Sunday, September 27, 2009

Is This a Good Idea? Politicians Telling Bankers How to Bank

From the Times of London comes a story on a recent interview with Prime Minister Gordon Brown. It raised a question for me, well actually several questions.
"Suggesting a major shift in his thinking, Mr Brown said that he would outline
tough new rules on the banking industry in his major speech to conference this

He said that he had a change of heart at the G20 summit in Pittsburgh last week, which had prompted in him a determination to toughen the rules on banks that want to return to "business as usual" and "the bad old days".

He said: "In the last few days I’ve become utterly convinced just how far we all have to go. The banks are anxious to return to the bad old days. A lot of people haven’t understood the damage that banks have done. I think the banking system forgot that. I’m determined we clean up once and for all."

He then added he would be introducing "the toughest action of any country in the world". He suggested that a fiscal responsibility Bill would be introduced in the Queen’s Speech, which would legally commit current and future ministers to bring down debt. This morning he suggested this legislation would "ban the new bonuses".

He added: "It will also say that where there is a bad behaviour the FSA [Financial Services Authority] will have the right to intervene and where a company doesn’t [behave] there will be penalties imposed."

The Government has already said that banks would have to pay bonuses from a bonus pool linked to profitability – plans the banks are relaxed about. It was not immediately clear whether the proposals signalled by Mr Brown this morning would go further than what has already been announced. Downing Street suggested more details would emerge later today.

"We will be saying to people we are not going to allow in any way a return to the terrible days where bonuses were based on speculation and short-term deals," Mr Brown said."
OK, I don't know much about banking and I'm no economist. But it strikes me as a bit of a stretch to think that the British people should feel comforted that politicians (who can't even manage their own expense accounts) are going to be telling business how to do their business.

Banks have been around for a long time and the profit motive drives their behaviour. If they operate inefficiently or take too many (or too few) risks, they lose money and people get fired. Seldom can employees trick their employers into keeping them on even though they are incompetent by hiring advertising firms and doing polling to figure out how to manipulate opinion in their favor - as politicians frequently do.

Now, it seems impossible for me to believe that government bureaucrats sitting in offices isolated from the rough and tumble of the marketplace can determine which rules should be applied to the banks at which times and in which ways? Doesn't that almost make the banks' own management a bit superfluous? Well, maybe that is an exaggeration: but doesn't it tolerate interference with a business enterprise that goes a tad too far? (I'm in favor of regulation that levels the playing field, staves off monopoly and protects consumers from being shafted. But there must be a limit somewhere.)

And is the motive of government here not driven by polls, elections and public opinion? I note that Brown claims to have had a "change of heart" at the G20 summit! Last week, he decided that this new regulation was needed! Are we supposed to think that public posturing for the next election has nothing to do with this "change of heart?" Wouldn't it be better to have a PM governing with his mind, rather than his "heart" on a matter of bank regulation?

Overall, the most troubling aspect of Brown's attitude to me is his apparent confidence (demonstrated over the past 12 years of New Labour) that the solution to the problems of the world are more government interference - in schools, in families, in churches, in businesses - in everything. He seems to think that tweaking the regulations can prevent the business cycle for having recessions as well as booms, despite the fact that the business cycle has been going on for hundreds of years and if it was so simple would not the government have done it just before the current recession? It reminds one of Obama's contention that he can save 500 million from waste in Medicare. Why not just save it and then discuss how to spend the money, if it is that easy?

The Enlightenment, I'm afraid, is not yet over. The hubris of the socialists persists through economic thick and thin. But I'm not convinced that more big government, more regulation, more merging of corporate and government culture into one huge bureaucracy no one can control is the way to save the world. But I think it might well be a way to ruin the world.

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