Tuesday, May 27, 2008

Top EU politicians: under-regulation, inadequate supervision, an undersupply of public goods

Thomson-Reuters has reported on a new letter sent by top European politicians and notables about the financial crisis and their frustration that "the European Commission -- which has sole right at European Union level to propose financial regulation -- has largely opted for industry-led solutions to rectify flaws highlighted by market turbulence."

The signatories include some of the biggest names in European political life of recent years: Lionel Jospin, Jacques Santer, Jacques Delors, Helmut Schmidt, Göran Persson, and others. We can offer the text of the letter in full, here.

A couple of excerpts give a flavour of their concerns:

"This crisis is a failure of poorly, or unregulated markets, and shows us, once more, that the financial market is not capable of self-regulation. It also reminds us of worrisome escalating income discrepancies in our societies, and raises serious questions about our ability to engage developing nations in a credible dialogue about global challenges.

Financial markets have become increasingly opaque and, identifying those who bear and evaluate the risk is frequently more than a formidable task. The size of the lightly or not-at-all regulated “shadow banking sector”, has constantly increased in the last twenty years. Major banks have been involved in a game of “origination and distribution” of highly complex financial products and in pretty questionable packaging and selling of debt tied to high risk mortgages. Inadequate incentive schemes, short-termism and blatant conflicts of interest have enhanced speculative
trading."

This is more or less what we have been saying for some time. They offer a brief summary:

The problem is a model of economic and business governance based on under-regulation, inadequate supervision and an undersupply of public goods.


The whole letter is well worth reading.

There are those who argue that the credit crisis is nearly over, and that things will return to "normal" before too long. If you think that, it would be worth reading this hard-hitting piece by the Financial Times' well-informed economics commentator Wolfgang Munchau, about the dangers posed by inflation. Among other things, he argues that "our situation could be worse than during the 1970s." Read that, and then read about this Merrill Lynch report, warning of more trouble "between nations and within nations" as people struggle to pay for everyday goods.

So the European notables are right to be concerned. They argue that it is time to set up an “European Crisis Committee” gathering high-profile politicians, former Heads of State and Government or Finance Ministers as well as renowned economists and financial experts on all the continents. In their concluding paragraph, they say:

"We must ensure that Europe’s competitiveness is supported and not undermined by financial markets."

In light of the current and impending property price corrections now underway in many economies, a result of the bursting of finance-fueled bubbles, this appears to be well said.

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