Osborne’s hypocrisy on financial regulation

George Osborne today pens a joint op ed in the Financial Times with Columbia University economics professor Jeffrey Sachs. After a series of letters last month from senior economists on the case for slower fiscal consolidation, the article attempts to make the case for faster action on the deficit but has been attacked for attacking “straw men“. It also exposes Osborne’s hypocrisy on financial regulation.

In the FT, Osborne and Sachs write:

In the recent duel of macro-economists, one camp has called for early budget consolidation, followed by further measures over five years. We agree. Others want more fiscal stimulus, delaying deficit reduction. We believe delaying the start of deficit reduction would put long-term recovery at risk. Such an approach misjudges politics, financial markets, and underlying economic realities.

Blaming our predicament on financial markets, as some in the second camp do, ignores the awkward truth that governments have enabled, if not enthusiastically promoted, recklessness, through chronic deficits and lax financial regulation.

But before the crash, George Osborne believed there was too much not too little financial regulation. For example, at a Chamber of Commerce event in April 2006, Osborne said:

“Regulation too inhibits enterprise. For example, speak to any business in financial services – from the largest investment bank to smallest independent financial adviser – and the threat of future regulation from Whitehall and Brussels is now their number one concern.”

Meanwhile, in August 2007 – as subprime mortgage backed securities started causing a worldwide credit crunch – David Cameron endorsed a report by John Redwood outlining plans to cut £14 billion in in red tape and regulation for UK businesses. According to the Sunday Telegraph, Mr Redwood’s plan outlined that:

“A vast range of regulations on the financial services industry should either be abolished or watered down, including money-laundering restrictions affecting banks and building societies. Mr Redwood’s group also sees “no need to continue” to regulate mortgage provision, saying it is the lender, not the client, who takes the risk.

A recent report by Madano – which analysed the background of parliamentary candidates primarily from the Conservative party – found, according to the Times, that, “The number of candidates running this year with experience in finance has doubled to 10 per cent from the 1997 intake of MPs.”

Mr Osborne is on one side of a legitimate economic debate about the speed of deficit consolidation. But he has no right to make political capital out of financial regulation.

http://twitter.com/houseoftwits/status/10513738205 House Of Twits

RT @leftfootfwd Exposed: George Osborne's hypocrisy on "lax financial regulation" http://cli.gs/ZnL0P
http://twitter.com/thedancingflea/status/10513789221 Claire Spencer

#facepalm RT @leftfootfwd: Exposed: George Osborne's hypocrisy on "lax financial regulation" http://cli.gs/ZnL0P
topsy_top20k_en

Exposed: George Osborne's hypocrisy on "lax financial regulation" http://cli.gs/ZnL0P
http://tangentreal.blogspot.com/ jdennis_99

Regulation in financial services is not too lax – it is disproportionately focused on the wrong organisations.

The FSA focus a substantial amount of their resources on the provision of financial advice, primarily due to the highly publicised mis-selling scandals over the last few decades, e.g. pensions, endowments, with profits, etc.

However, financial advice accounts for very little of the economic activity in the financial services sector. The vast majority of economic activity is accounted for by inter-bank lending, which is what caused the credit crunch in the first place.

Financial services regulation needs wholesale change, and in particular, a substantial change in focus away from small companies which account for little economic activity, and therefore little economic risk, and onto the companies which are supposedly ‘too big to fail’. If the regulation had been adequate in these areas, the taxpayer bailouts would not have been required.
http://www.taxpayersalliance.com Matthew Sinclair

Will,

Isn’t it possible that regulation was simultaneously too onerous and too lax?

After all, we aren’t actually talking about a scale, it isn’t like you can put some scale on financial regulation and say that doubling the cost to industry halves the risk of a meltdown or anything like that. You could have an incredibly tightly regulated financial services sector but still have those regulations too lax where it counts, costly regulation can even increase risk.

The most important divide, and one that has been quite widely covered, is between regulation addressing systemic and non-systemic risk. The cost of regulation rose substantially in the run-up to the crisis. But at least as far back as 2002, the British Bankers’ Association were warning that the FSA weren’t paying enough attention to systemic risk. The regulations were looking at the wrong thing. Jon Moulton criticised the FSA’s regulatory failure quite powerfully:

“The FSA has more to answer for – it substituted the analytical approach of the Bank with walls of process. Producing and processing Risk Analyses and checklists was ample satisfaction for the FSA when action was needed urgently.”

All those Risk Analyses and checklists could be quite expensive while not properly controlling systemic risk to the economy. I think the best evidence is that financial regulation actually contributed to the crisis, I set out the case at length in this report for the TPA:
http://www.taxpayersalliance.com/home/files/how_inept_regulation_and_poor_policy_decisions_drove_the_financial_crisis.pdf

Best,
Matt
http://twitter.com/republicofjones/status/10515633429 Richard Jones

Hardly surprising but it never hurts to underline how Tories work: http://bit.ly/b7fnZG /cc @feedly
http://twitter.com/maximusmanc/status/10515831479 Max p

RT @leftfootfwd: Exposed: George Osborne's hypocrisy on "lax financial regulation" http://cli.gs/ZnL0P
http://twitter.com/financialgains/status/10518102597 Finance News

News: Osborne's hypocrisy on financial regulation | Left Foot Forward http://bit.ly/9Lw3hM
Mr. Sensible

Agreed, Will.

And Matt, with the greatest of respect I don’t think we’ll take lessons on how financial institutions should work from ‘the non-taxpayers’ alliance’…
Allan Jones

Like jdennis and Matt I can’t see the contradiction in what Osborne says. Lax financial regulation is totally consistent with regulation being pointlessly onerous. If Brown had wanted to regulate the financial sector properly – instead of relying on the City’s tax revenues and hoping the tail risk of a financial catastrophe didn’t materialise on his watch (oops!) – he could have done this with a fraction of the regulation on the government’s books. For instance, a limit on bank balance sheets relative to GDP would be worth 1,000 pages of FSA regulation.

It takes some real chutzpah to attack the Tories on financial regulation after Labour helped generate the biggest financial boom and bust in our history, the fallout from which will leave public services decimated for many years and the prospects for the poorest even worse than before.

Perhaps a more useful ‘progressive’ input on this issue would be to criticize the limitations of the government’s proposed approach to financial regulation.