Amid a scramble to introduce tougher, far-reaching regulation of
the financial services industry, a group of 14 prominent economists
warn of likely disastrous consequences of building new regulatory
initiatives on the false premise that the financial crisis was
caused by failure of the market system.
Using the platform of the London-based Institute of Economic
Affairs, the economists’ study is highly critical of the role
played in triggering the crisis by those now championing new
regulations.
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These include the UK Financial Services Authority, the British
government, the European Union and G20, comprising finance
ministers and central bank governors from 20 major industrialised
countries.
Rather than laying blame for the financial crisis on banks and
other financial services companies as has become what the
economists termed “popular folklore” they argued that regulatory
authorities and governments are primarily to blame.
Philip Booth, editor of the study and professor of insurance and
risk management at the Cass Business School, commented: “Before the
crisis, regulators showed no special powers of foresight that would
suggest that extending their powers could prevent such crises in
the future.”
Specifically, in their study the economists emphasised that central
banks kept interest rates too low and failed to address
unprecedented levels of monetary inflation.
The US government, they added, also forced banks to lend to
borrowers in poor areas, despite the high risk that they would lie
on their mortgage applications and never pay back the loans.
These were the factors that combined to produce the sub-prime
crisis that triggered the financial crisis, not the malfunctioning
of free market mechanisms, the economists stressed.
Summarising their conclusion the economists emphasised:
“Regulations designed to prevent such crises exacerbated the
problems. They encouraged new forms of risk-taking, the development
of complex instruments and the adoption of uniform techniques of
risk management across the industry.
“Regulation also undermined the incentives for shareholders to
monitor banks and discipline them to behave cautiously and
conservatively.”
