Is it time to rethink regulation?

13 Aug 2018


Decentralisation is associated with the Reagan and Thatcher era. This was a time that saw the economic reduction in the states control of property and goods as they were sold off to private companies, eluding to the contentious term of neoliberalism that some celebrate, and others fulminate.


Some politicians, academics, and economists argue regulation is vital in sustaining stable markets and minimising monopolies. Others, however, adopts a notion like investor Graham Rowan, who regularly highlights and condemns poor governmental handling of the 2008 financial crash.


In his collection of opinion articles, simply entitled In My Humble Opinion, he wrote that ‘they purposefully interpret the issue as a liquidity measure rather than a solvency problem, over leveraged and running out of capital that would benefit the bankers and inflict more pain on the little lenders.’


He digresses further that the central bank, by purchasing government securities such as treasury bonds and gilts from the market to increase the money supply, flooded the financial institutions with capital to promote increased lending and liquidity. Surprising and lamentable by the government to solve a lending problem with yet more lending. Consequently, more money, through quantitative easing, was made to shore up the balance sheets of the banks as they sought to recover from the crisis.


Interestingly, in the past 40 years, since 1971, Rowan highlights that the growth in the importance of the central banking role has amplified. More specifically, in its ability to manage inflation expectation. In fact, the amount of money in circulation has grown at a confounding 11.5%, yet official measures have averaged 2.8%. Dominic Frisby, in his book Life after the State, explains how the CPI (consumer price inflation) only calculates consumer goods and services which have stayed at a reasonable level due to competition and increased productivity.


He explains: ‘according to the think tank PositiveMoney, in the UK only 10% of all money between 1997 and 2007 went into consumer goods. Inflation doesn’t consider areas such as house prices yet, between 1997 and 2007, 40% of newly created money went into residential and commercial property. 37% also went into the financial markets but CPI does not include financial assets.’


The freedom for ordinary high street commercial banks to merge with investment banks created a blurred line, as investment banks could place a bet on the stock market using money that the common man had deposited. Banks have been able to leverage more than the original 10:1 fractional reserve ratio. This is too much leverage in a system of money that is not entering real business but, instead, financial speculation creates a whole system under threat, as was the case in 2008.


Grace Blakely made a comparable reference in the New Statesman earlier this week that ‘at no point in the last 40 years has invisible trade made up for the UK’s huge deficit in goods.’


Since 1971, the lines between debt and money have become intrinsically blurred. We have an over leveraged and highly vulnerable system where collapse is inevitable, and banks and governments have the only privilege, lending other people’s money, but are also important enough to be ‘bailed out’.


Elsewhere, the common man remained a poor wage slave, relying on earned income having hardly benefited from QE. Consequently, a correlation of acceleration with financial inequality, malinvestment, working hours, divorce rates and, of course, the inability for the next generation to find itself on the housing ladder.


Governments seem to keep endorsing this system: encouraging lending, slashing interest rates, buying their own debt through QE, and a long-term refinancing operation where the central banks print further money for more financial debt.


This is not an unregulated free market but a protected crony capitalist system. It is a duopoly, that allows privilege for both the banks and government but which nobody else carries. When a body, like the government, have a power over money it becomes abused.  


Perhaps it’s time rethink these levels of regulation, and endorse a system of government that leaves the market to itself.


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