Futurology blog: what’s the next trend that’ll disrupt our world, financially, socially or just pointlessly?

Monday, 13 October 2008

Why trust government to regulate their own banks?

Now, with both the means and the incentive to milk the next economic bubble, why trust the UK government to do an effective job of regulation?

The UK bank bailout is a fantastic deal for the government: giving them a huge amount of boardroom clout, first dibs on profits and all at a fire sale price. In a couple of years, the taxpayer is going to start reaping the benefits. We’re always demanding windfall taxes from whichever corporations are making the most outrageous profits – well, now we’re going to get them.

And the forthcoming regulation won't stop that from happening. Because, after all, when has self-regulation been effective? In the case of governmental self-regulation, it's like putting an alcoholic in charge of the pub key.

Not that financial regulation has any reputation for being successful anyway. What it mostly achieves is to lock the stable doors as the horses head for the hills. That’s what the Sarbanes Oxley and Basel II compliance framework was all about – preventing the reoccurrence of Enron and Worldcom. But for all the extra burden it put on auditors and writers of annual reports, did it prevent the credit crunch?

In fact, by lulling investors into the false belief that balance sheets really did reflect reality, they probably helped to make it happen.

So why do we believe that new regulations will work better? While bankers are often caricatured as extremely dull, greedy people, financial innovation is driven by extremely creative, greedy people. They’re already working on finding a new bubble to inflate. Perhaps it’ll only come along in a year or two, perhaps it’s already a germ in someone’s imagination, or maybe it’s already attached to the footpump.

But at first it’ll look like the cleverest thing ever and financial commentators around the world will pump it enthusiastically, explaining how it makes the financial world more stable, secure, efficient, etcetera. The regulators will prod it warily, then give up under a hail of protest – and a couple of meaningful phone calls from their own paymasters.

Because the government will need to milk its new investment for all it’s worth. And they’ll be able to. As major shareholders, with seats on the board, and as both dividend and tax beneficiaries, they have the incentive and the means.

Massive expenses are just over the horizon for the government. There’s the Olympics, far starters. Then there’s all the infrastructure investment that’ll be forced by climate change. Flood defenses. High speed train links. More tunnels under the Channel. Massive donations to more flood-prone countries to stop their people from all getting on the next boat to Britain. Defence spending, so we can menace them with battleships when the donations don’t work.

And that’s why I’m not convinced that the regulators will be allowed to prick the next bubble. Instead it’ll be cheered to the rafters as a new boom. Faster than you can say tulipmania.

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