Financial regulation and the deception of government intervention

From Deception of Government Intervention (1964) – an essay in Mises’ anthology Economic Freedom and Interventionism – we learn how governments adopted “the third way”:

Faced with the tremendous challenge of totalitarianism, the ruling parties of the West do not venture to preserve the system of free enterprise that gave to their nations the highest standard of living ever attained in history. They ignore the fact that conditions for all citizens of the United States and those other countries which have not put too many obstacles in the way of free enterprise are much more favorable than conditions for the inhabitants of the totalitarian countries. They think that it is necessary to abandon the market economy and to adopt a middle-of-the-road policy that is supposed to avoid the alleged deficiencies of the capitalistic economy. They aim at a system which, as they see it, is as far from socialism as it is from capitalism and which is better than either of those two. By direct intervention of the government, they want to remove what they consider unsatisfactory in the market economy.

Such a policy of government interference with the market phenomena was already recommended by Marx and Engels in the Communist Manifesto. But the authors of the Communist Manifesto considered the ten groups of interventionist measures they suggested as measures to bring about step-by-step full socialism. However, in our time the government spokesmen and the politicians of the left recommend the same measures as a method, even as the only method, to salvage capitalism.

In the aftermath of the financial crisis, we are now going down a road towards ‘judgement-based’ regulation of financial firms in an attempt to salvage capitalism.

It is proposed that firms will be supervised by what amount to shadow management teams of disinterested, public-spirited individuals more able to reach sound views than firms’ own management teams: they shall possess “the optimal experience and technical ability”.

Quite where these mythical philosopher kings are to be found, I do not know. Presumably, financial firms and regulators already hire the best people available. And the notion that the best people will work for the regulator despite inevitably higher rewards in the firms themselves is silly.

Financial firms will find their business subject to the day-to-day judgement of government officials. To think that those officials will be more capable than the institutions’ traders and managers is a fantasy. The outcome will be, as it has been, a surprise financial catastrophe as regulators fail to foresee the future and, since they are bound to converge on “best practice”, fail as one.

A free society is not one based on constant official interference with business. It is one based on cooperation, choice, competition, profit & loss, predictable rules fixed well in advance and exit from the market: that is, property, contract and the classical rule of law.

Rather than resort to fantastic ideas about the effectiveness of government interference with market phenomena, we would do better to reapply the principles of a free society. Financial institutions should be no exception, for government intervention caused the crisis [1,2].

Postscript: Marx and Engels’ ten measures are available here.


Now State takes over bankers’ contracts – Telegraph

Via Now State takes over bankers’ contracts – Telegraph:

The new rules, which critics are likely to suggest amount to a State-enforced “incomes policy” for banks, will be contained in the Financial Services Bill to be announced in the Queen’s Speech.

The bill will give the Financial Services Authority (FSA) the power to cancel bankers’ contracts to prevent them receiving payments that it believes would cause instability in the financial system.

The FSA could stop bankers receiving bonuses that it believes are too high, or cancel remuneration packages that it thinks reward undue risk-taking.

It is hard to see this proposal as anything other than political posturing given the forthcoming election.  Are we to establish a new quango/ regulator “Ofpay”?  What will be the cost of that?  What access will individual bankers be allowed to their assessors?  How can the state decide which bankers have performed socially-useful functions and made positive contributions to the long term good of the bank concerned?  Working in a structured finance role in a dealing room environment is like being an MEP in the EU.  You have to be part of a team.  Management will only negotiate with voting blocs! One member of the team has to play the internal politics as in many other businesses, but this is of course an unproductive waste of time as far as shareholders are concerned.    How much more unproductive time will be spent trotting off to Ofpay to explain your achievements?

The root of the problem is the unreliable nature of banks’ reported profits. If the p&l was a sound number, surely the state could rely on employers to reward?  This news affirms my fear that the Government knows that the front-ending of prospective profits from derivatives trades and treating them as today’s “profit”, along with similar bank specific accounting wheezes, produce unreliable reported accounts.  That is the mischief the legislators should be focussing on.

Get that right and wages will look after themselves.

Further Reading