Professional Documents
Culture Documents
Much has also been said about the failure of regulation in the UK, where regulat
ion was unified and separated from the central bank. But Northern Rock was not a
failure of regulation as much as it was a failure of judgement on the part of t
he key human actors involved. It showed up the dangers of appointing academics t
o positions that should be occupied by people with practical knowledge of how ma
rkets actually work and how financial firms react in a crisis. The contrast betw
een the intellectual dithering of the top level UK authorities and the US Fed wi
th each turn of the screw, and the decisive, pragmatic responses of the US Treas
ury Secretary (an experienced market operator), could not be more stark.
The real arguments about regulation for the future are yet to come. Many of the
actions taken will be aimed at fighting the last war, not the next one. The best
option is to ensure that the incentives for self-regulation are designed to wor
k better than they did, and that financial system regulation is unified and not
fragmented. It is also better for regulation and supervision to be separated fro
m a monetary authority to avoid cascading conflicts-of-interest and cloud centra
l bank judgement about its previous errors.
What about socialising profit and privatising cost ? The present crisis has brought o
ut the stark problems of privatising profit only for the eventual costs of marke
t failure to be socialised. If TARP works, that prospect will be reversed. But i
n the final analysis these questions and arguments are hollow. In as extreme a c
risis as this, when confidence in the financial industry is lost, the only optio
n left is to deploy heavy artillery involving the credit of the state. That is b
ecause the state is only instrumentality that can legitimately print money to me
et its obligations. But, like nuclear weapons, that option is best used as a det
errent in extremism, rather than one which is invoked regularly. When that happe
ns, the public begins to believe that finance is an area in which markets either
do not work, or create so much systemic and social risk, that the credit and au
thority of the state should underpin the credibility of the financial system at
all times, and not just in extraordinary ones.