The solution isn’t an orgy of regulation
As the financial crisis continues apace, the response from some quarters is becoming increasingly bizarre.
One of the more ridiculous stances taken in this discussion has been by those who have adopted the position that the current crisis heralds the end of capitalism. However, the advocacy by others for a significant tightening of financial regulation without having any clear idea about the specifics is equally useless and unlikely to prevent a similar occurrence in the future.
It is clear that the current economic malaise has been caused by a failure of financial regulation, including the scarcity of regulation as well as systemic problems with the regulatory institutions themselves (in the United States there are almost as many regulatory institutions as there are sectors unlike the situation in Australia where the major corporate regulator is ASIC, and APRA to a lesser extent).
That much has been recognised, even by the former chairman of the United States Federal Reserve and one of the most prominent architects of the recent round of liberalisation of the US finance sector.
When recently fronting a hostile Congressional panel, Alan Greenspan admitted that self-regulation in the financial sector had been a costly mistake and largely responsible for our current predicament. It is comments such as these which have caused some observers to make broad sweeping statements disconnected from reality.
However, these sorts of comments are dangerous as they do nothing to explain the current state of being, nor do they contribute a solution.
Those looking for an informed criticism of the current situation, and potential solutions, cannot go past the contribution of Professor John Coffee, Professor of Law at Columbia University, and one of America’s foremost experts on corporate regulation.
According to Coffee, the failure of regulation which has led to the recent debt crisis occurred in three significant areas:
1)the lack of laws which prescribe what portion of debt an investment bank can use to leverage returns;
2) executive remuneration structures which reward executives based on short-term share price increases rather than based on the long-term health of the company; and
3) credit rating companies which effectively operate without any transparency or accountability.
Coffee’s considered intervention into the debate represents an intelligent assessment of the current problem. Until we begin to delve into the specifics of the current crisis, the solution is unlikely to emerge.
