Who's to blame?

I feel that it would only be appropriate to conclude this current run of blog posts by giving my personal view point of the current crisis and maybe attempt to suggest ways of improvement for the future.

My first blog post hinted at the modern phrase of “bash the banker”, a phrase which I utterly detest.  In my opinion the media have an awful lot to answer for in the demise of economic growth and need to change their approach in order for the world economy to prosper.  Many tabloids are full of columns written by ill-informed journalists spreading ill-informed messages to the masses, in turn creating a culture that is apparent today, one in which everybody has an opinion on the economy but few really understand what is going on.  I am not for one second saying that I am a “financial expert” however if the public were to take a step back, do some research they may see things in a different perspective.

In the years preceding the current crisis there was huge reliance on borrowing which in turn led to high levels of debt; personal, corporate and government.  The level of debt created an economy where people were spending above their means, getting 110% mortgages and buying themselves a 5* holiday in the Seychelles or a new car with the excess cash, and one in which placed a heavy reliance on overdraft facilities.  This in turn created a culture that was doomed when things went wrong; banks were contracting on overdrafts and the increase in unemployment meant many were facing bankruptcy. 

 I believe that a radical change is required; people need to take a “reality check” to what they can or cannot afford to prevent such a crisis happening again.

I also find myself very annoyed at the current “occupy” movements across the world.  Their main argument is that of how as taxpayers they have to foot the bill for the current economic crisis; however as “taxpayers” they also are paying for the police and bailiffs to evict the protesters, a hypocrisy I am dismayed no one realises!

Although my view previous tends to suggest that the individuals, bankers and governments were not to blame, this is not the case, of course they do.

A flawed system met by flawed regulation created the disaster we are living through today.  The impact of the housing bubble, interconnected financial systems and too much politics can also be pin pointed as reasons.  The nature of politics leads politicians to make decisions that may not be in the best interest of the economy, a strategy that needs to be closely looked at.

Over the past few weeks, I have given facts, theory and opinion in my assessment of financial regulation and the current crisis. I feel that it is impossible to pinpoint the exact cause of this economic hardship but the lack of regulation, harmful media coverage and a nation wide reliance on borrowing cannot be ignored.

Thanks for Reading

Take Care

PN

Regulation Regulation!

The question of who should regulate banks is certainly one for debate, there are many arguments for and against and with their being no concrete answer to which system is best, it is clear that an appropriate combination of theory and fact should be used to help point us in towards a conclusive answer.

The issue here is whether or not a bank should be regulated by a central bank or by an independent regulator.  For many years bank regulation in the United Kingdom was conducted by the Bank of England and there are many strong theoretical arguments for the case of a regulating central bank.  Firstly their informational advantage would be second to none and this met by their appropriate position to perform macro prudential regulation gives a clear advantage.  If a bank requires assistance the central bank would have to foot the bill giving them an incentive to regulate appropriately and in a manner that is in the economy’s best interest.   

There are a number of arguments supporting an institution with operational independence.  There is no conflict of interests with regard to other targets having to be met and this allows the institution to regulate other financial service providers. There are however a number of, in my opinion, key disadvantages to having an independent regulator.  In terms of a systemic view, they would simply view a bank, as an institution and maybe not take into consideration an economy wide view point.  They also would lack the key informational advantage which is seen by a central bank and finally not having to “pay” the consequences of poor decision making removes the incentive mentioned above.

In my opinion, the regulator should always be the central bank, if only for the simple reason that it holds superior information to any other institution.  Professor Marc Lavoie (2006) states that independent regulators “favour the interest of a privileged minority at the expense of the greater public good”, an idea I certainly agree with.  For example, if the FSA were required by state to provide the funding to rescue RBS, would they have acted differently……I think so.

Thanks for Reading

Take Care

PN

Reference:

http://www.progressive-economics.ca/wp-content/uploads/2007/07/zacharie.pdf