Central bankers are still trying to rescue their monetary policy models with some additional twists such as forward guidance, but not engaging in the fundamental re-think needed. (If you need better authority than I for this assertion, please do read Bill White in the Dallas Fed series here).
Paul Tucker tells us that the new rules for banks will “go beyond ring-fencing” and that EU banks will all have to restructure themselves to comply with tough “resolution” principles. We shall see. The new rules only come into effect in 2019 – and there’s no promising that that deadline won’t be extended.
The emphasis of regulators, bankers and commentators is on the wrong target – recapitalisation of banks. It should instead be on weeding out all institutions with bad business models. Those with good models, in tune with the demands of modern society, will be able to attract market funding. But so long as the central banks flood the system with liquidity, as they are still doing six years after the start of the crisis, nobody knows or can judge the true state of any bank.
As John Kay reminded us recently, central bank/regulators are trying to regulate behave whereas should reform structure. Stabilising the structure of finance was necessary as an immediate response to the crisis in 2007-08, but precisely the wrong thing to do long term. Regulators will go on trying to regulate behaviour – that is certain. Why? Because they have no real idea how markets work or can work in the right conditions. They instinctively reach for administrative solutions.
The only viable solution is to reform the structure of international finance – both the official and private parts. The answers given in ‘The Money Trap”- paperback edition out next month – still hold.
This will involve a new interpretation of central bank independence. They will be independent in the sense they were in the 19th century. Their task will be to hold governments to account in fulfilling the obligations they have undertaken to the international community, and to oversee the integrity of their financial systems. The idea that they should set interest rates for purely domestic purposes will come to be regarded as laughable. For it will come to be realized that the domestic interest is served only if – and to the extent that – the collective international interest is also protected.
We need a new international monetary system and new models for banking, central banking and finance. And they will come. The globalisation of financial markets has run far ahead of the rules designed to contain and channel its energies to socially useful purposes.
The State will set ground rules, as market economists from Adam Smith onwards have always insisted. To escape from the grip of cronyism, it should adopt the French slogan: ‘reculer pour mieux sauter’. While governments should set the rules of the game, no longer is it possible for them to do so effectively at the national level.
Over the summer I read three interesting books – David Stockman’s “The Great Deformation”, Justin Lin’s “Against the Consensus”, and Lorenzo Bini-Smaghi’s “Austerity”.
Despite coming from quite different ideological perspectives, there are important points of agreement between the authors. They agree that much of analysis on which current government policy based is superficial:
• The search for scapegoats is unhelpful
• Lack of discipline on major actors is critical
• Given global financial markets, such discipline should be obtained by stronger collectively agreed rules.
• We cannot return to the old system. So the challenge is to build political consensus on a new one.
True, they differ in their solutions – for Stockman, there will be no escape without confronting and breaking the power of crony capitalism. Lin’s zeroes in on the international monetary system and the privileged status of the dollar. Bini-Smaghi traces the underlying common fault as the pressure on democratic governments to avoid real ‘structural’ reforms.
I believe that recent developments make the solutions outlined in “The Money Trap” even more relevant.
Central bankers should prepare for a new world
Central bankers are still trying to rescue their monetary policy models with some additional twists such as forward guidance, but not engaging in the fundamental re-think needed. (If you need better authority than I for this assertion, please do read Bill White in the Dallas Fed series here).
Paul Tucker tells us that the new rules for banks will “go beyond ring-fencing” and that EU banks will all have to restructure themselves to comply with tough “resolution” principles. We shall see. The new rules only come into effect in 2019 – and there’s no promising that that deadline won’t be extended.
The emphasis of regulators, bankers and commentators is on the wrong target – recapitalisation of banks. It should instead be on weeding out all institutions with bad business models. Those with good models, in tune with the demands of modern society, will be able to attract market funding. But so long as the central banks flood the system with liquidity, as they are still doing six years after the start of the crisis, nobody knows or can judge the true state of any bank.
As John Kay reminded us recently, central bank/regulators are trying to regulate behave whereas should reform structure. Stabilising the structure of finance was necessary as an immediate response to the crisis in 2007-08, but precisely the wrong thing to do long term. Regulators will go on trying to regulate behaviour – that is certain. Why? Because they have no real idea how markets work or can work in the right conditions. They instinctively reach for administrative solutions.
The only viable solution is to reform the structure of international finance – both the official and private parts. The answers given in ‘The Money Trap”- paperback edition out next month – still hold.
This will involve a new interpretation of central bank independence. They will be independent in the sense they were in the 19th century. Their task will be to hold governments to account in fulfilling the obligations they have undertaken to the international community, and to oversee the integrity of their financial systems. The idea that they should set interest rates for purely domestic purposes will come to be regarded as laughable. For it will come to be realized that the domestic interest is served only if – and to the extent that – the collective international interest is also protected.
We need a new international monetary system and new models for banking, central banking and finance. And they will come. The globalisation of financial markets has run far ahead of the rules designed to contain and channel its energies to socially useful purposes.
The State will set ground rules, as market economists from Adam Smith onwards have always insisted. To escape from the grip of cronyism, it should adopt the French slogan: ‘reculer pour mieux sauter’. While governments should set the rules of the game, no longer is it possible for them to do so effectively at the national level.
Over the summer I read three interesting books – David Stockman’s “The Great Deformation”, Justin Lin’s “Against the Consensus”, and Lorenzo Bini-Smaghi’s “Austerity”.
Despite coming from quite different ideological perspectives, there are important points of agreement between the authors. They agree that much of analysis on which current government policy based is superficial:
• The search for scapegoats is unhelpful
• Lack of discipline on major actors is critical
• Given global financial markets, such discipline should be obtained by stronger collectively agreed rules.
• We cannot return to the old system. So the challenge is to build political consensus on a new one.
True, they differ in their solutions – for Stockman, there will be no escape without confronting and breaking the power of crony capitalism. Lin’s zeroes in on the international monetary system and the privileged status of the dollar. Bini-Smaghi traces the underlying common fault as the pressure on democratic governments to avoid real ‘structural’ reforms.
I believe that recent developments make the solutions outlined in “The Money Trap” even more relevant.
Written on October 9, 2013 at 9:45 pm, by robert
Categories: Banking, Homepage, Official Money, RP's Diary | Tags: Adam Smith, Bank of England, banking, central banking, central banks, David Stockman, Justin Lin, Lorenzo Bini-Smaghi, Paul Tucker