It is clear that the financial crisis of 2008 was a failure of both the regulated and the Regulator(s)(this seems to be the overwhelming consensus). The behaviour of regulators also needs to be carefully considered. Of course system changes need to be made e.g. increases in capital ratios (see FSA.gov.uk) but these are not a substitute for effective regulation! Effective regulation has to be properly resourced and the regulated must know that enforcement is certain, serious breaches could lead to the closing down of a business and, where appropriate, custodial sentences would be applied. In the past the regulated knew that none of those three principles would apply.
Writing out of the equation so called "Trading Activities" - Hedge Funds, Commodity Trading and Foreign Exchange Trading which should not be compared with lending for investment in real world business - manufacturing, construction, infrastructure and retailing suggests differing taxation treatment with the latter much preferred to the former (which in all honesty can only be described as gambling) in tax policies (this appears to be the position of the majority of EU States). This I suggest would make the regulation much easier. The downside, some would argue, is that all of these things together would make lending for the real economy perennially difficult (can it get more difficult than now - the consensus view is that banks are not lending because they are unsure or are unwilling to divulge their real liabilities see Liam Halligan, Sunday Telegraph Business 29th January 2012 p.B4). However I do not believe this to be a foregone conclusion as the differing taxation treatment referred to above would mean that returns on real economy projects could provide a better home for the surplus cash that is floating around (trade surplus nations and the effect of printing money.The behaviour of regulators would need to be different. We must find a way of containing the bureaucracy so businesses can operate well, while properly fulfilling the regulatory requirements. This therefore is not mainly about form filling, ticking boxes nor being in constant contact with the regulator. It is about exercising objective judgements. It is difficult to be completely objective if you believe your next career move is Poacher becoming Gamekeeper (or in this instance the reverse could apply equally).
Further in relation to behaviour - Regulators will have to be ultra professional (you really cannot have umpteen lunches and dinners and perhaps other "freebies" with people and organisations who you are monitoring for compliance with regulations - look at the recent case of the Inland Revenue - there may be nothing in it but it is well established in the public service that the perception is as bad as the actuality, something that seems to have been forgotten in the past few years). Consideration should be given to a restriction on those (obviously in positions of some considerable executive authority) leaving the regulator whereby they will not be permitted directly or indirectly through third parties from engaging in the businesses/industry which they were regulating. It would help in this regard if the government stopped messing around with Public Sector pensions with such requirements and restrictions as those proposed.
It is perfectly possible for these public policy objectives to be achieved what is needed is the will.
Monday 30 January 2012
Sunday 22 January 2012
Effective Financial Regulation is about understanding behaviour
I am prompted to write this piece following debates this past week about capitalism, irresponsible or otherwise, moral capitalism and perceptions of corporate behaviour. Newsnight on BBC2 Thursday sought to portray the current discussion as a choice (battle?) to have capitalism or something completely different. Something completely different did not emerge. UK politicians (Cameron, Clegg and Miliband {E}) spoke about moral markets and corporates ripping off customers. This post is about what I see as the deeper and more systemic failures of our form of capitalism and markets. The UK politicians seem to be preparing us for changes at the margins rather than very much more rigorous regulation.
Niccolo Machiavelli makes a very insightful observation in "The Prince" (p.15 OUP World Classics 1984) (although talking about power it applies because today controlling money is power) that:
"The desire to acquire is truly very natural and normal thing; and when men who are able do so, they will always be praised and not condemned; but when they cannot and wish to do so at any cost. herein lies the error and the blame.". Understanding this piece of work in a contemporary context would, I believe lead us to designing better and more long lasting regulation in the Financial Sector. He is saying the desire for acquisition is what most of us wish and that many would praise those who succeed but that to do so regardless of the consequences if one has not been successful is a grave error. Now the desire to acquire is constrained by both personal character, personal circumstances and external factors so there need to be rules of behaviour which are explicit and the knowledge of the certainty of enforcement.
It is simply woefully insufficient to say (on Newsnight) as Ellie May O'Hagan (UK Uncut) did that it is not their job to suggest an alternative. There was an honest input from Julie Meyer (CEO Ariadne Capital) who acknowledged that there were bad people out there - perhaps as many as 5% involved in the Financial Sector (that is an awful lot of people - 37500 in the UK alone). This suggests both the need for rigorous regulation and the certainty of enforcement. The market does deliver benefits but light regulation has not worked and the sooner UK politicians realise that the market itself is agnostic about morality if not amoral and it is us who need to impose morality on it to make it work for the benefit of us all not a very small minority. There needs to be stringent requirements such as if there is a serious breach of standards licenses to operate could be withdrawn. The resources necessary for effective investigation and enforcement have to be provided (and don't give us all this eyewash about stifling the market because we now know who pays - Jill and Jack in Britain pay). So Messrs Cameron, Clegg and Miliband (E) could we please have some honesty about the real issues - we make the rules that could result in "moral" markets and responsible capitalism and not just look at the consequences whether that be rail fare increases, bank charges or parking fees. If we do not its only a matter of time before the next crash.
Niccolo Machiavelli makes a very insightful observation in "The Prince" (p.15 OUP World Classics 1984) (although talking about power it applies because today controlling money is power) that:
"The desire to acquire is truly very natural and normal thing; and when men who are able do so, they will always be praised and not condemned; but when they cannot and wish to do so at any cost. herein lies the error and the blame.". Understanding this piece of work in a contemporary context would, I believe lead us to designing better and more long lasting regulation in the Financial Sector. He is saying the desire for acquisition is what most of us wish and that many would praise those who succeed but that to do so regardless of the consequences if one has not been successful is a grave error. Now the desire to acquire is constrained by both personal character, personal circumstances and external factors so there need to be rules of behaviour which are explicit and the knowledge of the certainty of enforcement.
It is simply woefully insufficient to say (on Newsnight) as Ellie May O'Hagan (UK Uncut) did that it is not their job to suggest an alternative. There was an honest input from Julie Meyer (CEO Ariadne Capital) who acknowledged that there were bad people out there - perhaps as many as 5% involved in the Financial Sector (that is an awful lot of people - 37500 in the UK alone). This suggests both the need for rigorous regulation and the certainty of enforcement. The market does deliver benefits but light regulation has not worked and the sooner UK politicians realise that the market itself is agnostic about morality if not amoral and it is us who need to impose morality on it to make it work for the benefit of us all not a very small minority. There needs to be stringent requirements such as if there is a serious breach of standards licenses to operate could be withdrawn. The resources necessary for effective investigation and enforcement have to be provided (and don't give us all this eyewash about stifling the market because we now know who pays - Jill and Jack in Britain pay). So Messrs Cameron, Clegg and Miliband (E) could we please have some honesty about the real issues - we make the rules that could result in "moral" markets and responsible capitalism and not just look at the consequences whether that be rail fare increases, bank charges or parking fees. If we do not its only a matter of time before the next crash.
Wednesday 18 January 2012
Welcome
Welcome to this blog. The journal will be concerned with political, social and economic issues mainly in the UK but also abroad. The blog will endeavour to comment on the various issues with a rigorous eye on the evidence base to support what is being said. Comments will be most appreciated.
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