Thursday 19 March 2009

Third World Regulators Put Gordon Brown To Shame: FSA Report (2)

With a 126-page,
jargon- and graph-laden report like this, the danger of getting lost among the trees is great, so let’s start by staking out the wood:

Canada has largely avoided the worst of the ‘global’ banking crisis, and we know why. The UK is suffering very badly from it, and we know why. The difference lies in Jean Chrétien’s genuinely prudent regulatory approach versus that of Gordon ‘race-to-the-bottom’ Brown.

Where to begin on the Report itself ? Firstly, as CU says below, this is a very political document in that it conveniently sticks to Brown’s line that we’ve been taken unawares by a big boy who ran away. Turner, still more-or-less in his FSA honeymoon period, surely didn’t need to be this mealy-mouthed – if only in his own long-term interest. But, as with Butler and many another British report, even if there are signs the author knows what the score is (viz Turner’s live performance before the Select Committee), it’s just not good form for a gentleman to speak plainly.

It’s also rushed and shoddy in its production: typos etc abound - did a senior career civil servant get anywhere near this ? Looks more like spin-doctor editing in No.10 to me.

And what stuff it contains.

“Robert Shiller’s work illustrates that irrational exuberance is possible in housing markets as well as in equity markets” - we didn’t need anyone’s “work” to tell us that, matey (and Gordon Brown promised in 1997 to prevent it happening !)

“Inadequate capital against trading book positions allowed excessive leverage …Insufficient attention was directed to liquidity risks” – no sh*t, Sherlock !

“Getting macro-prudential analysis and tools right for the future is vital” – well, errr, yes.

I intend to run a short series on various themes from the Report over the coming days, but for now I’ll indulge in a little name-dropping to justify the headline above. Earlier this month I had the pleasure of dinner with the excellent Dr Tarisa Watanagase, Governor of the Central Bank of Thailand. In 20 minutes she described a more subtle, sophisticated and effective regulatory regime (which actually exists – in Thailand !) than that operated by Gordon Brown's FSA prior to the current carnage. Her operative grasp of the interplay of Pillar’s 1 and 2 of Basel II, and practical implementation of formula-based macro-prudential intervention, makes Turner’s analysis look trite, his conclusions timid and tentative.

With our whole economy hanging off the banking sector, Gordon Brown has given us a regulatory system worse than that of a Third World country. He must not be allowed off this shameful hook.



AntiCitizenOne said...

So she would or wouldn't agree that Basel 2 naive treatment of reserves (based on a %age, rather on historic affordability prices/wages) basically regulated the credit bubble into existence?

roym said...

Yes, whats the lady's answer?

im getting confused a bit now. shoddy regulation is to blame? but didnt i read on here earlier that there's no magic regulatory bullet that would have been preventative?

I suppose restoring authority to the BoE would be a start.

Nick Drew said...

ACO - if I understood her correctly, she reckons (a) yes, Pillar 1 reserves have been inadequate, even if 'correctly' applied under Basel II; but (b) regulators have compounded the problem by failing to utilise discretionary top-up powers [i.e. Pillar 2 - hard to disagree in the case of UK, IMHO], and (c) that intelligent use of contingent macro-prudential measures - she gave a neat example from the Thai mortgage market - can minimise the need to fall back on socialization of risk / losses, the ultimate fallback.

roy - Turner is musing that maybe "no system of regulation could ever guard against all risks / uncertainties, and that there may be extreme circumstances in which the backup of risk socialization (e.g. of the sort of government intervention now being put in place) is the optimal and the only defence against system failure" (p45)

Don't know if CU would agree with that: but personally I'd say that, to the extent it's not tatologous, it's a cop-out / counsel of despair, and shouldn't let Brown off the hook. 'Optimal' is a strong word - where's the proof of that ? - short of some a priori Marxist position.

Unproven, of course, but taking Canada as a data-point, I'd say it's arguable that superior regulatory enforcement, let alone a clever new reg. regime, could have prevented much / maybe most of what we are seeing.

Anonymous said...

Canada did have a long period of experience with the Alberta Social Credit system and must have learned quite a lot from that.

Anonymous said...

Those banks should just have been allowed to go bust if you ask me.. after all they were supposed to be overseen by their boards and their shareholders all of whom were happy to take the cash when things went well...

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