Surely the greatest misnomer in modern times is the term “financial de-regulation”. For at least 25 years, various business funded think tanks and mono-culture, conformist university economics departments have hailed its advantages, for the most part completely capturing the world’s business press. I know. I am actually a business journalist who was, until recently, in the mainstream media. I watched it first hand. This continuous and intense propaganda worked. It has even been successfully prosecuted after the GFC, the blame for which has been somehow laid at the feet of governments and not the financial institutions and private actors who actually caused it.
As I have long argued, the phrase is nonsense, always has been nonsense and always will be nonsense. Finance IS rules. It can’t be de-regulated. As Andrew Haldane of the Bank of England pointed out in a terrific speech at Jackson Hole, far from reducing the number of rules — surely the point of “de-regulation” — it has massively increased the rules. Haldane uses the metaphor of a dog catching a frisbee to describe how intuition is better than complex analysis in completing difficult tasks. He should also have used the metaphor of dogs chasing each others’ tails, because that is what has happened as regulators and traders descended into a grim embrace trying to outdo each other.
Because this simple point about money being rules seems destined not to be understood, both regulators and analysts treat government and private markets as if they are separate. They are not. They are a continuum. Two sets of rule makers and rule users. All that has happened with financial de-regulation is that the setting of the rules has shifted from governors to traders (witness the $4 trillion in the foreign exchange market transacted per DAY and compare it with, say US GDP of $15 trillion a YEAR). As Haldane points out, is has created a spiral of growing complexity as regulators try to catch up with traders. In banking, he calls it the Tower of Basel.
Does this look like “de-regulation” to you?
In the US, regulatory reporting has a history going back to the early 19th century. Nationally chartered banks began to submit quarterly returns after the formation of the OCC in 1863. In 1869, following a legislative amendment, these became “call reports”, so named because banks were asked to report on surprise dates to prevent window-dressing. The Federal Reserve Act of 1913 required all state-chartered member banks to file reports with the OCC and in 1917 responsibility for collecting these passed to the Federal Reserve. By 1930, these reports might contain around 80 entries.
Today, regulatory reporting is on an altogether different scale. Since 1978, the Federal Reserve has required quarterly reporting by bank holding companies. In 1986, this covered 547 columns in Excel, by 1999, 1,208 columns. By 2011, it had reached 2,271 columns. Fortunately, over this period the column capacity of Excel had expanded sufficiently to capture the increase.
Taken together, the emerging picture is of a steadily-rising regulatory tower. New floors have been added in response to each crisis episode. Extra filing cabinets have been ordered and installed to house the explosion in regulatory returns. And many new skulks of supervisory foxes (together with the occasional hedgehog) have been installed on the upper floors.
Haldane provides many measures of the explosion of rule making, it is very much worth the read. He reveals by implication the complete absurdity of the push to deregulate from right wing think tanks and right wing economists. They have styled themselves as being anti-government and in fact they started a dynamic in which both governments and traders set in train an orgy of rule setting. That is, the very opposite of what they said they were trying to achieve.
I am very much attracted to the notion, popularised by the historian Paul Johnson in his “History of the Modern World”, of the “law of unintended consequences”: how routinely actions create the opposite outcome to that intended. This insight is often used, and often rightly, to criticise well intentioned government action that creates the opposite result to that sought. It is a framework much loved by right wing think tanks when they are demonising big government. They have not noticed, however, that in the area of financial deregulation the same problems apply to their own arguments and on a scale that beggars belief. That says something about their capacity for self criticism.
It has turned the world’s money system into a Tower of Babel.
Haldane explores whether the rules should be kept simple or complex, tending to come down on the side of simplicity. He quotes Herbert Simon’s use of heuristics, evolving models of analysis that change over time. That is appropriate, and addresses the problem of why the quasi scientific models for economic analysis are so flawed. Scientific, or mathematical laws do not evolve. They are supposed to be true at all times. Obviously that cannot work when you have human beings who can understand those rules and act on them. To state the obvious, such action is outside, it cannot be captured by the rules. Because when the rules were formed, that action had not happened yet.
Until it is understood that regulators and traders are just part of the same continuum of rule making, and that creating a financial system which is sane will require something outside the continuum of rules, we are in big trouble. Crises will continue. We need to look to human wisdom, for instance. Haldane would argue for simplicity. Experience, perhaps. What is certain is that we need something other than just a new rule.
Haldane comments that decent change would require an about turn from the behaviour of the last 50 years. He asks if a “once-in-a-lifetime crisis cannot deliver change it is not clear what will?” He is right. The basic lessons have not been learned. Including that money IS rules.
“To ask today’s regulators to save us from tomorrow’s crisis using yesterday’s toolbox is to ask a border collie to catch a frisbee using Newton’s Law of Gravity.”