Was deregulation or overregulation responsible for the 2008 crisis?

The purpose of this post was primarily to introduce this new finance blog called – Spontaneous Finance (HT: Alt-M blog). For the uninitiated, spontaneous order was a term popularised by Austrian school. So the blog as one would expect mixes finance ideas with Mises, Menger, Hayek etc. And even more interestingly, the blogger Julien Noizet works as an analyst in finance industry.

In his inaugral post at alt-m, Noizet sums his core thoughts:

Many discussions of the causes of the worst financial crisis in decades focus on macroeconomic indicators, while overlooking fundamental changes in the mechanics of the financial  system that have occurred over the past three decades.  That focus has, in my opinion, given rise to two fallacies.  The first of these holds the financial crisis to have been unforeseeable.  The second has it originating in the US.  In truth the crisis was a foreseeable consequence of financial developments common to most of the industrialized world.

Rather than taking a step back and attempting to understand the underlying drivers of the boom and  bust, politicians, central bankers and many members of the general public were quick to attribute  them to “inherently unstable” and insufficiently regulated financial (and especially banking) industries.  This perspective led to the introduction of unprecedentedly sweeping financial reforms.

Was banking an inherently unstable industry that needed stronger oversight?  As a financial analyst spending all day looking at banks’ balance sheets and speaking to bankers about their business model, this understanding made little sense to me.  My peers and I could see the hundreds of pages of regulation that banks had to comply with.  Banking was hardly an unregulated industry.

Might the crisis have instead had its source in developments outside the private financial industry? Some economists, but also many commentators of the finance industry, were quick to accuse monetary authorities of bringing about the boom.  While I do think there is some truth to this, my experience led me to believe that there was much more to the story than that.  Asset bubbles did not appear at random but involved similar asset classes simultaneously around the world, implying a common denominator.  One such common denominator consisted of the Basel accords, an international agreement on banking regulation first implemented in the 1980s, and revised on numerous occasions since.  I also noticed that new start-ups, free from Basel regulatory constraints, seemed to be thriving in areas and products avoided by mainstream banks, indicating a supply side rather than a demand side issue.

Equipped with these observations, and inspired as well by the Free Banking literature arguing that past financial crisis were rooted in badly-designed rules, I decided, in 2013, to found the blog ‘Spontaneous Finance,’ with the aim of coming to grips with our recent disaster.  I here offer a brief review of some of my postings there, with apologies for the perhaps cryptic nature of the necessarily brief summaries.

He points how Basel regulations which were supposed to prevent crisis are actually creating one by numerous policy interventions.

He puts more faith in the spontaneous finance:

Is there anything we can do?  Might deregulation give us an antifragile banking system?  Fintech — the various alternative financial start-ups that are starting to reshape financial services, which are (so far) mostly free from the red tape that constrains (and protects) established banking behemoths — may offer another way.  Innovations like marketplace lending and cryptocurrencies might conceivably give birth to a new system of relatively free banking.  Although remote, the possibility is no less exciting, as it would represent an emergent order capable of responding to changing market demand for funds and money — something that traditional banking has ceased to be.

Of course, arriving at such a new system will also take time.  But as Israel Kirzner and Immanuel Kant have taught us, patience is required if private-market entrepreneurs are to have a chance of coming up with better solutions to current financial-market disorders than we’ll ever get from government regulators.

Useful stuff..

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