There’s lots of good stuff on the current economic crisis. Ferguson states his basic thesis:
In my view, the lesson of the 1970s is not that deregulation is bad, but that bad regulation is bad, especially in the context of bad monetary and fiscal policy. And I believe the same can be said of our crisis, too. The financial crisis that began in 2007 had its origins precisely in over-complex regulation.
and then defends it by looking at the correlation (or lack of it) between regulation and financial markets’ stability.
Towards the end there is a fascinating observation:
Those who believe this crisis was caused by deregulation have misunderstood the problem in more than one way. Not only was misconceived regulation a large part of the reason. There was also the feeling of impunity that came not from deregulation but from non-punishment.
There will always be greedy people in and around banks. After all, they are where the money is – or is supposed to be.
But greedy people will only commit fraud or negligence if they feel that their misdemeanour is unlikely to be noticed or severely punished. The failure to apply regulation – to apply the law – is one of the most troubling aspects of the past five years. In the United States, the list of those who have been sent to jail for their part in the housing bubble, and all that followed from it, remains laughably short.
Voltaire famously said that the British periodically executed an admiral pour encourager les autres. All the detailed regulation in the world will do less to avert a future financial crisis than the clear and present danger in the minds of today’s bankers that, if they transgress in the eyes of the authority on whom their business ultimately depends, then they could go to prison.
Instead of exhausting ourselves drawing up hopelessly complex codes of “macro-prudential” or “counter-cyclical” regulation, let us go back to Bagehot’s world, where individual prudence, rather than mere compliance, was the advisable course, precisely because the authorities were powerful and the crucial rules unwritten.
I began this lecture by contradicting the proponents of stricter regulation, only to end it by advocating the exemplary incarceration of bad bankers. I hope you now see why these positions are not contradictory but complementary.
A complex financial world will be made less fragile only by simplicity of regulation and strength of enforcement.
Think about what he’s arguing. Ultimately part of the problem is not that our systems don’t work but that there are greedy (dare we say, evil) people in the system. It’s no good having all sorts of guidelines and frameworks if, ultimately, you don’t have fear of punishment. That’s what constrains people. It’s an argument to take account of our sinful nature, although I’m sure he wouldn’t put it in those terms. Setting up decent systems just won’t cut it because people are evil. The heart is deceitful above all things, who can understand it? (Jeremiah 17:9)
Of course, the other solution is the regeneration of the Spirit that the gospel brings. I can’t see Ferguson even beginning to argue for that 😉
Let me go one step further. Imagine you were giving a similar lecture but not about financial markets. Imagine it was about another crisis – the Anglican Communion. Couldn’t we say much the same thing? It’s not about regulation or lack of it. We have decent systems in place. The Instruments of Communion are more than sufficient to reign in heterodoxy and heresy. But by now the malefactors know that there will be no punishment and so they are free to act as they will. It’s a side-thought, but worth making nevertheless.
And, again, the real solution is repentance. And often only stiff action makes the offender understand that repentance is required.
It’s been said before but I’m reminded of this glaringly obvious fact: The Anglican Covenant is not the solution to our problems. The solution is enforcement of the penalties that currently are available, and particularly those available to Canterbury. And then mercy and forgiveness when true repentance is produced.