Adam Smith foresaw the lunacy of the FSA....

The quote below from Adam Smith appeared in a recent article from the Mises institute. It describes exactly the circumstances of the grand conceit of the the FSA and Hector Sants.

The man of system, on the contrary, is apt to be very wise in his own conceit; and is often so enamoured with the supposed beauty of his own ideal plan of government, that he cannot suffer the smallest deviation from any part of it. He goes on to establish it completely and in all its parts, without any regard either to the great interests, or to
the strong prejudices which may oppose it. He seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board. He does not consider that the pieces upon the chess-board have no other principle of motion besides that which the hand impresses upon them; but that, in the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might chuse to impress upon it. If those two principles coincide and act in the same direction, the game of human society will go on easily and harmoniously, and is very likely to be happy and successful. If they are opposite or different, the game will go on miserably, and the society must be at all times in the highest degree of disorder. (paragraph VI.II.42)

Clearly the likes of Sants can learn a lot from the past.

This is Why You Don't EVER Vote Labour...

The graph above tells you all you need to know about Gordon Brown. It tells you exactly what we have been saying - Gordon Brown is the most useless Chancellor of the Exchequer - ever. It tells you that it was, and is, his mad expansion of the money supply that drove the massive bank busts. The man is a menace.

H/T Douglas Carswell's blog

How to Regulate Financial Services - Lesson 1

Recent speeches by cuddly old Hector have basically said that despite the milions of words framing our existing 'regulations' the FSA failed to stop people selling poor products. And as this is the case we are going to write even more words to stop people selling bad products and we are going to make everyone's life a misery, or at least and especially make the lives miserable of those people we think are going to be guilty in the future. A sort of 'precrime' department. Welcome to the Minority Report for real.

How about a simple alternative and just a few words? As follows:-

"The world is full of people who are for the most part totally honest andf hard working. Sometimes in the general course of commerce, products are made that might not be all they seem and the people employed to sell them are not dishonest but not necessarily fully informed as to their quality, and in any event they owe a duty their employer to sell as many of these as possible. This is a very good thing as in the end it creates a lot of wealth. But, Mr Consumer, you have a duty too. Make sure that you understand what you are buying before you buy it and if you don't understand it, don't buy it. Oh, and as regards you Bankers, if or rather when you screw up, you will burn".

There you go, financial regulation in one paragraph. How hard can it be?

Grand Designs

Do you like the Channel 4 program Grand Designs? I do. I love Kevin McLoud’s slightly ironic delivery and I love the optimism of the people embarking on complex projects in house design and creation. The almost desperate need to realise their dreams. But what really does fascinate you most? What is the common theme that connects the vast majority of these dreamers? Yes, they get it hopelessly wrong. They are wildly overoptimistic as to what can be achieved in a realistic time and a realistic budget. They are almost universally ignorant of the ways of the construction industry and the customs and practices evolved over centuries that allow smooth liaison between trades and between the architect and the men realising his creation. It is a very complex matter involving a logical process and certain necessary durations and the limits of men and materials. Much of this is not written. It is in the individual skills of the tradesmen and in the materials they use. The architect knows he can rely on these matters without any need to specify them exactly. He knows that the customary contractual relationships will happen, often without a contract but in the natural cooperation to get the job done that is beneficial to each other. I have worked in construction. I have made drawings. I have written specifications. I have set out bills of quantity. But in all those bureaucratic documents I have never had to set out how men work with other men. How the natural need to cooperate well in order to succeed happens without the need for any detailed prescription. It all happens as if by magic, and I have been there as the Engineer often merely to explain and clarify or to mediate.

Here is a lesson for all bureaucrats. We know what to do. We do not need you to tell us. Because you can’t. You do not know what we do and how we resolve the millions of small equations necessary to complete even the simplest negotiation let alone a complex product like a trophy house.

And yet here you are again embarking on another risible attempt to have us bend to your will to do what you say is what we should do, quite against the grain of our superior knowledge. Here you come arriving with the laughably named Retail Distribution Review. The title simply camouflage for another bureaucratic Grand Design for retail financial markets. And just like most of the dreamers observed by Kevin McLoud it is clear that you have absolutely no clue as to what you are about. Like other initiatives - stakeholder products, revised banking capital ratios, treating customers fairly, and others – it will fail. It will fail because it is bureaucratic and it will fail because you are wrong. Likely the outcomes will be diametrically opposite to what you intend.

