By Graham Reid & JR Max Wheel
16 November 2009
14 Months after Lehman’s collapse, neither national nor international agreement has been reached on future financial regulation,.
Why not? Because nearly all debate has been with the wrong agenda and Darling’s proposed Financial Services Bill merely perpetuates the attack on Banks and Bankers without proposing solutions to any of the serious issues.
What is needed is real leadership not political posturing. What problem ever got solved by arguing about the details before agreeing the objective?
The real debate starts with “who should do what?”
G20 should accept the fact of a global financial industry and focus on getting agreement on a principles based macro-prudential framework, not the detail, to underpin day-to-day regulation at National level. They have been long on rhetoric but short on implementation. Why? Because there is no framework in place to ensure that agreed policies are followed through. This failure to allocate responsibility is the major cause of delay.
They require an agency to carry out their decisions. This could be newly created or an enhanced IMF with teeth to impose sanctions. FX manipulation by individual countries or blocs should also be within their remit hence they should move towards national currencies being measured on a purchasing power parity basis to an agreed global monetary standard to include a mix of major currencies and a basket of commodities. This effectively stops Governments from gaming and debasing their currencies.
Central Banks and National Governments (or supranational for the EU) should concentrate on setting their national rules and reporting demands within the agreed principles, albeit bearing in mind the desire to remain competitive internationally, and ensuring regulation is a dynamic process.
They should authorise banks and all major financial institutions, including insurance companies given the overlap between product areas thereby giving them real teeth to impose sanctions or close them down if so required. Banks head-quartered in a particular country should have the absolute responsibility to ensure compliance of all divisions even those working in another jurisdiction.
Most countries have far too many regulatory bodies with conflicting responsibilities, notably the US and UK. They have failed in their primary duty; a serious cull and radical overhaul must be made.
Whether you need super regulators is a moot point – very difficult to achieve and frankly more problem that it is worth if national regulation is effective. Information and statistics need to be up streamed from national levels to the macro-prudential level. This means targeting actual or potential bubbles not avoiding them and would be a first step to restoring sense.
We must not forget that the US will have spent 12% of GDP propping up the financial system and the UK over 13%! Money supply growth and velocity of circulation are still very weak or falling despite this huge injection of public money – something is wrong and expectations of inflation and deflation remain finely poised. The first essential of currency is that it is a means of transaction and a store of value. Restoration of sound money must be a core aim of policymakers. There are serious signs of loss of confidence in the fiat money system.
As G20 are the self-appointed economic policemen they must additionally address problems associated with asset bubbles, trade and fiscal imbalances, and to force the vital issues of trade reform that WTO is incapable of doing.
Taking specific examples shows how misguided the debate has become
The UK Government has given highly conflicting directives; lend more but rebuild the capital base, retain competiveness but don’t pay bonuses for outperformance, restrain foreclosures but clean up bad debts.
All countries would regard protecting the national economy and taxpayers to be of paramount importance whilst ensuring a vibrant financial sector giving fair reward to customers, employees and investors alike. If this mantra is followed, sensible regulation follows more easily and Government intervention on employment contracts becomes an irrelevance.