by Jerome a Paris
Wed Mar 26th, 2008 at 06:37:40 AM EST
Give them credit when it's due, but the FT is discussing head-on the right thing today, ie banking regulation, and bringing forward, under credible bylines, opposite sides of the arguments:
The rescue of Bear Stearns marks liberalisation's limit by Martin Wolf
The lobbies of Wall Street will, it is true, resist onerous regulation of capital requirements or liquidity, after this crisis is over. They may succeed. But, intellectually, their position is now untenable. Systemically important institutions must pay for any official protection they receive. Their ability to enjoy the upside on the risks they run, while shifting parts of the downside on to society at large, must be restricted. This is not just a matter of simple justice (although it is that, too). It is also a matter of efficiency. An unregulated, but subsidised, casino will not allocate resources well. Moreover, that subsidisation does not now apply only to shareholders, but to all creditors. Its effect is to make the costs of funds unreasonably cheap. These grossly misaligned incentives must be tackled.
More regulation will not prevent next crisis by John Kay
The notion that future banking crises can be averted by better regulation demonstrates unrealistic expectations of what regulation might achieve. Banking supervision asks public agencies to second-guess the decisions of executives who earn millions in bonuses and business strategies that yield billions in profit.
(...)
But in financial services, the demand today is for more regulation. That call should be resisted. The state cannot ensure the stability of the financial system and a serious attempt to do so would involve intervention on an unacceptable scale.
(...)
We cannot prevent booms and busts in credit markets, but today's regulation of risk and capital - which is more reflective of what has occurred than of what may occur - does more to aggravate these cycles than to prevent them. Regulation in a market economy is targeted at specific market failures and should not be a charter for the general scrutiny of business strategies of private business. Banking should be no exception.
I find one article a lot more compelling than the other, but while "we have more money, therefore we're right" may sound like an unimpressive argument in theory, it has very real influence in practice, as we should very well know. But fundamentally, this is the debate: will it be one person, one vote, or one dollar, one vote?
And meanwhile, despite the stock market's temporary optimism, things are quietly worsening in the credit market:
Hoarding by banks stokes fears on credit crisis
Central banks' efforts to ease strains in the money markets are failing to stop financial institutions from hoarding cash, stoking fears that the recent respite in equity markets may not signal the end of the credit crisis.
Banks' borrowing costs - a sign of their willingness to lend to each other - in the US, eurozone and the UK rose again even after the Federal Reserve's unprecedented activity in lending to retail and investment banks against weaker than usual collateral and similar action in Europe.
The continued friction in the money markets came even as stock markets were showing new signs of optimism in spite of fresh data from the US showing consumers at their most pessimistic for 35 years and house prices falling at the fastest rate on record.
The system is slowly choking to death. What action is taken to resolve that will also create precedents as to how the sector functions (and is allowed to function in the future). Thus this is a fundamental debate to have.
It's probably too much to ask from politicians to grab that issue, which is highly technical and complex, but it's at least a good sign that economists are discussing it without taboos.
