Davos is a time for overpaid bankers and consultants to rub shoulders with the senior regulators and government officials who determine the rules for their money making games. Once again, just like last year, regulation will be a big topic of conversation.
Governments will be saying they want more of it. They will argue their favourite syllogism – Our purpose is regulation. Regulation has just failed. Therefore we need more regulation. Big businesses will be saying – Our businesses agree we need lots of regulation. We can live with all the regulation we currently have. If you impose any more the money making machines could break down. Both these stances are idiotic.
There will also be a delicious dance over the canapes. The politicians wil be seeking opportunities to cash in on the rich vein of public anger about bankers, polishing soundbites on how they too like President Obama will be tough on bankers and the causes of bankers. The bankers and consultants will be responding off the record saying that they cannot take too much pain, tactlessly saying that they are in a vicious squeeze already which means no remuneration over £1million until things have calmed down a bit.
The truth is there were both market failures and regulatory failures to create the Great Crash. Competitive markets work, rewarding the successful and customer friendly and weeding out the unsuccessful. The banking market is not a properly competitive market. In the UK the Competition authorities were asleep at the wheel or ordered by the government to turn a blind eye to the competition failures. They allowed mega banks to emerge, when they should have blocked the takeovers and insisted on more competition. We need to make the elaborate competition machinery work properly. That does not require more law or more regulators. It just requires a few senior regulators in the current structure to break up over large banks and to prevent new mega banks emerging from anti competitive mergers.
Most people agree there does need to be some addtional regulation on banks and other deposit taking institutions besides enforcing a competitive market. We need the reassurance that the banks will be able to pay our money back. That requires regulation of cash and capital. Again, that is already part of the present system. There are plenty of highly paid people who are meant to do that. The only change we need to is to have a few people in each major jurisdiction who know how to do it properly. It does not take many people in the UK, as the banking market is so concentrated. If you get the top ten banks right you have sorted out the problem. One person could do that, armed with the right regulatory powers, if he or she understood bank balance sheets.
Large companies like all present regulation because it keeps competitors out. They have spent the money on complying with it, and don’t want that changed. Just because the regulators and the large companies agree does not mean we should. The truth is much current regulation is a waste of money, an anti competitive practise, a nonsense which does not keep our money safe. If Davos wanted to do somehting that actually helped get us back to stronger growth it needs to do three simple things:
One: Assert the need for more banks and a much stronger enforcement of competition policy. The UK could pledge to create half a dozen new banks out of the two it currently owns
Two: provide simple counter cyclical rules on cash and capital to ensure we have better endowed banks in future
Three : Prune the other regulations, so more businesses can start up in competition against the established players.
Bolting on more rules to a system which does not work is a bad idea. Failing to create a competitive banking market means business as usual.