C'mon ref, everytime: How regulators failed banking

The lack of refereeing is at fault for banks' action and if we're not careful, the clock will strike thirteen over bank reforms

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who's been watching the banks?
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Simon Miller
On 27 July 2012 13:43

There was a saying among the more freedom-loving bloggers on the internet during the Labour years that 1984 was meant to be warning not a textbook.

However, as Ingsoc reaches a crescendo ahead of the opening ceremony tonight, with the media keen to emphasise how great the Olympics are going to be, it is the daily hate that is disturbing me.

Let’s get one thing perfectly clear from the start - the actions of banks and the economic crisis were not the fault of capitalism.

Yes I know you need someone or something to blame for overextending yourselves on cheap credit and over-leveraged houses, but that wasn’t capitalism’s fault. The fault partially lay with the failure to allow capitalism to run its course.

Capitalism demands creative destruction. In other words, when a bank fails, something takes it over or something takes its place. This did not happen.

The failures were absorbed by panicking regulators and politicians. Loss was socialised by these corporatists who managed to con everyone that the system was too big to fail.

It wasn’t the system that was failing. The capitalist system was doing its job - how on earth did you think Barclays swooped in for Lehmans? This is the creative destruction that is inherent to capitalism if it is allowed to work.

By acting in a corporatist manner, we have ended up being lumbered with massive costs, banks that should have gone to the wall surviving, and a moribund economic morass that no-one wants to deal with because there is no political will.

The answer that is being shouted from the rooftops is more regulation, but that is daft. We had plenty of regulation but no supervision and that is the key.

Put it another way - Rugby is a game for thugs played by gentlemen who respect the laws of the game; right?

Rubbish. Every team at every level looks to gain an edge, whether it is being offside, taking another player off the ball, boring in at the scrum and so-on. Every team looks at the laws and pushes it to and over the edge if they can get away with it.

Except there is one person in the middle, the ref, to try and stop them.

And so it is with financing. If there is no ref, the system will be gamed. I am bemused by this idea that we can go back to some glorious halcyon day where bankers were kind, lovely people who sang to the birds - I mean did you ever watch Mary Poppins?

Bankers, like anyone else, will seek a competitive advantage over their competitors and that is a good, healthy thing when legal. And there’s the thing: the scandals of recent weeks were due to illegalities not capitalism; they were crimes.

No, the problem is not in the game itself but in the players and the quality of the ref. In financial terms, the ref had gone on a wander - either that or had become a homer.

Where exactly was the supervision? Why did the Financial Services Authority (FSA) see fit not to intervene over the Libor rate, despite knowing there was a problem? Why did the Bank of England say that this was an issue for the central banks and not the regulators if it says it did not have a supervisory role as it weaseled out of responsibility at the Treasury Select Committee.

Indeed, as a non-executive director at the FSA and on its risk board, how exactly did BoE deputy governor Paul Tucker not know that there was a problem here?

But they say more rules are needed. The International Rugby Board said the same leading to a flood of regulations that have had an unintended consequence of confusing ref and player alike, stifling the game it was supposed to protect and enhance.

You cannot resuscitate a corpse by tightening the noose but that seems to be the answer from politicians.

Just as the Australian Rugby Board tried to de-power forwards in the game, so UK politicians should be wary of noises coming from the US and Europe.

Whether it’s because of wanting to boost Frankfurt, or simply because of this bizarre idea that the ‘Anglo-Saxons’ are out to destroy them, the eurozone is delighted at the events over here. But there is nothing, I repeat nothing, that they are doing that will be healthy for either the UK or, ironically, the Eurozone if the eurocrats get their way.

By chasing the financial transaction tax among other things, and trying to do it unilaterally, finance houses will seek other arenas to ply their trade where they will contribute jobs and taxes.

As for the US, well, since the big bang, there has been a battle between New York and London over dominance in the financial sector, a battle in which London is ahead, just.

So the US does what it always does - act in its own interests. There is no special relationship between us, every so often our interests coincide; and good for them, we should be doing the same.

But, make no bones about it. This is an edge in the latest economic play on the chess board. The noises about UK banks and UK regulation are deafening but conveniently forget the American players that have yet to settle with the US authorities over their roles in the Libor rate and there are still money laundering questions being asked over certain US banks, especially one that was acting on holy orders.

Just as President Obama hit out at BP - or British Petroleum and American Oil to give it its full title - it suits US policy to hit out at UK players as it will suit their own banks and markets if London is shackled.

Don’t believe me? OK, if the US gets its way and the Hong Kong and Shanghai Banking Corporation or Barclays gets split up, how long do you think before someone like Bank of America or JP Morgan Chase makes a play for the smaller, more vulnerable companies?

This is not capitalism, nor is it about lessons learnt. No lessons have been learnt because corporatism is still wending its destructive way through the system.

So enjoy your daily hate, but don’t think that our competitors and allies in the world are looking to punish London for your health.

Simon Miller is the Editor of Financial Risks Today. He tweets at @simontm71

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