Say farewell to gentlemanly capitalism

Tony Curzon Price

3 May 2008

Tony Curzon Price foresees a new era in which finance will be as tightly regulated as pharmaceuticals

Ever since social arrangements became complex enough to write into laws, we have regulated the behaviours that have the potential to mess up our common lives. Look at the Book of Deuteronomy. It’s all there: health and safety (diet and hygiene), taxation, bankruptcy, neighbourly envy, sexual conduct... and finance too. The Old Testament is pretty draconian: no lending for interest within the tribe — but as much as you like outside the tribe. Lawmakers understood even then that easy credit, with its potential to exploit gullible optimism and generate bubbles, could rock a society to its core.

The 21st century’s first credit crisis is not over, but the acute phase is now understood. Financial institutions are laden with untradable, badly priced debt that they can’t re-sell. Governments everywhere have shown that they’ll do anything to avert a confidence run on the whole system. Liquidity is being pumped in, and the immediate cost is coming in the form of increased inflation. All that money chasing goods that not even Chinese factory capacity can provide fast enough means higher prices. Inflation is a stealth tax — it hits those who can’t negotiate their incomes upwards in line with prices, such as pensioners on fixed annuities, the subsistence poor and anyone else who is outside the developed world’s commercial economy.

The history of financial regulation since Moses’s day has been a generational cycle of loosening, crisis, tightening; loosening, crisis, tightening. We’re about to get down to some serious tightening again. Alan Greenspan, now less the guru and more the pied piper who enchanted us into the magical realm of ever-increasing asset prices, worriedly noted two weeks ago: ‘Those of us who look to the self-interest of lending institutions to protect shareholder equity have to be in a state of shocked disbelief... But I hope that one of the casualties will not be reliance... on financial self-regulation.’

Greenspan is about to have his hope disappointed. Banking will come out of this crisis looking like a regulated utility. Something like this last hit banking in 1929: US legislators of that era set the scene for finance through to the Thatcher–Reagan deregulations of the 1980s. The Glass–Steagall Act of 1933 separated commercial and investment banking. The idea was that consumers needed the protection of regulation and social insurance for deposits. Corporations, and the rich, could go to the lightly regulated investment banks for grown-up caveat emptor business among consenting adults. This sector would not be given the guarantees of bailouts, and in exchange it could be lightly regulated.

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