Regulation in the financial sector

The author is Mojmír Hampl, the original article can be found at Laissez Faire

Laissez-faire - let us be
Laissez-faire - let us be

On several occasions, readers of the observations have asked me a rather logical question: “Mr Hample, you are still writing about regulations in areas outside the financial sector. Why don't you write about nonsensical regulations in this area, when In addition, do you work in it yourself? ”Yes, these interviewers are right, I paid the least attention to the area I should probably know best. Probably just so that my lyrics wouldn't be even more depressing. However, developments in world financial markets directly encourage reflection on regulation in the world of finance and the role of the state in the monetary universe.

Are you wondering if the role of the state and regulations in this sector is great? Yes it is. And is it bigger than in some other areas? Yes, I would sign that too. And you're not trying to fight that, Mr. Hample? But yes, and if there is a deregulatory God somewhere, he sees it. However, it is at the level of deleting words and sentences, not radically deleting paragraphs, pages or entire books, if I can afford this example.

A sad finding for many is the fact that the importance of the state in the financial sector is higher, mainly because the state even regulates the key basic price, ie the interest rate. Although the purpose of interest rate regulation is not to influence primarily the prices of services provided in finance (as is the case with energy, for example), but to influence price level movements throughout the economy (it is a kind of "metaregulation"), this role of the state is of course crucial. And therefore responsibility. In my opinion, all other regulations in the financial sector are only derived from this basic price regulation.

For decades, liberal economists have been arguing about what to do with it. Many argue that economic cycles are co-created or even dominantly created by the state by erroneously manipulating the basic price in the economy. And this also creates a financial crisis, which they must then address. If the state can't set the prices of anything, why should it be able to set the interest rate?

And suggestions on how to build the system differently? For example, the state would not regulate the price, but the volume of "goods" in the financial sector hence in the economy, ie the amount of money. Their price would then be derived from this volume. I am sorry, this is the quadrature of a circle, if the state cannot determine the price of the good, it cannot even determine the volume - that is, how much of the goods is to be produced. This was confirmed by the theory and practice of socialist planning. Others therefore propose a complete, radical cut-off of the state from the financial sector, for example in the form of so-called free banking, where the institutions that create the goods, ie money, would compete. But even such an arrangement does not, in my opinion, solve the basic problem of finance.

The basic problem is that the financial sector has unfortunately turned in the eyes of the audience into a provider of public goods, a guarantor of savings and deposits, which guarantees profits and does not allow losses. It has become a system with the expected implicit guarantee of the state for all losses that individuals in this sector will suffer or may suffer. And the state has become a universal insurance company for all "insurance claims" in the financial sector, no matter who is to blame and no matter how large. We are constantly looking for security in an uncertain risky world, and we want it all the more, not the less.

So far, we have lived in a system of rather implicit state presence in the financial sector. The audience silently waited and expected to never lose their money, but system at the same time they are operated by normal market entities with normal profit motivation. A combination that may not produce good results. As Jiří Suchý said: when you cross a passerine and a dandelion, you may not end up with a beautiful horsetail, but a disgusting dandelion. Economists called it a moral hazard.

In times of crisis, such as today, only this implicit role becomes an explicit role and takes the form of rescue packages, bank recapitalisations or their nationalization. After all, it is guided by a simple reasoning: what is more political, ie public affairs, than people's money, than their savings, pensions, insurance? What can upset and uncertain more voters than the potential loss of their money?

Unfortunately, if the financial sector is more and more a provider of public goods, there is no way out of this regulatory trap. Even free banking is no guarantee that people will not consider the guarantee of their money as a public good. Such a will of the majority, and thus the transformation of a private good into a public one, cannot, in my view, be prevented in any monetary and financial order if normal democracies exist.

Unfortunately, after the current crisis, the financial sector will probably move even closer, at least in some countries, to a provider of typical public goods - institutions operating in this market will be more supervised, regulated, remunerated, maximized profits, reasonable costs and so on. It is necessary to face this wave, but it is also necessary to know its strength well.

And is there any general hope? Perhaps only in the fact that the path to the financial sector providing an explicit public good, with everything, of course, does not work either. And the smart know it now. In addition, unlike the current suboptimal system, it does not work not only in bad, but also in good times. That this hope is very long-term? Yes. And do I have any more tangible ideas? No, on the day I am writing this observation, unfortunately, does not occur.