Tighter regulation or stating the bleedin’ obvious?
The Financial Services Authority have today leapt into action and put together some stringent measures to ensure the security of the proverbial barn door now that the frolicsome pony of the UK’s economy has successfully bolted, eaten lots of sugar lumps, and subsequently been mown down by a truck.
Among their hard-nosed, profound changes to our current banking system are the following:-
- A change in the purpose and function of the FSA so it focuses on financial firms’ strategies and identifies when they might get into trouble.
Now I’m curious to know if I’m the only person who looks at that and wonders what the FSA were doing before. Financial Services Authority: that says, to me at least, an authority to oversee financial services, so if they weren’t looking at what financial services were doing, and that surely includes their overall strategies, what were they looking at?
- Banks being required to build up healthy reserves in economic boom times.
Why do we need to tell banks to do that? Seriously, that’s like having to tell a bloke running a fish and chip shop to take the chips out of the fryer when they’re cooked, or telling a bin man to chuck the contents of the bin in the back of the lorry, we assume the person behind the counter in the chip shop knows what they’re doing, and we assume the bin man knows what he’s doing, why do we have to tell the people who run banks, who earn in a year what we’re likely to earn in 20, how to do the basics of their job? More worryingly, why do we have to force them to do the basics of their job?
Going even further, this is just a tacit admission that our current system is inherently tied to boom and bust. Here’s a thought: a financial system that, almost by definition, leads to periods when people lose their houses and jobs through no fault of their own, is not a very good system.
- Risk taking to be discouraged through forcing banks to hold more capital and a bonus system that discourages risk taking.
Again, stuff that banks should be doing anyway. Basically this is saying that prior to this “profound change” in the FSA’s thinking, it was absolutely fine and dandy for a bank to take your savings, quite literally gamble them, and, whether the gamble paid off or not, give a massive sum of money to the person who did the gambling. Oh, and it’s also just peachy for banks to make up money out of thin air with just a tiny fraction of the amount being backed up by actual assets. The very fact that this is being regarded as a profound change indicates that bankers are a bunch of uncaring, overpaid scumbags, and the FSA a bunch of uncaring, oblivious idiots.
- Credit rating agencies to be regulated.
Hang on… you mean they weren’t regulated before? Credit rating agencies basically define the value or worth of packages of debt. That should be calculated according to the interest being paid on the debt and the likelihood of payments being defaulted. It gets complicated but essentially that’s what they’re there to do. I’d say that’s quite a big deal, because the debts we’re talking about are often mortgages, and that’s basically a contractual representation of your house. Basically what they did was rated high risk mortgages as high value because of the high rates of interest being paid on them, and ignored the risk of people defaulting on those payments. That was stupid, but it happened because there wasn’t any regulation, and because the credit ratings agencies basically found a way of making money out of doing it. They found a way of making money out of doing something incredibly risky and stupid, and they did it, a lot. They were able to get away with it because the idea of regulating them was seen as intrusive government.
Now all the above is essentially about the FSA, their changes, and the state of play before those changes. I’m asking why those changes are regarded as profound when they seem to be pretty much common sense, and should have been in place all along, and I’m asking why the services being regulated didn’t recognise and do something about the problems they were well aware they were creating?
The answer is that they found a way to make lots and lots of money by doing stupid, risky things with other people’s money, and the FSA, and all other relevant authorities, were quite happy for them to do it because it looked like that Holy Grail of capitalism: economic growth.