I am one of thousands of people working in the retail financial services game that knows by custom and practice what works and what does not. I am one of thousands carrying out millions of those small transactions that secure efficient delivery of financial services to our millions of diverse clients who are all individuals with unique demands and requirements. How can you possibly know what they all want? How can you be sure that what you propose does not result in massive consumer detriment as the mad bureaucracy you inflict on us pours carborundum into the smoothly oiled machinery of the existing market developed over centuries?

You have required us to respond to your consultation paper on this risible proposal, and we have responded. But clearly it is pointless to do so. By doing we give spurious legitimacy to these ridiculous proposals. We let you bog us down in the trench warfare of the minutiae when we need to be using blitzkrieg to go round these bureaucratic blockages. To advance to a place where the costs are lower and customers benefit and do not suffer bureaucratic detriment.

But you are clever. A lot of your proposals hand further cartelising advantage to some of my peer group who are only too happy to have competition limited by the application of arbitrary entry requirements into the game, and these are also backdated, mind you. Why should you decide today that things are now different and to play we must adopt entry requirements that we have already passed by dint of experience and relentless continuing education? This is akin to writing to a motorist demanding a fine for parking in a street ten years ago that now boasts a yellow line. Oh yes, you are egged on by the consumerist lobby. But what Which knows when you embark on this is how they will profit it from it. Not how it will help the public or when or why.

I predict that this latest initiative, among the most stupid, will fail. It will go over-budget. It will take a lot more time. But unlike Kevin’s heroes you will not absolutely have to finish it. You will find after spending all this time and our money that it does not work and quietly bury it. Its one result will be the destruction of a lot more of other people’s wealth and the livelihoods of a lot of entirely innocent and hard working and honest small businessmen.

So a word from the wise. Stop it now. Stop wasting everyone’s time. Just stop it.

Sants talks Nonsense - again.

Hector Sants and the FSA

I see that Mr Sants has been given a platform to speak about his plans for the future of the FSA. The essence of his speech seems to be that the FSA should do more of what it has been doing that has already failed. Employing more people to look at what independent businesses are setting out to do before they’ve even done it. This is based on the analysis that the recent banking failures were because the FSA was not doing enough and that its regulations were light touch. Clearly if that basic analysis of the causes of the current problems is wrong then what the FSA now proposes to do is wrong, so let’s look at it.

The credit crisis was triggered by the freezing of the short term paper market that commercial banks used to refinance and fund their mortgage books. The classic borrowing short and lending long that has regularly got them into trouble in the past. The market froze because investors had lost confidence in the commercial banks ability to service and repay these loans. In other words the bond market made an accurate judgement of risk. Or rather it passed an accurate judgement on the fiscal, monetary and regulatory policies of various international governments.

In the USA it, the bond market, realised that the two nationalised underwriters and issuers of the mortgage backed securities, Fanny Mae and Freddy Mac may not have been as secure as they thought and that a whole load of junk mortgages they had financed were, well junk. The borrowers were of very questionable quality. These borrowers had been encouraged to borrow money by the US government and lenders had been forced to lend to them by the use of anti discrimination laws. The State had intervened in the normal course of human action. It had set about to rig the market to favour its chosen voting clientele.

In the UK Gordon Brown made various moves that were certain to doom us to this crisis. One, under the FSMA 2000 he created the current, now generally known to be flawed, regulatory structure. An Act deliberately designed to concentrate knowledge of and power over the financial system in one man’s hands, his. At the same time he abandoned any prudency over the money supply and changed the general price level target from the RPI, which includes housing costs, to the CPI that does not. These lax policies further reinforced the UK’s retail banking cartel, encouraged the creation of a whole raft of secondary banking business engaged in real estate finance and drove the pricing of risk to low and ultimately unsustainable levels. Many people became lulled into apathy by the falsity of the claimed end of boom and bust. No acknowledgement was given to the ending of the Cold War as the driver of prosperity and low increases in the general price level as the countries liberated from communism joined the world economy and grew their economies though trade by supplying us with goods at low prices. Furthermore Brown’s government pandered to the consumerist lobbyers and encouraged massive redress payments for allegedly mis-sold financial products. This transferred huge amounts of capital from savings in insurers, banks and other market participants, to lucky and mostly opportunistic and vexatious claimants who then spent it on more imports.

