Should the Bank of England have tools to prick property bubbles?
The answer is no. (but not according to this FT article)
Wait… Actually, it already has tools: it’s called monetary policy. Place the interest rate at the right level and stop massively injecting cash in the economy and, perhaps, you won’t witness real estate bubbles?
There are other hugely distorting UK government policies at the moment: the Funding-for-Lending scheme and the more recent Help-to-Buy, which both push demand for property up through artificially low interest rates. I’ll explain that in details in another post.
So the question becomes: why adding other distorting tools (whether ‘macroprudential‘ or ‘microprudential‘) and policies, such as maximum loan-to-value or loan-to-income ratios, on top of already deficient tools and policies? I have another suggestion: why not trying to correct the failings of the first layer of policies? Just saying.
PS: Lord Turner is obviously mentioned in this FT article.
The Failure of Adair Turner
I like Baron Adair Turner of Ecchinswell (Lord Turner for short). Every time he speaks about the financial system, I can hear enough misconceptions and misunderstandings to give me enough material to write several posts. By the way, he used to be Chairman of the UK’s Financial Services Authority, the former UK financial regulator, between end-2008 and early 2013. I have attended a couple of his conferences in the past.
Lord Turner has a particular quality: he is quite good at figuring out the symptoms of a crisis, but always seems to mistake those symptoms for the underlying disease. As a result, he comes up with misguided remedies that are usually very interventionist and with the potential to make things worse. So you’ll probably hear of him relatively often on this blog.
A couple of weeks ago, he published an article called…”The Failure of Free-Market Finance”… As you can guess, I couldn’t miss the opportunity to review it. Well… I was disappointed. Not because he doesn’t make any mistake, but simply because he does not seem to actually justify the title of his article.
Overall, he is right than an excess of debt is partly a reason for the crisis, and that current mainstream economic theory does not factor in leverage (or not enough) and wrongly considers a low and stable inflation as enough/necessary to ensure economic and financial stability. But he never explains how this debt level builds up over time (to be fair, he does explain it in other articles and presentations, but once again, without ever digging enough in order to reach the root cause. Probably more on this later).
I find it quite ironic that someone who promotes a strong state control of the financial sector, like Turner, quotes Friedrich Hayek. My guess is that he needs to reread Hayek. As Hayek never mentioned over-investments as the cause of the economic cycle, but malinvestments (roughly, investments wrongly directed towards less than profitable-enough activities) (although over-investments could arguably be linked to the theory). And Hayek would certainly never have promoted state control, which he saw as the root cause of crises.
Photograph: Alastair Grant/AP
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.
Spontaneous Finance 
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