The financial sector seems intent on self-destruction

 By The Aspen Institute

Former Federal Reserve Chairman Alan Greenspan's attack on regulation in the FT earlier this week, combined with yesterday’s reports of attempts to spike the UK Independent Banking Commission reveal a financial system intent on its own self-destruction.

It should come as no surprise that the banks are fighting sink the Vickers Commission before it has even begun. But that the Treasury is arguing for a ‘truce’ before the Commission has even issued its interim report (due on 11 April) is worrying in the extreme. We need protection from destabilising financial activities, but as is becoming increasingly clear finance clearly needs saving from itself.

A nef report, Subverting Safer Finance, released this week showed a range of ways that, compared with other major financial centers (including even the US), the UK has been part of the problem in key areas of financial reform, rather than leading the search for solutions.

The danger is that by freeing finance to pursue maximum short-term gain, we build more risk into the system, destroying global stability in the long run. Greenspan backs his call for reduction in regulation with the claim that with “notably rare exceptions (2008 for example), the global “invisible hand” has created relatively stable exchange rates, interest rates, prices, and wage rates.”

One of Greenspan’s “notably rare exception” was, as George Osborne recognised when he launched the Vickers Commission, “the worst financial crisis in living memory”. As the Economist Paul Krugman notes on his blog, Greenspan is calling for a repeal of financial regulations that are designed to prevent a repeat of the crisis for which he, more than any other individual, bears personal responsibility.

A jaw-dropping intevention that left, Krugman, an Economist who must have seen a thing or two in his time, “nearly speechless”. Henry Farrell, Professor of Political Science and International Affairs at George Washington University, elegantly emphasises the point with a range of other “notably rare exceptions” including: “With notably rare exceptions, the levees protecting New Orleans have held fast in the face of major hurricanes.”

J.K. Galbraith understood why we build both regulation, and presumably, flood defences. He famously described regulators as vigorous in youth before rapidly approaching complacent middle age and then either becoming senile or an arm of the industry they were set up to regulate. The Vickers Commission must be protected from the formidable pressure of the financial lobby if they are to come up with effective remedies. Vitally, as Adair Turner recently pointed out, we need a new kind of dynamic regulation that grows, evolves and is ever watchful of the fast moving world of finance. Not only do we need a new structure to make banks both safe and useful, but a new type of regulator that doesn't grow old.  To meet the challenge the Vickers Commission must be allowed to do its work unhindered.