A verdict on the saviour?

The Institute of Economic Affairs recently published a study by 14 economists, some academic and others from various commercial or commentary institutes. The "Verdict on the Crash" summarised their findings on the causes of the present recession. Tuesday's Daily Telegraph listed their findings and gave its own commentary.

The main conclusions were:

1) Central banks created a monetary bubble which fed an asset price boom which distorted the price of risk. In particular, they allowed or fixed interest rates at too low a level. This was the kind of policy pursued by Alan Greenspan, but allowed here as well when cheap imported goods kept inflation down.

2) The US government encouraged high-risk lending, particularly in setting high targets to achieve housing for low income families via Fannie May and Freddie Mac.

3) Banks and their regulators failed to use any of their tools to apply a gentle rub on the brake to stop the build-up of risks. They come under criticism for not observing their statutory duty to maintain market confidence. Here the FSA in particular was found wanting. It should be added that the much maligned and criticised hedge funds, private equity and tax havens, that is the largely unregulated areas hitherto, are exonerated, and the guilt was among the highly regulated banks and insurers.

4) The tax and regulatory systems themselves encourage complex and opaque methods of increasing indebtedness.

5) Bank depositors should be made prior creditors, and individual banks should be allowed to fail, to provide a "market threat" to promote prudent behaviour. Full information must be reported to shareholders. "Lender of last resort" facilities should be re-emphasised, whereby banks with illiquidity are disciplined by having to obtain funds at higher rates.

6) In future central banks should monitor risk build up and also the growth in the money supply, as indicators of trouble and need for action.

The overall conclusions will not surprise many people, but will disappoint G.Brown and others who condemned the wrong institutions in scapegoating, and who are hell bent on more and more regulation, despite the findings that the unregulated or lightly regulated sectors in fact behaved more responsibly than those regulated in great detail.