Friday, March 28, 2008

We Are Not Worthy

Financial expert at work [Parental discretion advised]

Last evening Tyler imbibed a few noggins with some ex-colleagues from the City. And despite all those reports of explosions and gunfire we hear every day, they were in remarkably good heart. So what, if a few hedge funds have blown up and bank shares have tumbled? These things happen, and there has been obvious excess. Save retail depositors, but let the bankers burn.

Yes, I know, if you can keep your head while all around are losing theirs, you clearly don't understand the gravity of the situation. But listening to these boys and girls, you'd almost think those squawking bankers are deliberately bigging up the danger in order to safeguard their own narrow self-interest!

One statement particularly caught Tyler's attention: that the US Federal Reserve's decision to accept unlimited amounts of dodgy debt from the investment banks as loan collateral, and to allow that debt to be valued by the banks themselves, consititutes the biggest fraud in US financial history. So let's hope Mervyn King does not buckle under the pressure and allow the same thing here.

How will it all play out? Obviously nobody really knows. But one thing's for sure: there will be a whole raft of new financial regulations as panicky regulators and legislators run round bolting stable doors. And a whole raft of costly unintended consequences to follow.

Which got us talking about the fitness of our rulers to decide such things.

The Economic Secretary to the Treasury has lead responsibility for financial regulation. Since last June that's been the bright Kitty Ussher (St Pauls Girls and Balliol), but she has zero prior experience of finance. Her boss is A Darling; 'nuff said.

And when it comes to Parliament, nobody thinks people like John McFall and his Treasury Select Committee colleagues (such as the abominable grandstanding George Mudie) have a prayer of wrapping their heads around this.

But then again, how are we going to decide financial regulation? The "experts" at the FSA?


A referendum! Why not have a referendum on liquidity adjustment factors for Value At Risk?


But surely we could have a referendum on stem cell research. A damned tricky area for sure, but essentially an issue of morality. Why should our MPs' ill-informed views and prejudices have primacy over ours? Why should we let Mr Punch ram his Catholicism down our throats? Surely we should decide such morality issues by referendum.

And come to that, isn't it time we finally got that death penalty referendum we've been owed since 1965?

At which point, one experienced City operative opined that ordinary people (and he included himself in that) don't understand the issues as well as our rulers. We are not worthy. We need to have our rulers deciding the difficult stuff because we haven't had time to find out about it all.

Tyler's jaw flapped open. How could anyone say that, standing at a City bar in the aftermath of the biggest failure of UK financial regulation in 150 years? Surely he could have done a better job himself?

Well, yes, he said, maybe with financial regulation, he could have. But he knows nothing of, say, stem cell research. Or organising a healthcare system. Or education. Or policing. Or anything really, other than finance. And rugby.

The City crisis is obviously much worse than these guys had let on. This poor chap was clearly suffering from terminal shell shock. Either that, or he's never focused on the woeful shortcomings of our rulers.

The problem he assumed away is that none of us know how to organise and run everything. And that goes for our professional politico and commissar class more than anyone. As the Major is forever telling us, all they really know about is getting elected and appearing on Newsnight. Never will they know as much about finance and its regulation as my friend at the bar.

Which of course is precisely why we need to dismantle Big Government. Centralised decisions are almost always bad decisions. We desperately need decentralisation , with power passed to those who actually understand the issues on the ground, be they head teachers, hospital managers, or City financiers.

Yes, we need a framework of law, and yes, the state needs to ensure the little guy is protected against the barons. But when it comes to the barons themselves, they should be left - nay, encouraged - to make their own decisions. And if they suffer losses from making the wrong calls, tough. That's all part of how we make progress.

PS The consensus at the City bar is that to prevent further Crock style pavement queues we urgently need the higher deposit insurance cover for retail punters - £100K is the favoured figure - paid for by the commercial banks themselves (as in the US FDIC system- see this blog). We also need the special measures insolvency process. Apart from that, it's buyer beware: wholesale investors should make their own decisions on where they put their money; they should learn not to rely blindly on those conflicted credit rating agencies; if they lose money, or even their entire business, that's just the way it goes.

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