More regulation or better regulation?

Both American and EU capitalism are heavily regulated. Both have concentrated on a lot of detailed regulation of financial services, and both have done it badly.

The EU dreams that there is a free wheeling US system and a cleverly regulated EU system. In times of trouble when US output wobbles, they come out and assert the answer is to move from American to EU capitalism. This is all absurd.

Over recent months despite all the rhetoric the US economy has fallen less than Germany or the UK. The EU, the UK and the US economies have all messed up their banking regulations, failing to demand enough capital in the good times, and then temporarily demanding too much cpaital in the bad times. Both the UK and the US have set interest rates that were too low in the good times and too high in the run up to the bad times.

How can anyone believe Mrs Merkel regulating the detail of hedge funds or Mr Brown running the investment banks would suddenly put the world to rights? The hedge funds and the investment banks that did overdo it could have been controlled properly if only the US, UK and EU regulators had behaved sensibly over the volume of credit and capital requirements in the heady days.

The fact that they did not is no argument for more regulation of a different kind. it is an argument to try and find a few regulators who know what they are doing, to set sensible limits to credit. If hedge funds and investment banks had been able to borrow less we would not be in the current mess.

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14 Comments

  1. Ian Jones
    Posted February 23, 2009 at 7:05 am | Permalink

    The real underlying cause of the current problems was the fact interest rates were too low for too long. This was due to the Govt basing policy on measures which were already outdated to the times, in this case inflation!

    However, I cannot help but look at the markets and feel it was and still is a get rich quick casino. There needs to be a lot more regulation on where pension funds and bank deposits go. These funds should only be allowed to invest in shares and other long term investments. Derivatives to be used to hedge positions in which the investor has the underlying asset only.

    If the rich wish to gamble with hedge funds then that’s fine but commercial banks/pension funds should not be allowed to get involved. This is the only way we can get investment back into wealth creating companies rather than chasing zero sum “investments” or simply creating credit.

    Finally, there should be some sort of legislation for those who want to earn big bonuses. If they lose the money they should have to pay back the same % as they would have gained if things had risen. This would focus minds and maybe I wouldn’t see my pension fund collapse every 10 years.

  2. John Moss
    Posted February 23, 2009 at 8:18 am | Permalink

    The Government already heavily legislates the activities of Pension Funds, which is one reason why they have been forced into buying bonds rather than shares. This all followed the Maxwell scandal in the early 90s. Labour of course added much more regulation, setting rules on fund balance and risk which increased the skew of funds away from equities.

    Investment banking needs to be separated from retail banking. Retail deposits ought to have a guarantee scheme, but if you put your cash into an investment bank, it ought to be at your risk, not that of the taxpayer. The BoE can offer lender of last resort facilities to those banks it thinks are sound, but that needs full disclosure.

    We also need to end the concept of “off-balance sheet” investment. You either own an asset or you don’t. If you do it is on your balance sheet either as a share value or as a debt owed to you. Valuation of assets also needs tightening with proper indepenedent market assesment of value replacing “mark to market” which had bankers valuing their own assets.

    The root of the banking crisis remains the inability to value the assets, (loans and shareholdings in joint ventures), held by banks, so other banks won’t lend to them because they don’t know if the bank they are lending to is about to go bust.

    I am increasingly coming to the view that a “bad bank” is the answer, with a system whereby the banks passing assets to the bad bank get 50% of the face value now, but share 50/50 in any up or downside when the assets are realised or written off.

  3. pp
    Posted February 23, 2009 at 10:16 am | Permalink

    Diverse regulation.

    If Browns intenational super regulator idea is taken up, then one thing is sure – that the next crash will be a ‘perfect crash’ with every economy in perfect sync with identical flaws all going ‘bust’ as precisely the same time — with not a single power in a position to lead any recovery.

    The other sure thing is that whatever Brown/Darling do, it is precisely the wrong thing.

    Aside from fraud, let private companies do what they like to each other – just keep the taxpayers out of it.

  4. Lola
    Posted February 23, 2009 at 10:59 am | Permalink

    ‘Light Touch Regulation’? Nope. The FSA ‘handbook’ if printed out stands 8 (EIGHT) feet high – 2.430 m for non believers.

