The ongoing debate about the response to the current financial crisis in a way of “improved” regulations ranges from arguments for liberal, light touch approach, blaming for the crisis the state authorities, to heavy handed, strict approach, blaming for the crisis the financial industry.
However the current crisis happened in the presence of laws that prohibit institutions taking monopolistic positions and setting up and operating financial pyramid schemes. As it was demonstrated in the article "The largest heist in history" the root cause of the current financial crisis was lending by financial institutions with loan to deposit ratio above 100%. This constituted a pyramid scheme and, as such, was prohibited by law. The current crisis did not happen because of lack of sufficient laws and regulations but despite of them. They were not sufficiently monitored and enforced.
At present the major reason of not being able to deal with the current crisis effectively and swiftly by letting market forces doing all the work (and that includes bankruptcy) is the existence of the banks that are “too big to fail”. Their market position enforces governments’ rescue packages. The raise and growth of these “too big to fail banks” happened despite the existence of anti-monopolistic and competition laws and regulations designed to ensure a level playing field, free market economy. A bank that is “too big to fail” holds too dominant position. It is about dictating terms of business from the strength of their position in the presence of lack of sufficient competition as governments effectively underwrite their commercial risks. A bank that is “too big to fail” heavily curtails market competitiveness. Apart from dire consequences that are seen now, it imposed unfair competition environment on smaller players that were not “too big to fail” (and a lot of them are failing now). Larger banks took more risk as they had effectively a massive, free of charge, government sponsored insurance policy.
Before debating any change in laws and regulations, giving false impression as somehow the existing ones have been insufficient, we should revisit the existing laws and regulations and ensure that they are enforced. In practice, it would mean prosecuting a large number of financiers, regulators and some politicians who created or allowed to create and operated or allowed to operate a giant global pyramid scheme in a form of banks that were “too big to fail”. They are guilty of contravening existing laws and regulations related to pyramid schemes and monopolies.
This does not mean that there is no room to revisit some regulations with a view of making them more effective, like using a maximum loan to deposit ratio as a regulatory tool alongside interest rates. But this is a side issue.
It is highly unlikely that it is possible to create bullet proof regulations that would cater for any future financial product in any economic context. Financiers will always find a way to outsmart or corrupt regulators and politicians. The best way to ensure future probity is a mass prosecution of the perpetrators of the current crisis on the grounds of building and operating pyramid schemes and breaking anti-monopolistic, competition laws. If they end up in jail for lengthy period of time (some of them, no doubt, will commit suicide) and their wealth is confiscated, their successors, a new echelon of bankers, regulators and politicians, will ensure effective self regulation bearing in mind the demise of their disgraced predecessors. And this will be far more effective than any new regulations.
However the current crisis happened in the presence of laws that prohibit institutions taking monopolistic positions and setting up and operating financial pyramid schemes. As it was demonstrated in the article "The largest heist in history" the root cause of the current financial crisis was lending by financial institutions with loan to deposit ratio above 100%. This constituted a pyramid scheme and, as such, was prohibited by law. The current crisis did not happen because of lack of sufficient laws and regulations but despite of them. They were not sufficiently monitored and enforced.
At present the major reason of not being able to deal with the current crisis effectively and swiftly by letting market forces doing all the work (and that includes bankruptcy) is the existence of the banks that are “too big to fail”. Their market position enforces governments’ rescue packages. The raise and growth of these “too big to fail banks” happened despite the existence of anti-monopolistic and competition laws and regulations designed to ensure a level playing field, free market economy. A bank that is “too big to fail” holds too dominant position. It is about dictating terms of business from the strength of their position in the presence of lack of sufficient competition as governments effectively underwrite their commercial risks. A bank that is “too big to fail” heavily curtails market competitiveness. Apart from dire consequences that are seen now, it imposed unfair competition environment on smaller players that were not “too big to fail” (and a lot of them are failing now). Larger banks took more risk as they had effectively a massive, free of charge, government sponsored insurance policy.
Before debating any change in laws and regulations, giving false impression as somehow the existing ones have been insufficient, we should revisit the existing laws and regulations and ensure that they are enforced. In practice, it would mean prosecuting a large number of financiers, regulators and some politicians who created or allowed to create and operated or allowed to operate a giant global pyramid scheme in a form of banks that were “too big to fail”. They are guilty of contravening existing laws and regulations related to pyramid schemes and monopolies.
This does not mean that there is no room to revisit some regulations with a view of making them more effective, like using a maximum loan to deposit ratio as a regulatory tool alongside interest rates. But this is a side issue.
It is highly unlikely that it is possible to create bullet proof regulations that would cater for any future financial product in any economic context. Financiers will always find a way to outsmart or corrupt regulators and politicians. The best way to ensure future probity is a mass prosecution of the perpetrators of the current crisis on the grounds of building and operating pyramid schemes and breaking anti-monopolistic, competition laws. If they end up in jail for lengthy period of time (some of them, no doubt, will commit suicide) and their wealth is confiscated, their successors, a new echelon of bankers, regulators and politicians, will ensure effective self regulation bearing in mind the demise of their disgraced predecessors. And this will be far more effective than any new regulations.
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