I once saw an advertisement for a book that would apparently reveal the secret of making a profit in the foreign exchange markets. I did not buy it. Someone who knew such a secret could use it to make billions for himself. He would not sell his secret, and thereby render it worthless (currency trading is a zero-sum game), for £9.99.
You should be sceptical of those who claim to be giving away something very valuable, including their extraordinary knowledge or skills. Yet that is precisely what our political leaders are now asking us to believe of financial regulators.
The big new idea in banking regulation is that regulators should force banks to hold more capital when their lending is causing the price of assets (such as houses) to get too high: that is, to reach levels from which they must crash. The Obama administration now has a similar idea concerning commodities, such as oil. They want regulators to intervene in commodity markets to counteract speculation that they believe is making prices too high or too low.
Let us not argue about whether it makes sense to say that a price can be too high when people are willing to pay it, nor whether any human, even computer-assisted, could possibly know that it is. Suppose that some people really do know such things. Why would they work for the government on a salary of less than £50 million?
Knowing that the market has over-priced oil, for example, is extraordinarily valuable. You could take a massive short position and make a killing when the price falls from the heights it wrongly occupies. Or, if you knew that house prices are too low, you could buy shares in real estate investment trusts and soon be rolling in money. For someone who knows whether tradable assets are over- or under-valued, massive wealth is assured.
Perhaps I underestimate the benevolence of those blessed with such amazing skills, but it is hard to believe that they would forgo great wealth for the sake of working in a government department. My guess is that the people who will end up occupying the envisaged regulatory roles will be ordinary human beings. They will know no more about the proper value of things than any other well informed market participant, such as an investment banker guided by his economic research team.
Intelligent, informed people disagree about the value of things. Market prices reflect the balance of disagreement between those willing to put their money where their mouths are. If you think a panel of government employees with no “skin in the game” can do a better job … well, I wonder if you would like to buy this sensational new book …