As I argued late last week in the Yorkshire Post, contrary to received opinion, outside of the Armed Forces, the City is the most highly disciplined, conservative and regulated work environment in the UK. So a reasonable starting point ought to be not about the lack of regulation, but the existing thrust of it.
With that in mind, I'd like to invite you to read this excellent blog, which I think merits some quality economic debate on Centre Right - by Art De Vaney, Professor Emeritus of Economics at the University of California. As he says . . .
Few people realize how much of the present damage to markets is caused by the new regulations imposed by Sarbanes Oxley and the “mark to market” rules imposed by FASB. How do you mark to market when there is no market? The market for troubled loans has dissolved for two reasons: no one knows what they are worth, and if an investment bank takes the loans into its portfolio it must mark them at the market price. The market is illiquid and facing not mere risk. They are facing uncertainty. No one knows what the values are or what the probabilities are.
Moreover, on preventing bank runs in the future, de Vaney adds . . .
Anybody who has mastered seventh grade arithmetic can figure out that no bank or money market can sustain a run. In order to earn a return, liquid assets must be invested in assets that cannot immediately be liquidated, and if many similar assets are liquidated simultaneously in a market the value will fall precipitously. Yet no one ever proposes that bank depositors or money market depositors shouldn’t all have immediate access to all of their deposits, why?
No regulation of markets will ever overcome such moral hazard, we should be regulating depositors rather than the market. Depositors should have the expectation that they can receive some portion of their deposit immediately, but if they ask for it all they will have to wait some period of time, that increases proportionately to the size of the amount they want to withdraw AND the number of current withdrawal requests. This will never happen. Instead we will have recurrent bail outs.
Discuss!
