Lefties just don't get it

The City that is....or perhaps it's a wider problem than that, it's innovation they don't get.

John Kampfner was editor of the New Statesman so I think we can call him a fully paid up lefty. He complains about the level of regulation in the City as one of the causes of our current ills.

For years now, the hubris of the City of London has been more pronounced than that of Wall Street, Frankfurt or Tokyo. Ministers like to call it "the light touch". Others talk of the timidity and structural weaknesses of the Financial Services Authority. Whenever they have had the opportunity to impose the same level of scrutiny of financial services as exists in the rest of society, ministers have flunked it.

Certainly, I too would argue that City regulation leaves something to be desired. But my analysis of what is rather different.

We had a pretty decent system which was then destroyed by the creation of the FSA. Before that City regulation was very much in the hands of those who knew what was going on: might be the Stock Exchange, might be the Bank of England, dependent upon sector. It was light touch, in that it rarely if ever depended upon the criminal law: but then that meant also that it never needed to come up to the standards of evidence of the criminal law either. Heads were banged together in secret, obvious spivs and rogues frozen out, a few phone calls around and misdemeanours were dealt with before they became systemic.

Now we have the FSA and that brings with it two problems: the regulators aren't the intimate participants in the markets that they once were and are thus depressingly out of touch with what is actually going on and secondly, they're attempting to run everything with a rules based approach. With every jot and tittle included.

Now in a reasonably static environment this works, or at least can do so. But to think that the City is static is to entirely misunderstand it: it's the great centre of innovation in the country. We might not like some of the outcomes of such innovation (second and third level CDOs perhaps) but others have made life hugely better: the basic securitisation of mortgages, the eurobond markets, AIM perhaps. 

And you cannot run such an innovative place from an unchanging rule book: you need the flexibility of very broad rules and standards administered by those who actually understand what the market participants are doing. Unfortunately, this blindness isn't restricted to the administration of the City.

I'm seeing a parallel horror in the way that the new EU REACH regulations are going to work. I have a little business that imports odd metals into the EU (and other places from time to time). There are some metals that I might import into the EU once every two or three years (berylllium and rhenium, to give examples). Under this new system I must register every metal that I import in quantities of over 1 tonne a year: and register them at great expense too. So I'm actually being asked to register, and pay for, all the metals that I might import in the years to come. But I don't know what they are, of course, for I don't know what future supply and demand are going to be like. Perhaps Rolls Royce will win a larger share of the jet engine market, meaning that more rhenium will be demanded? Maybe the electronics industry will expand, demanding more gallium or germanium? But to be able to react to such changes in demand I have to register now, and pay now, for things that simply might not happen.

I agree that some of this is simply me whinging: but I regard the two as aspects of the same common mistake. You simply cannot regulate dynamic and innovative markets in this manner, from a rigid rulebook. For if you do so you stop them being dynamic and innovative and thus you lose much of the purpose of having markets in the first place.

Something which, I submit, lefties simply don't get.