In regards to the FSA, it set about creating a massive rule book, that one of my colleagues tells me stands eight feet high if you print it out. This is not at all light touch regulation. It is not either heavy touch. It is just plain wrong touch, as events have proved.

Elsewhere, international banking regulators redesigned commercial banking capital requirements, making them much looser on the basis that modern financial techniques allowed more and different types of instruments to be used as capital, and less of it. This was a green light to banks that they could gear up their balance sheets. The banks assumed that the great and the good in international regulation knew so much more about it that it must be OK. Moral hazard was again inflated by politically driven statist bureaucratic regulatory actions that flew in the face of the accumulated wisdom of their peoples gained over centuries.

These epic political, central bank and regulatory failures set about fuelling a real estate asset bubble, which as bubbles do, eventually imploded due to the wise actions of ‘the market’. The market, that is me and you, made an accurate judgement on all these state and regulatory failures and stopped the party. Well done the market.

So the FSA’s analysis of the reasons for the real estate bubble crisis – not the credit crisis note – is utterly flawed, and yet it now sets about basing its next actions on this flawed analysis. Welcome to the Mad Hatters tea party.

The FSA now proposes more proactivity in the design of financial products and other interventionist measures to ‘prevent another banking crisis’. Since this was not a banking crisis they have already made their first mistake. Next, having proved they have absolutely no clue as to what went wrong, what to do about it when it did, and no idea it was happening when it was obvious to everyone else that it was, what unbelievable arrogance makes them think that they have the monopoly of wisdom in financial matters or the design of financial products or the way in which financial businesses should be run? It is utterly risible to assume that 2600 (soon to be 3000) people in an ivory tower block in London’s East End have any more knowledge than the other 60 million people in the rest of the UK as to how best to carry out the millions of individual transaction that we each undertake very smoothly each day. We, the market – or better human action - solve these equations effortlessly without anybody getting involved at all, especially the State.

Clearly regulation, as practised in the UK as ‘nationalisation by regulation’ was in very large part the cause of the real estate bubble. So how is making more intrusive regulation ever going to solve it? Well, of course it is not. It will in fact make it worse. It will increase exponentially the moral hazard. As Mr Sants says, he wants the FSA to do more of what people thought it was doing. What they thought it was doing was making financial transactions risk free. This is a nonsense on so many levels it is difficult to know where to start. One, if no-one has any risk in any transaction, they know that whatever decision they take however stupid, will never result any personal loss. This will add massive additional moral hazard. Two, if there is no risk involved how will any return be made? Three, if there is no return because all the risk has been removed the risk to everyone will be increased as returns will be zero and no wealth is created.

Regulation is always the cause of these crises, it is never there solution. Weak politicians love regulation because it looks like they have done something. Bureaucrats love regulation because it builds their empires. Both of them love regulation because it gives them ability to control more people and tell them what to do. It is a power thing. The reason that politicians outsource regulation to quangos is that when it goes wrong, as it always will, (Dan Waters ‘All regulators end in failure’,) they cannot be directly blamed for it.

The best regulation of all is of course not to do it in the first place but to trust people to sort it out for themselves, which we can do very nicely thank you. You might think that commercial banks need supervision of their basic balance sheets because they will always greedily expand their asset base to irresponsible multiples of their capital. Well, yes, but only where the state has a monopoly of money. If the freedom to create our own money is returned to us the banks will become more prudent with their balance sheets and compete on safety not rate. In short Gresham’s Law – ‘bad money drives out good if it is at the same price’ – will come into play and the banks will need to offer sound money to survive. Unfortunately the Voter is not ready for such liberation and we are stuck with poor quality state monopoly money and State banking supervision. Such minimal bank balance sheet supervision as is required is not difficult, it is just beyond the hopeless FSA bureaucracy.

As we have seen Sants and the FSA’s basic analysis of the causes of the current recessionary forces are utterly wrong, so how is their solution to those wrong analyses going to work? Well, of course it is not. If Sants and his hench-bureaucrats get their way we – that is our clients - are doomed. And like all failed statist bureaucracies, having no longer any credibility or any moral authority and a recalcitrant population that will not be cowed by threat, they have started simply, metaphorically, shooting people.

Welcome

This is the new blog for the Adviser Alliance. You can visit our website here.