    How can a small retail FS business like mine ever hope to be on top of it? Well, it can’t. There are two things you have to understand. One, the handbook is there to hang you with. Two, to trade sensibly you have to ignore as much of it as possible and just try and do you best for the clients.

    • alan jutson
      Posted February 23, 2009 at 1:23 pm | Permalink

      Lola

      My guess is any FSA Inspector would not be aware of what was in most of it either. You will find if you do spend your life reading it, that it will probably contain so many contradictions that it is unworkable in any practicle form.

      The sad fact is that we as a Country have thrown Commonsense out of the window, that is why we now have an Army of Health and Safety Inspectors etc, etc, etc who are always looking for someone to blame no matter how minor the so called offence of non compliance.

      In the “bad old days” if you took somone to Court, the Judge would apply commonsense and a test of reasonableness to the evidence of the case and make a ruling.

      Yes it had errors, No it was not perfect, but it was far more simple, as most people were bought up to expect similar standards in either Business or the Law.

      The problem with trying to cross every “i” and dot every “t” is that no one ever can do them all, as someone will find a situation on which no ruling exists, which then requires further Regulation to correct, and so it goes on, its the if its not listed as wrong, it must be alright syndrome.

      This Government is a prime example of such Regulation and G Brown is a master, who else would require an explanitory document running to thousands of pages to explain Tax changes in every Budget he gave.

      Excess Regulation/Laws and its small minded enforcement is the bain of all of our lives. JR has preached this often enough, but unfortunately most just do not understand.
      People believe that every type of wrong doing requires more Regulation/Law when in fact more simple but stronger Regulation/Law with commonsense applied would be much better.

      The problem would be choosing the one to Apply Commonsense, as standards and expectations are now more diverse having been complicated over the years by poor Regulation.

      The Lawyers are the only people who benefit from all of this paperwork in our claim Society.
      Ask yourself how many Senior MP’s of all Parties have a Legal background, and you may get close to finding the reason.

      • mike stallard
        Posted February 24, 2009 at 7:30 am | Permalink

        Here is Australia, Health and Safety is part of the fabric. The Trades Unions, too, are strong. There is a Labour Government after a Liberal one.
        BUT people get by and the country is, I think actually in credit. There doesn’t seem to be a housing crisis either and (apart from the terrible fires and flooding) the papers hardly mention government borrowing or an economic crash.
        I am told that one mining company in NSW sacked 6,000 employees recently, but otherwise, things don’t seem too bad.
        It can be done with common sense and all hands rallying to the pumps.

        • alan jutson
          Posted February 24, 2009 at 8:49 am | Permalink

          Mike
          Have seen the Australian Prime Minister on TV on a few occassions, and he was interviewed when he was here.

          I have to say that both myself and my wife were impressed by the way he actually gave a concise and sensible answer to all questions put to him.

          He seemed to in short be an ordinary human being to whom you could relate, who had a grip on the Nations Policy and believed in his Countrys ability to resolve any issues that may come along, without any spin.

          It may be very different in reality (only those in Australia would know), but at least he looked the part and comfortable in it.

  5. Johnny Norfolk
    Posted February 23, 2009 at 11:41 am | Permalink

    Better regulation.
    The way Brown goes on about it you would think it had nothing to do with him.
    Why did he not properky regulate when he changed all the banking rules.

    He needs to change HIS rules not add on more.

  6. StevenL
    Posted February 23, 2009 at 5:10 pm | Permalink

    John,

    If you have an idea about how to make regulation better why not submit it to the Better Regulation Executive on their website here:

    http://www.betterregulation.gov.uk/

    Same goes for anyone else, apparently the government wants us all to submit our ideas on how to make regulation ‘better’.

    From their website:

    “Got an idea on how to improve regulation? Then help us by using our ideas section below and telling us how we can make life easier for you.

    Even the smallest ideas can make a big difference.

    We will consider all of your ideas, publish them online and respond within 90 days.”

    Reply: have done so in the past, but they will not deregulate which is part of the need. I set out many proposals in the Ecopnomic Policy Review, available as a download on this site.

