Regulator turned academic knows the rules

One of the strengths of Howard Davies’s book is its brevity. Many, many thousands of words have described the symptoms of the global financial crisis and several thousands the prognosis.

The problem with so much of this work – including Thomas Piketty’s magnum opus, Capital in the Twenty-First Century – is that it lacks the practical instincts of a regulator turned academic whose default is to promote a post-crisis banking and financial regime which could actually be made to work.

Howard Davies’s prognosis is as radical as it is refreshing. As always, the world is too complex to define a set of rules that can bind the new world order. This time round, the backdrop is a combination of China as emerging new power refusing to play by the rules of the Ancien Regime, in this case floating exchange rates; the US playing the establishment role by defending its status as the world’s reserve currency; and if it is not stretching the analogy too far, the European Union in the role of the insecure bourgeoisie balancing the conflicting interests of the ECB and national banks.

Article continues after advert

Throw into this spicy mix mammoth leverage masquerading as the alchemy of the erstwhile Masters of the Universe and it is little wonder regulators were and are behind the curve in designing a new order. That the system needs correcting is not in doubt, but how to do so?

Reforms to date have been piecemeal and confusing. Monetary policy co-ordination remains a dream and the tax system is largely unchanged.

Paul Tucker at the Bank of England points out: “Detailed rulebooks are the meat and drink of regulatory arbitrage” and so taking responsibility away from boards and companies themselves is not the answer, but making them feel the heat of the market is.

“The strongest bulwark against another financial crisis is fear.”

In effect, we have to go back to first principles and eliminate distortions in the tax system which make debt more attractive than equity, make shareholders more accountable for the success or failure of their companies and stop governments using cheap tricks to inflate property prices. Simple.

Published by WileyJulian Ide is chief executive of Old Mutual Global Investors