Politics of Financial regulation

Paul Krugman has in his NYT article says the politicians have not learnt lessons from the financial regulation.

He begins saying how people just refuse to change their beliefs despite contrary evidence.

When I first began writing for The Times, I was naïve about many things. But my biggest misconception was this: I actually believed that influential people could be moved by evidence, that they would change their views if events completely refuted their beliefs. And to be fair, it does happen now and then. I’ve been highly critical of Alan Greenspan over the years (since long before it was fashionable), but give the former Fed chairman credit: he has admitted that he was wrong about the ability of financial markets to police themselves.

The US politicians were aghast to see the bailouts going to wall street and had promised to do something. However, they were just false promises

But he’s a rare case. Just how rare was demonstrated by what happened last Friday in the House of Representatives, when — with the meltdown caused by a runaway financial system still fresh in our minds, and the mass unemployment that meltdown caused still very much in evidence — every single Republican and 27 Democrats voted against a quite modest effort to rein in Wall Street excesses.

In part, the prevalence of this narrative reflects the principle enunciated by Upton Sinclair: “It is difficult to get a man to understand something when his salary depends on his not understanding it.” As Democrats have pointed out, three days before the House vote on banking reform Republican leaders met with more than 100 financial-industry lobbyists to coordinate strategies. But it also reflects the extent to which the modern Republican Party is committed to a bankrupt ideology, one that won’t let it face up to the reality of what happened to the U.S. economy.

 Things look quite bad in US. Liz Warren in a recent interview says:

The administration has been reluctant to pressure the banks because they say they need the financial system’s cooperation in their recovery policies.
The notion that we need to ask the permission of the big banks about which approach to use is just wrong. Who’s asking the American family which provisions are OK with them? I understand that we need to get the economy back on an even keel, and destroying large financial institutions isn’t going to do that, but neither is destroying the American middle class. We need to be asking, what are the best tools to repair the economy? Not, what are the tools most acceptable to the big banks?

Though, some progress is made elsewhere.  Recently, UK bankers also opposed mere suggestion of Adair Turner for Tobin Tax. However, he still went ahead and now proposes a super tax on bonuses of bank executives. French PM Sarkozy also agrees to join Darling and introduce a similar tax. Meanwhile IMF is working on feasibility of Tobin tax.

But overall, it is all pretty sad and disappointing. The politicians are again giving into demands of the big financial sector lobby.

There are ample papers which speak on political economy of finance development. These papers say that financial sector development does not take place in developing economies because of vested interests. They call this the interest group theory where the elite want all the scarce finance resources for  themselves and oppose any reform which aims to provide finance to the common public.

What we see in developed countries after the crisis is reversal of the entire idea. The financial sector is just so powerful that it opposes any reform which could mean more responsibility on the sector. The idea of financial oligarchy is so powerful and is now getting irritating and frustrating. If the politicians are unable to reform the financial system given the scale of the crisis, they surely are waiting for a bigger crisis to follow.

Forget history, we are refusing to learn any lessons from the present. I also wonder many a times does economics really matter? It is always politics which wins.

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5 Responses to “Politics of Financial regulation”

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