  7. chris southern
    Posted February 23, 2009 at 8:22 pm | Permalink

    K.I.S.S (keep it simple stupid) it’s the guide line for all rules and regulations that work.

    too many regulationslaws and they fail to work, stupidly complicated regulations/laws and they fail to work.
    the big G got it wrong on every level, too many, too complex and a failure to listen when the warning signal actualy worked.

    surely it would be easier to wave good by to UKPLC and just start again, i like pound sterling but a change and no debt (through no fault of my own!) would be bloody nice (i’m already taxed into poverty, and by poverty i mean it)

  8. mike stallard
    Posted February 24, 2009 at 7:38 am | Permalink

    Our host must be getting more and more frustrated with the sheer hopelessness of this terrible government which, it now transpires, is in bed with the rich and greedy at the expense of everyone else.
    It is also incompetent.
    As any fule no, if you have three people in charge, chaos happens. FSA, the Treasury and the BofE are the three people.
    My sheer disgust at a Labour government which neglects the poor, takes almost half their income, sells the country and then throws their own people onto the dole by mistake surprises me.

  9. alan jutson
    Posted February 24, 2009 at 5:29 pm | Permalink

    John

    Whats your take on CRB checks being required on all voluntary workers ?

    I have been a Local Lions Club Member for nearly 20 years.
    Lions Clubs being probably the largest voluntary service organisation in the World with about 1,500,00 members,

    All pay to be a member, no expenses claimed, all money collected going to local or national charitable causes.

    We are informed that all voluntary workers will shortly need to be CRB checked under a new Law (not yet in force) the same as many other service minded paid jobs that involve contact with either children or vunerable adults such as the NHS WORKERS, POLICE,CHILD MINDERS,TEACHERS, SCOUT LEADERS,YOUTH CLUB LEADERS,SOCIAL WORKERS,TEAM COACHES ETC ETC.

    It is estimated I am told that some 11,000,000 people in total will need to be checked through this route to prove their innocence under this new system.

    Whilst I am all for making sure Vunerable people do not get abused or taken advantage of, is this really the best way of moving forward.

    At the moment it would seem that A CRB check if you have one, only covers you for the single task/job, it is not a multiple task system. So if you are an NHS worker who has been checked and passed but you want to do voluntary work, you need to be CRB checked again, and if you want to do more than one voluntary bit of work you need to be CRB checked yet again.

    We have some members in our Club who hold three different CRB certificates all saying the same, but for different organisations,
    Ie Lions Rotary,HNS,Magistrates etc.

    Would appreciate your comment.

    Reply: it seems a very clumsy way of trying to achieve a desirable objective. It might be easier to confine such checks to people who have sole charge of children without other adults around, which might cut down the numbers a lot.

    • mike stallard
      Posted February 24, 2009 at 11:44 pm | Permalink

      CRB is merely a way of saying that you have not been put onto police records. It is not, therefore, a reliable way of sorting out perverts and people who suddenly do something awful.
      It costs voluntary agencies in two ways: 1. it is appallingly expensive. 2. It deters the best volunteers who like to feel that they are innocent until proven guilty.
      I have worked a lot with vulnerable people over the past fifty or so years. In just one case I soon spotted the criminal pervert (who later went to jail on police evidence).
      The state of our primary schools, the scouts and youth clubs – virtually bereft of men (who like to be innocent until proven guilty) – should be giving us a wake up call.
      And does this have anything to do, by the way, with the underachievement of boys at schools? Or the gang culture and bad behaviour in the evenings?

      • alan jutson
        Posted February 25, 2009 at 8:06 am | Permalink

        Exactly, its a sledgehammer to crack a nut, and another over the top regulation which allows the State to collect even information on its citizens who have to prove their innocence and at the same time divulge their Bank Account Details etc.

        Whilst I do not wish to minimise in any way the shocking abuse of children or anyone else, records seem to suggest that it is usually a family member who is to blame in most of these cases. Those people have no checks at all.

        Voluntary services of all kinds have trouble getting and keeping members, this is going to be just another obstruction to that cause.

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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