Tuesday, June 23, 2009

Congitive regulatory capture or heads on spikes?

Not long ago the bomb-throwing Financial Times columnist Willem Buiter denounced what he called the "cognitive regulatory capture" of the US Federal Reserve by Wall Street. And remember this, from Paul Krugman in May? Now we have Adair Turner, chairman of the UK's Financial Services Authority, saying this:

"Bankers and regulators are already showing signs of forgetting the lessons of the ”biggest financial crisis in the history of market capitalism. . . . Lord Turner said he had noticed ”aggressive” hiring of traders by investment banks had resumed, raising new fears of irresponsible pay deals."

And the FT added:

"The chairman of the Financial Services Authority also claimed there were signs that some countries were losing their zeal for radical regulatory reform. ”There’s a real danger we don’t seize the opportunities of this crisis,” he told the Commons treasury committee."

Very strikingly, another FT story adds this:

"Alexander Justham, director of the FSA’s market division, said the industry must understand that the idea that watchdogs should not be involved with those they regulated “at the early stages” – rather than letting firms largely self-regulate – was “just not acceptable” any longer.

“This is where society wants us to be. You should do the right thing and if you don’t you run the risk of having your head put on a spike. We are not intending to go to war with the industry but, equally, we and the industry are going to have to change,” Mr Justham said."

So part of the UK regulatory apparatus appears not to have been captured, at least from the way this man is talking. Imagine the City of London regulator saying "this is where society wants us to be" just a year or two ago. He would have been laughed out of his job. Change of the TJN type is certainly underway.

Still, there remains a real danger, in the current atmosphere of tentative of recovery, that lessons will be forgotten. A lack of zeal for regulatory reform would mean, among other things, that the offshore problem would be allowed to fester. The "green shoots" of recovery atmosphere, which would fuel to any "lack of zeal" remains a fragile thing, though: the FT added this today

"Growing pessimism about the prospects for a global economic recovery sent stock and commodity prices tumbling on Monday while new data showed that leading US corporate executives were cashing out of their share holdings at a rapid pace."

And there is anecdotal evidence such as this:

"Nearly one in six "prime" mortgages in the UK have fallen into negative equity, according to ratings agency Fitch. Households in Sunderland and Northampton are suffering most from the property crisis, it reveals."

Not to mention a handful of rather dire global growth forecasts currently doing the rounds. Many people believe that if there is indeed a recovery underway, it won't be a robust one. All we can say is: don't forget the lessons of what might have been - and still might be - the biggest economic crisis of our lifetime.


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