Last Updated Sep 10, 2009 1:23 PM EDT
Of the points Carney makes, one that stands out in particular to me is at the end of the article:
It seems far more likely that the systemic monitors in the US and Europe will fall prey to regulatory capture and be used by powerful financial institutions to gain advantage over less influential competitors. In fact, this is already happening. Wall Street banks are reportedly using the Obama administrations pay czar to prevent competitors from bidding up the cost of their best traders. And in Europe, banks and politicians are angling to protect domestic banks against foreign competition.I share Carney's concern; in fact, this is a point I have raised tirelessly since March. Big banks, I have argued long before others did, will end up swallowing niche financial institutions, in effect creating a monopoly environment that ends up ripping off tomorrow's consumers and investors. And indeed, this is exactly what is happening.
The central problem with a collapse like the one we have just experienced (and may be on the way out of, according to some) is that it was made out to be a whole lot worse in places than it actually was by those with specific vested interests in enacting populist political reforms which would end up giving them the upper hand. Those populist reforms included limiting bonuses, protectionist measures on foreign investment, and significantly, stricter lending standards.
Populist political reforms never work effectively in a free market environment; for instance, Sarbanes Oxley is a prime example of a disastrous attempt to inject morality into the marketplace and in the process, stifling incentive and competition (much fewer foreign companies listed in the U.S. after the law was put in place).
While bonus payment restrictions might sound attractive to those who are angry at the big bank chiefs, in effect all it does is drive the best to the biggest banks. (This is a problem that was conveniently overlooked in the latest Dutch financial institution salary reform, since there aren't as many regional banks which would suffer as there are in the U.S.).
Likewise, protectionist policies restricting the stateside deal-flow created by Asian and Middle Eastern banks are ultimately regressive. All they end up doing is assuring that the rest of the world grows and gets rich without us. And as much as a tightening of lending standards might appeal to those who think U.S. monetary policy is way, way too loose, it will again, only suffocate the little guys. But if enacted for a little bit of time, such reforms wipe the slate free of competition for the Goldman Sachs's of the world.
Worse still, the doomsday predictions created by Washington D.C. financial reform lobbyists have all been taken on board with enthusiasm by the academic community. In fact, never before has the financial cadre taken so seriously the words of economists, who are usually just background noise in saner times. Meanwhile, FDIC chairman Sheila Bair stands by and ushers in what is effectively yet another hostile takeover aided by a regulator (think Colonial BancGroup, Guaranty Financial, and Bank United, to name just three).
What we experienced last year was a natural market crash. Banks are always the first firms both to feel the benefits and take the brunt of cyclical economies -- seeing one or two go under should have been no major worry then. In fact, bankruptcies of major institutions are a great chance to create reforms that encourage more innovative competition. Instead, we find ourselves blowing that chance -- and end up with the same type of products (think LIBS, or life insurance backed securities) that got us into trouble in the first place.