Regulators are stuck in the silly season
TODAY is officially back to school day for City workers and businesses across London, with the last holidaymakers finally back at their desks – it is a shame, therefore, that so many politicians, regulators and commentators remain so hopelessly stuck in the silly season.
As so often these days, it is Lord Turner, the City’s very own “Red Adair”, to which one must turn first. The FSA’s chairman is continuing to defend his flawed view that the financial services industry has “grown beyond a socially reasonable size” and that the industry must be cut back with the help of crippling “Tobin taxes” on financial transactions.
The idea isn’t new. It crops up every few years and is derived from the age-old fallacy that financiers and bankers serve no real purpose – other than to shuffle money around uselessly, while taking a cut in the process. Turner and Tobin’s analysis and prescriptions are wrong, for many reasons, as others have already pointed out. But two fresh points deserve a hearing.
It is true that parts of the financial system had grown too big but not in the way Turner believes. Bubbles always lead to excessive growth and exuberant investment in certain parts of the economy – in some cases it is the production of tulips, in others railways or dot.coms and in recent years it was construction, property-related derivatives, credit card debt, bank balance sheets and so on. All of these are now being downsized without the help of new regulations.
Turner’s real problem is that he suffers from what F.A. Hayek, the Nobel-prize winning economist, described as a “fatal conceit”: a belief that he understands the economy better than it is possible for anybody to do so. Nobody, not even the best or brightest banker or regulator, has any idea what the City’s “right size” is; the kind of knowledge one would need to make that sort of judgement is not available to any one mind, however bright. Soviet central planners used to believe that they could gauge what a society’s wants and needs were, and then provide for them. Supply and demand were meant to be reconciled without the existence of decentralised markets and prices; it all ended it disaster. Turner is making the same intellectual error that doomed Marxism.
There are plenty of other silly season stories about. In a populist bid to distract attention from their own failings and ever-rising unemployment, many governments, especially Germany and France, are pushing for a fresh “crackdown” on bonuses. I have little doubt the G20 will come up with some sort of “agreement”; but few such resolutions ever make it into legislation in every member state. There is also a very big difference between changing the structure of payouts – the UK’s current position – and actually capping or banning bonuses. Most of the lofty promises made at the London G20 meeting have failed to be implemented; expect the next summit to be no different.
Forecasters are equally all over the place. Some remain wedded to untenably ultra-bearish positions; the remainder have reverted to their natural, institutional optimism and have started spouting the same ultra-bullish predictions that helped stoke the bubble. The truth will be somewhere in the middle, as I have been arguing since January. It’s good to be back.