that it said re-regulating, not merely regulating. Deregulation of the industry over recent years was flawed.
I’ll give a few quotes, but the subtle arguments and caveats about the nature of the required regulatory regimes are excellent.
The task of making financiers pay for their mistakes would tax St Peter himself.
But what do you do when risk and reward are skewed? When Bear’s shareholders gain at the taxpayer’s expense? Or when the other investment bankers and their shareholders take on that extra bit of risk, knowing that they keep all the gains, but that the state will shoulder some of the losses?
The article goes on about the ideal of letting bad financiers go bust, ruined by the reality of the entanglement and dependency of the wider economy on confidence in those prone to piracy. My preference is to disentangle such dependencies. Finance is not a fundamental human need like food, water and energy. If it’s so essential to a modern state, then the state must have control, including limitations on profits just like they do for electricity.
As for better regulations, The Economist wants them, but recognizes they are no panacea.
Civil servants, however dedicated, cannot outwit the combined forces of the world’s bankers.
In exchange for its new risks, the state must protect taxpayers by tighter regulation of any institution too entangled to fail.
And the final caveat from one of the few intelligent and honest journals that believes in free markets?
The system is accident-prone, but it rarely makes the same mistake twice. Take comfort from that if you dare.