Wednesday, February 06, 2008
In the Financial Times (Feb 5th 2008) Martin Wolf explains why it is so hard to keep the financial sector caged and why it is important nevertheless to make the effort.
….. the banking sector is the recipient of massive explicit and implicit public subsidies: it is largely guaranteed against liquidity risk; many of its liabilities seem to be contingent claims on the state; and central banks create an upward- sloping yield curve whenever banks are decapitalised, thereby offering a direct transfer to any institution able to borrow at the low rate and lend at the higher one.
The bigger point still, however, concerns macro-prudential regulation. As William White of the Bank for International Settlement has noted, banks almost always get
into trouble together. The most recent cycle of mad lending, followed by panic and revulsion, is a paradigmatic example…….In the end, we are left with a dilemma. On the one hand, we have a banking sector that has a demonstrated capacity to generate huge crises because of the incentives to take on under-appreciated risks. On the other hand, we lack the will and even the capacity to regulate it.
Yet we have no obvious alternative but to try to do so. A financial sector that generates vast rewards for insiders and repeated crises for hundreds of millions of innocent bystanders is, I would argue, politically unacceptable in the long run. Those who want market-led globalisation to prosper will recognise that this is its Achilles heel. Effective action must be taken now, before a still bigger global crisis arrives.
Discussion on Wolf’s article elsewhere (on Eurotrib) is of some interest, highlighting the implications of this approach as seen from a continental ‘anti Liberal’ worldview that sees the current uproars as ‘the Anglo Disease’.