Monday, October 11, 2021

Why it’s wrong to limit free markets in the financial crisis

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In early April last year, an astonishing 97.5 percent of American voters gave their approval to increased regulation of financial products sold to them—including such a regulatory proclivity seen in the UK. America’s action will be echoed in other free-market democracies.

…but still falls far short of what is needed

…some are calling for a moratorium on state regulation of financial services—temporarily, at least. But that would not be good for America either. America is doing far too little to give free markets and individual choice the democratic support they need to run the global financial markets.

Proper regulation is urgently needed

Protectionism isn’t free. Even a large expansion of trade within and between countries could be considered protectionism. A case can be made that protectionism is probably a less effective form of protection than is regulation. The purpose of regulation is to ensure that a limited number of parties in a democratic society can access the product or service they want and pay the appropriate price.

The cost of regulation tends to fall on society at large, and that matters. A ban on firms being bailed out by the taxpayers in the event of a crisis is important not because it lowers the risks that financial firms run, but because a ban on bailouts discourages banks from taking more risk for the same or even better profits.

Dodd-Frank and other recent regulatory developments do not help free markets: they have added layers of complexity to the rule-making process and have politicized financial services.

A global ‘no go’ zone

What about competition? “Concentrated government doesn’t create free markets,” Michael Osborne of Yale’s Financial Markets Program told me in a recent interview. “It doesn’t have to.”

Proposals are already floating around in the European Union that would effectively create a ‘no go’ zone by limiting or even banning high-frequency trading: national regulators at first ignoring but then proscribing the pursuit of profits at the expense of the long-term interest of institutional investors. There’s a risk that national regulators might end up paralysing the functioning of the global market.

Of course, less corrupt jurisdictions such as Sweden, Norway and Switzerland have provided the world with good rules over many decades. But good rules cannot replace institutions, which is where a nation’s courts come in. National courts are where customers of institutions and honest professionals have recourse to ensure that rules are upheld.

There’s hope for the United States

Americans have a chance to have a legitimate seat at the global financial table. A growing global consensus of financial leaders —from Richard Prasquier to the Brics — is behind calls for a global financial regime that is based on international law. It is a consensus that has been building over a long period of time.

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