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.
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.
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