The myth of self-regulation. In the big debate about new regulations to govern the money markets (see my columns in yesterday's and the day before yesterday's newsletters), there is broad agreement on one thing - politicians reject the idea of bank self-regulation. Barack Obama and Nicolas Sarkozy have made this clear and called for new laws. The Italian finance minister Giulio Tremonti said it was the politicians that had to use legislation to set the rules. If one leaves it to the banks to regulate themselves, then one is paving the way for a new crisis - a crisis of bankers wanting soft regulation, where soft would annihilate regulation. In the words of the Financial Stability Board chair, Mario Draghi, the banks and the finance system have become so complex and so indebted that self-regulation cannot control them. Banks have to be made to follow rules - more own capital, less debt (gradual debt reduction to avoid nipping the economic recovery in the bud), a ban on too many over-complex financial wheelings and dealings, and surveillance with teeth to intervene.
These ideas have been stressed in recent weeks and this is significant, as is the fact that growing numbers of bankers, in the United States and elsewhere, are backing regulations rather than opposing them - backing them as the only way of winning back credibility and gaining public trust. It is also a fact, however, that many goliaths in the banking world, and not only in the United States, will not simply roll over and agree to the new rules being formulated. Larry Summers, an economic advisor to the US president, has warned about the danger of the rules not being applied across the board because banks specialise in seeking out areas of the world where the money markets are less regulated, adding that parliamentarians in Washington are outnumbered three to one by lobbyists. He who laughs last laughs merriest.
Softly softly. I should also point out that the most objective and best qualified figures involved in this debate and in the negotiations might recommend public regulations but they all admit that it is a tricky area because of the complexity of the beast. Jacques de Larosière, whose report inspired the European Commission's financial supervision recommendations, warned against toothless regulation and against over-zealous regulation alike, commenting that over-zealous approaches are already being seen at various levels. He argues that too much regulation would seriously dent banks' willingness to lend money and would therefore paralyse economic growth. This column is too short to summarise his views - I recommend to readers his interview with Philippe Herzog, chair and founder of the Confrontations organisation, published in the most recent issue of the Confrontations Europe review. The lesson to be learnt from this is that it is easy to play to the gallery and call for revolutionary new regimes that sweep aside the existing system, flying in the face of the fact that there is not a single example in the world of progress being made for ordinary people through stamping out the freedom of initiative; as if (to quote a divided country that experiences both types of system at once) there were more freedom and well-being in North Korea than South Korea.
Sweden leads the way. One highly controversial aspect of the new financial rules being examined is the idea of a special tax on banks that are too-big-to-fail in order to create a stabilisation fund to bail out banks, rather than the taxpayer having to cough up to bail them out (to the detriment of savers and the economy in general). This idea has been mooted by Barack Obama but rejected by the big banks. The idea is backed by the chair of the Financial Stability Board and the president of the European Central Bank, Jean-Claude Trichet. Sweden has already introduced something similar, as we explained in issue 10059. The Swedish finance minister Anders Borg has told the Spanish finance minister Elena Salgado, who took over from him as chair of the Economic and Finance Council, that the tax on lending establishments introduced in Sweden in 2009 has been a success. The money raised has been put in a special financial stability pot that already has 29 billion Swedish kroner in it and will reach 2.5% of Sweden's GDP in 15 years' time. The details of the tax have been carefully worked out to prevent banks upping sticks and leaving town (as may well happen with a tax on transactions or a tax on turnover). The idea of a tax on banks is controversial, but Salgado has announced that the Swedish system will discussed by the EU's economics and finance ministers in Madrid shortly. Watch this space.
(F.R./transl.fl)