Regulation and The Law of Unintended Consequences
Posted by Mark on 31st Oct 2008
It would seem that the political consensus is that only further regulation can save us form the savage beast that is laying to waste the financial markets. I think at best it is likely that politicians will end quixotically tilting at yesterdays monsters to no real effect, the beast will have moved on; at worst, however, they will sow the seeds for the next financial crises, be it in 5 or 50 years.
Some Stateside commentators, in fact, believe that our problems are down to too much regulation.
For example, Fannie and Freddie were borne out of the depression of the 1930. Their remit was to ensure easy credit to Main Street America to promote and foster a property owning democracy. What they morphed into, over time, was a state backed cuckoo sat in the middle of the mortgage market sucking in trillions of dollars of funds, but more importantly all of the decent customers. The only rational response of the banks was to chase the higher returns "offered" by poorer credit rated customers. Stir in a bit of well meaning legislation into the pot, courtesy of Bill Clinton, to ensure that banks couldn't turn down customers for fear of being branded racist, bake it for eight years and you have big slice of Sub Prime Pie.
You would have thought that three quarters of century of a command economy would mean that the Russians could do regulation a bit better. However once again, the seemingly sensible regulations put in place to prevent oligarchs from taking assets out of the country, have had disastrous and unforeseen consequences.
Not able to take cash out of the country to fund acquisitions that ranged from Chelsea FC, Candy & Candy flats to Courchevel and Iceland, they instead borrowed from Western banks secured against their rouble denominated equities. The credit crunch, assisted by a less than prudent invasion of a small neighbour, led to a dramatic fall in their value, margin calls to meet the western loans, fires sales, a run on the currency, further falls in value.......
The Russians will now blow their currency reserves, effectively re-nationalising the economy and will end up with a politico-economic structure resembling National Socialism. Nice.
I could go on, but it would appear that unexpected consequence of the Credit Crunch has been to turn a left wing leaning, champagne socialist, like me, into a raging right-wing economic Neo-Con. Not Nice.