Tighten the controls?

After the collapse of Enron the US authorities were determined to avert anthing of the same nature again. They passed the Sarbanes Oxley Act, with extra regulation to prevent it happening. The result was to reduce the efficiency of financial markets, and a further result was the move to London, which seemed a less troublesome centre.

Ironically banking impropriety still persisted in the USA, and led to sub-prime mortgage selling and derivatives to get rid of the risk.

So is the solution to tighten regulations and controls still further? This is what those on the left have screamed and Brown seems to be promising. (Don't worry, bankers, his promises never lead to anything except constant repetition!) He has recognised, however, that from the ease with which banking "moved" from the USA to London there will have to be cross world identical controls or banks will "move" again.

Anything which ossifies and prevents innovation, in banking and elsewhere, is usually bad in terms of costs and also in promoting still further ways of avoiding the controls. The supervisory and regulatory costs should not be underestimated, and neither should the costs of compliance and avoidance.

Is there another way?

If Governments did not intervene with great resources, as Greenspan did in the USA to stave off contraction by reducing interest rates almost to zero and Brown did implicitly in the UK by going for bust on tick, there would be less selling of houses to people who could not afford them and no artificial boom in house prices. Intervention has to take a major part of the blame for our present situation. Those who took great risks were merely responding.

What this is saying is that if the economy overheats then pumping money in will delay but not remove the correction which will come into many markets. It is not market failure alone or at all which has prompted this crisis, but governments who try to manipulate markets. The result is bigger failures and a loss of confidence in which banks fear to lend to banks! You need not be a monetarist to appreciate that pumping huge amounts of liquidity into an economy and keeping interest rates down will lead to a problem unless you are in the depths of recession.

If banks and others are likely to behave rashly, because they can expect a bail-out by Government, then there is an alternative to tying them up with endless red tape and standing over them like some Victorian headmaster. This is to use the law, - to make those guilty pay a price for hazarding their business. It will require the open publication of accounts, - no "off balance sheet items" - Brown is right, it's a pity that he does not practice what he preaches. It should encourage shareholder democracy. It will involve the prosecution or denunciation of the guilty. Above all, it will mean that some firms must be allowed to fail.

It will also require that such regulation as we already have is fully applied, and that regulators and monitors actually do their work. Whether the complicated tripartite system which Brown brought in, with overlapping and confusion between Treasury, Bank of England and Financial Services Authority, is fit for purpose, may be a legitimate question. It was surprising that those monitoring Northern Rock did not seem to see the vulnerability of the business plan of lending long term and borrowing short when times became difficult.

There will always be those who for political and ideological reasons wish to control and takeover. They should be resisted. So too should the government hubris which thinks it can permanently resist the pent up forces of the market. Finally if there is to be regulation, it must be firmly applied, if necessary with the full force of the law.