Control versus openness

As if we do not have enough regulation already, it seems that all enterprises are to have more in the future. This applies especially to the banks, even after they have paid back the money they borrowed from the government.

There are two broad ways of preventing banking failure.

The first is to have a vast army of regulators with great powers clambering over every facet of the banks' activities. This may prevent (- it hasn't in the recent past) future banking lapses, but the costs are enormous, both on the regulator's side and on compliance by the banks. An unknown cost is the inefficiencies introduced and also the introduction of social objectives in place of commercial ones. Social policy is the area of government, efficient and profitable banking is the commercial objective. To confuse the two will probably mean that neither is well served.

In the view of many scholars, one of the main contributions to the present recession, the sub-prime mortgage market, arose from well-meaning US presidents Carter and Clinton, who pressurised lenders into lending to borrowers who had little prospect of repaying. The social prevailed over the commercial.

This is a kind of socialism by control and regulation, rather than ownership.

The second is to allow the market to work, but to insist that information is "free", full and honest, that it to have a great degree of openness. Another of the main causes of the recession has been the level of distrust, because other banks were suspected of hiding liabilities "off balance sheet". (Of course governments try this, but there is an openness which means that no-one is really deceived.)

There is still some suspicion that some actors in the wholesale mortgage market are still concealing items, so the level of inter-bank lending, and therefore mortgage finance, is not as great as it should be and the interest rates are not as low as they ought to be.

On this policy, certainly for financial institutions at least, full relevant details should be disclosed on pain of prosecution and severe penalty. The Bank of England could resume its traditional role of monitoring ratios, perhaps in conjunction with the company's auditors. The figures could be reported to the public and to other banks.

By this means savers could see where reckless lending was occurring, such as 125% mortgages, and the implication would be clear.

The force of knowledge and competition would bring reckless behaviour into question, as other financial actors vote with their feet. There could still be real competition, in service and product, but the forces of Demand and Supply would ensure that for the same product the cost was broadly the same everywhere.

Between the two approaches the first would obviously appeal to those who wish to bring everything under political control. This has failed in the present situation, and so its advocates and proposing still great control and strait-jackets.

The second should appeal to all who want efficiency and competition, who dislike deals done in secret between bankers and regulators who are too close, and who prefer to use the law as the ultimate sanction to produce honesty. The problem recently is not that there has been too little regulation, or that it has not been sufficiently intrusive, but rather that it has been badly applied and very confused.