G20 and EU 'posturing' could exacerbate future banking crises … The efforts of the G20 and European Union to overhaul financial regulations have been lambasted for being "disingenuous political posturing" that are "increasing the likelihood of future meltdowns", an influential think-tank has warned. The TaxPayers' Alliance has published a paper accusing politicians and regulators of basing their response to the financial crisis on a "mistaken view of its causes" and "political considerations." – UK Telegraph
Dominant Social Theme: Regulation comprises a balance that must be found.
Free-Market Analysis: This article (excerpted above) is an interesting one because it actually explains the reality of what is taking place today regarding regulation. Regulation, in fact, often does nothing to address the "problems" it is intended to solve but does provide a justification for the powers and privileges that accrue to a ruling elite.
Regulation is inevitably presented as a necessary good in Western jurisprudence. One who contravenes regulations is a lawbreaker and there are variety of remedies available to the state. Unfortunately, the idea behind regulation does not seem to be based on economic logic.
The two professions – law and economics – are seen as disparate entities when in fact no lawyer ought to be released into the world without an understanding of economics, preferably laissez-faire economics. Such a comprehension might go a long ways to reduce the amount of bad laws that circulate in society.
Drug laws provide us with example of regulatory futility. Reducing the flow of one drug or another merely drives up the price of that drug, which stimulates further production. If through aggressive interdiction, a particular drug is made unavailable, then other drugs will be found. The ramifications of Draconian enforcement of bad laws are not hypothetical. Colombia, for instance, was destabilized for decades by enforcement aimed at wiping out the cocaine trade. Eventually, the largest dealerships were broken and industrialized cocaine trafficking was reduced in that former narco-state. But the trade merely moved to Mexico; and so did the "war." Today Mexico is widely regarded as a failed state and the results of expanded drug enforcement are seen in the murders of thousands and the displacement of millions.
Billions of taxpayer dollars that have been spent on drug enforcement but the rate of flow of drugs probably has not decreased noticeable. What such "wars" do accomplish, unfortunately, is to build up the power and infrastructure of the state itself. Policing officials – military and civilian – establish themselves and build enforcement empires that bear no relationship to the "problem" but merely act as sinecures.
As regulatory and legal battles are pursued over years and even decades, the level of violence usually increases. Again, we can see this in Mexico where the war on drugs has turned into a real war waged by the military of both the US and Mexico. Eventually, one presumes the superior firepower of the state shall rid Mexico of its drug-dealing enterprises or at least diminish them. But that will not solve the problem. Market demand will be met. The industry will merely migrate elsewhere.
In the white-collar arena, the militarization of what has been declared criminal is often less obvious. But in fact the damages are just as severe. What ends up occurring is a homogenization of strategies allowed to the investor. Thus, mutual funds can purchase instruments but not hedge against them; stock brokers can suggest stocks but not strategies that minimize risk (as these might be considered arcane and therefore "aggressive").
Ultimately, all regulation is a price fix, resulting in a queue, a misallocation of resources or other sorts of market distortion. Thus when one regulates a given practice, the very act of regulation provides opportunities for others not involved in the particular act being regulated.
If there is a market niche available within a given business continuum, people will try to fill it. If it is a strong enough market need, people will simply circumvent the regulation or law. If enforcement is stringent enough, providers will be driven underground, but they will continue to offer the service and receive compensation. We can see this reflected in the banking critique offered by the Taxpayer's Alliance, as follows:
The paper, which was co-written with the Lagatum Institute, an academic group that focuses on wealth, attacks the key aim of politicians including Prime Minister David Cameron and Chancellor George Osborne for internationally co-ordinated regulation. It warns that "global regulation causes global crises" … That means that global regulations can be dangerous because they increase the amplitude of global credit cycles."
The paper adds: "The Basel regulations may still be procyclical, imposing more onerous requirements on institutions at times when the system is in trouble." The authors claim the new regulations, including the G20-sponsored Basel rules and the Capital Requirements Directive of the EU, have been based on too narrow a view that "greed and insufficient regulation" were the causes. They argue that "regulations and poor policy choices" were also to blame – and that the authorities are in danger of making similarly dangerous mistakes. – UK Telegraph
There is no doubt that financial regulation tends to exacerbate the volatility that it is supposed to address. By mandating that certain strategies and "best practices" be followed, lawmakers concentrate capital surges and make the market generally more susceptible to financial shocks, not less. In the case of banks, the Basel regulations will merely further restrict what banks are capable of providing to customers.
According to the website Nuwire Investor, banking officials have complained that "higher capital requirements and limited investment behavior would restrict lending abilities, drive up borrowing costs and reduce banks' profitability by discouraging lucrative investments." By demanding that banks act in certain ways and forego certain "risky" businesses, regulators in fact weaken these institutions financially, which makes them less likely to withstand financial difficulties.
Higher capital requirements will ensure that banks will lend less, which will also affect the bottom line. And the increased "transparency" that is being demanded will further reduce the services that large banks are able to provide, since certain customers will look elsewhere for services rather than put themselves into situations where they will receive scrutiny.
Ultimately, the hypocrisy of the new banking regulations can be seen by the lack of attention paid to the relationship between central banking and commercial banking. It is mercantilist central banking, with its enormous money flows and ability to print money from nothing that causes the investment manias that end up ruining central banking's distribution system of commercial banks.
In fact, these banks are nothing more than conduits for fiat money. It is a given central bank that sets policy and determines the price and quantity of money in the current environment. The whole exercise of regulating banks capital reserves is fairly ludicrous given that banks have no control over the economic environment that central banks create. So long as central banks continue to flood economies with excess paper money, the commercial banking sector shall struggle with overwhelming booms and subsequent busts.
The unfortunate "facts on the ground" thus remain in force. An Anglo-American power elite that has evidently and obviously created a central banking economy worldwide continues to enjoy the privilege of printing money at will. When the process blows up economies singularly or all-at-once, the fingers are to be pointed at the distributors of the funds – the commercial banking community.