The Gold Standard  

Philip Stephens writes a good comment in FT on Lord Adair Turner’s remarks at the Prospect Magazine Round Table. The remarks appear eminently sensible to me:

Step forward Lord Turner, who as chairman of the FSA is Mr Sants’ boss. Last week Lord Turner threw a grenade into the debate. Thinking aloud during a roundtable discussion reported by Prospect magazine, he said bonuses were as much a symptom as a cause. Policymakers needed to ask more fundamental questions about why financial services generated such vast profits and about whether the industry had grown so big as to outstrip its usefulness to the rest of the society. [More here]

He ends with the right question:

A few short months ago, everyone agreed that things could never be the same again. Well, unless policymakers are ready to examine critically the structure, efficiency and utility of the financial services industry, back to the past is precisely where we are heading.

Even as they stash away this year’s bonuses, the bankers are betting that politicians and regulators will bow before demands that they protect London’s “competitiveness”. I fear they may be right. Lord Turner, though, has at least mapped out an alternative. Just what do the banks offer the rest of society to deserve those vast profits?

One reader was not amused.  But he offered nothing more than sarcasm and another reader (commenting on another article) offered unsubstantiated claims on behalf of the financial sector.

Here is the link to the roundtable. I have not read the transcript yet.

A friend sent me this article – another sarcastic piece, this time on the Reserve Bank of India with very little attempt to substantiate. A very one-sided view with some elements of truth. But, overall, it sets up many strawmen to knock them down. Increasing risk weights on exposure to speculative sectors before they boomed, changing incentives on recognition of profits in securitized transactions, scenario testing for interest rates going up done as early as in 2002 – were clearly proactive steps taken by the RBI in the period 2002-07.

but I thought Cowen’s position as the “defender” of financial innovation was interesting. Basically he agreed that financial innovation can cause problems, but he first argued that the innovation in question (synthetic CDOs) was a response to bad regulation, and then argued that regulation was likely to cause more problems than it solved, and therefore our best bet is to let the free market sort it out and hope for the best.