The Bankwatch

Tracking the consumer evolution of financial services

The G20 ought to consider only regulation that assesses the outcome of good and bad decisions

President Bush makes an important point and distinction here [emphasis mine].  The couch economists and newly found supporters of a new President are tempted by talk of new regulation and government control. 

Bush defends free-market system | BBC

Returning to the cause of the credit crunch, Mr Bush admitted that failures had been made "by lenders and borrowers, by financial firms, by governments and independent regulators".

But that the answer was "not to try to reinvent the system".

Instead, he said the solution was to "fix the problems we face, make the reforms we need, and move forward with the free market principles that have delivered prosperity and hope to people around the world".

He added that while capitalism was "not perfect", it was "by far the most efficient and just way of structuring an economy".

"It would a terrible mistake to allow a few months of crisis to undermine 60 years of success," said President Bush.

Clearly there are issues that caused the current problem, and the first paragraph is one I have discussed frequently here.  The lack of transparency, in the orchestration of securitised mortgages as they are converted into ABCP is certainly at the core of the issue here.  Whether regulation, control, bank audits, new financial alternatives – this must be fixed.  But if we think about it, new regulation on that would only serve to protect banks from purchasing securities that they did not understand.


Did I just understand what I just said.  We need protect banks from themselves and their own uninformed decisions?

This is why the notion of regulation is hard. 

Relevance to Bankwatch:

The nature of the regulation that what the G20 ought to consider this weekend is regulation that assesses the outcome of good and bad decisions, rather than attempt to regulate markets, and their processes.  That result is determined by measurement (accounting rules) and capacity to absorb losses (capital requirements).

All President Bush is saying with that headline is that lets not throw the bay out with the bath water.  Worse, lets not become so technocratic that business decision making is over-ridden by government controls that could well produce dysfunction the likes of which might make the current crisis seem like a walk in the park.

Written by Colin Henderson

November 13, 2008 at 21:41

One Response

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  1. I don’t normally agree with W. Bush, but in this case it sounds like he may have a point – prudence in regulation is important. The issue here is a kind of borderline fraud where these securities were incorrectly rated and insured. I think a good dose of transparency is important, but using this as an excuse to burden the market with a bunch of bureaucracy would be a big mistake.

    Dobes Vandermeer

    November 14, 2008 at 00:17

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