I’m not aware of any unconditional support for central banking as such around The Cobden Centre but, nevertheless, occasionally a central banker says something worth hearing. Today, that central banker is often Andy Haldane, Executive Director, Financial Stability at the Bank of England.
So what is the secret of the watchdogs’ failure? The answer is simple. Or rather, it is complexity. For what this paper explores is why the type of complex regulation developed over recent decades might not just be costly and cumbersome but sub-optimal for crisis control. In financial regulation, less may be more.
Mr Haldane is a way from Greenspan’s famous defence of gold and free banking but the contemporary debate is also far from that point. Haldane’s speech is an intellectual tour de force which concerns some of the epistemological problems which will be so familiar to Austrians.
In my time-limited speech on the Bill which hands vast discretionary power to the Bank of England, I criticised it, saying, “I sincerely hope that it represents the absolute zenith of contemporary thinking on interventionist bank reform”. Perhaps it may yet: Haldane concludes,
Modern finance is complex, perhaps too complex. Regulation of modern finance is complex, almost certainly too complex. That configuration spells trouble. As you do not fight fire with fire, you do not fight complexity with complexity. Because complexity generates uncertainty, not risk, it requires a regulatory response grounded in simplicity, not complexity.
Delivering that would require an about-turn from the regulatory community from the path followed for the better part of the past 50 years. If a once-in-a-lifetime crisis is not able to deliver that change, it is not clear what will. To ask today’s regulators to save us from tomorrow’s crisis using yesterday’s toolbox is to ask a border collie to catch a frisbee by first applying Newton’s Law of Gravity.
It does not yet seem likely that a central banker will produce a speech with which Austrian-School liberals will agree whole-heartedly but Andy Haldane’s recent contribution was a courageous step in the right direction.