It is becoming a cliché, that doesn’t mean to say that it’s not true, but the current financial crisis will change the way the financial system operates. You don’t have to be an out and out Marxist (or indeed the Archbishop of Canterbury) to express concern about some aspects of the behaviour of lenders in the low-interest rate, easy credit, boom years. And this especially relates to the US lenders which were obviously quite comfortable about providing “sub-prime” mortgages to people of very little financial substance. So much for good banking practice!
Of course, other things have contributed to the current crisis. Regulators failed to perform their tasks properly. The FSA regulation of Northern Rock springs to mind. The handling of this beleaguered financial institution provides a text book case of why our current tripartite regulatory system is “not fit for purpose”. The ultimate responsibility for dealing with Northern Rock fell between the cracks in the edifice of Gordon Brown’s Brave New World of City regulation at its first significant test. In addition, the ratings agencies simply failed to adequately rate a whole range of bizarre and ultimately toxic assets. And the authorities, especially in the US, kept interest rates too low for too long. Now the party is over and Anglo-Saxon capitalism is having a very nasty hangover.
But, and here is very big but, this is not the time to write off the animal spirits of free markets that drive innovation and enterprise. It is saddening, and wholly predictable, that our colleagues across the Channel appear to be celebrating the humbling of the US, in particular, and the financial crisis, in general. And, worse, we have the sight of the EU’s legislators sharpening their quill pens to tighten up the regulatory regime for the financial sector.
This is not the time, nor the place, for knee-jerk reactions from Brussels. Of course, Britain must raise its game in regulating the financial markets. But we have the regulators and we have the regulations. What we need to do is make them work effectively. Returning banking regulation to the Bank of England would be a useful start. What we don’t need is more prescriptive and inflexible regulations from legislators who tend, at the best of times, to be biased against Anglo-Saxon ways. And this is not the best of times.
