Welcome to Spontaneous Finance
Five years after Lehman’s collapse, the world is still struggling to get out of the worst financial and economic crisis in decades. Politicians, regulators, economists and the public were fast to blame ‘greedy bankers’, speculators, financial deregulation and free markets for the mess. Banking and finance were inherently fragile and had to be regulated and monitored closely.
The backlash against finance led to thousands of pages of new regulations and other requirements: Basel 3, Dodd-Frank, Vickers, Liikanen… There is not a week without a new regulatory proposal to make banks safer. While the Glass-Steagal act was 37 pages long, Dodd-Frank was 848, from which regulators have extracted…14000 pages of regulation so far.
Layers of new regulations are added on top of previous regulations to try to correct their failings, and new regulatory, macroeconomic and macroprudential powers are granted to central banks and regulators, making them some of the most powerful economic bodies in history. As The Economist pointed out early 2012, Dodd-Frank is too big not to fail. Despite this, The Economist also fell for the “more regulation is needed” argument. At the time of my writing, it looks like there is only one way forward: more red tape.
Yet I decided to create this blog to offer an opposing view and a counter-explanation of the crisis. In this blog, I’ll argue over time that free markets and finance are not to blame for the financial crisis and its economic consequences. Banking is not inherently fragile, as Larry White explained very well in a recent article. Poor regulation and political incentives are the culprits that have made banking and finance fragile. As a financial analyst covering the banking sector, I personally witness and experience every day the distorting effects of various pieces of regulation on banks. Not only increasing red tape leads to economic inefficiency, but it also creates unintended consequences that can sometimes be dramatic, as the recent crisis demonstrates.
Throughout history, money and finance have emerged spontaneously, through voluntary human action as people looked to facilitate trade. No central entity governed the emergence of finance, and when a government, king or dictator, tried to take over, define or ‘harmonise’ the financial system, it almost always ended up in tears. Contrary to the mainstream economic view, the most stable banking systems in history were all almost free of regulation and other constraints.
This is why it is time to offer a free-market point of view on current financial issues. Therefore, not only will I comment on major financial and monetary developments, but we will also illustrate our points through the study of financial and banking history, most of the time ignored, but often of particular relevance. Financial innovation will also be a particular focus of this blog. There currently are exciting innovation spontaneously appearing out there, thanks to the initiative of private entrepreneurs and private demand, such as peer-to-peer lending, crowdfunding, virtual currencies and other trading and FX online services. In my opinion, those innovations reflect the very essence of the spontaneous laissez-faire process of linking savers and borrowers that is finance.