Financial regulators

Financial regulators appear to have been to be impotent onlookers in the monetary boom and bust of many developed countries, and not the strong authoritative pillars they were meant to be. Any financial regulator or central bank chairman who are proven to not have acted upon information received about excessive risk taking by the sector under their oversight,  or even if they did not adequately investigate and monitor the sector, should, in my opinion, be held legally responsible.

United States

The monetary expansion of the past decade in the US was substantially aided and condoned by Alan Greenspan, the former chairman of the Federal Reserve. He held the post during 18 years which proved to be enough time to instutionalise a loose monetary policy of low interest rates and cheap capital despite much evidence of successive bubbles in asset prices such as stocks and property. He justified this by his belief in self-correcting markets and an upwards shift in in the level of sustainable economic growth and higher productivity for a variety of reasons such as increased investment by business in computer systems.

In the US, besides Alan Greenspan, another prime candidate is the Securities and Exchange Commission and its former chairman, William H. Donaldson. He introduced rules to substantially reduce the requirements that large investment banks were subject to. He also decided to rely on the computer models of the very banks the SEC were meant to monitor to determine the riskiness of their investments. While his successor, Christopher Cox, introduced many positive reforms, they were not strong enough to undo the damage done by his predecessors or reduce the risk of the leveraged boom in toxic securities that was underway. His subsequent reaction to the beginning of the crisis in September 2008 was relatively ineffective. They were appointed by the former US president George W Bush.

Here’s a video that describes how toxic assets were created. It’s really incredible that the Federal Reserve and Securities and Exchange Commission allowed this kind of thing to go unchecked!

The Crisis of Credit Visualized from Jonathan Jarvis on YouTube.

United Kingdom

The UK duo of the Bank of England and the Financial Services Authority were notably ill-coordinated in their response to the financial crisis. This became evident with their tentative handling of the collapse of Northern Rock and the ineffectiveness of their bank monitoring procedures despite the prior warning signals. The combination of poor regulation, the large size of its financial services sector, and the existance of a property price bubble (almost as extreme as Ireland’s) has resulted in severe strain in the stability of the UK financial system. There were very few controls on banks speculative investments in toxic assets. The pound sterling has suffered major falls against most major currencies.

Switzerland

The Swiss bank, UBS, and the Swiss reinsurer, Swiss Re, seem to have had free reign to invest any amount of capital in any class of assets. As a major global financial institutions based in a relatively small country, they have the potential to be a destabilising force for Switzerland. The recent downturn of the Swiss Franc may prove to be a sign that Switzerland is losing its status as a safe haven in times of international financial turmoil.

Austria, Italy, Belgium

The financial regulatory authorities of Austria, Italy and Belgium did nothing to react to the issuance of large amounts of , euro-denominated debt to borrowers in countries of Central and Eastern Europe. While this is normally benign, if the currencies of the respective countries is hit on financial markets, the debt becomes ever more expensive for the borrowers to service. The borrowers receive income in their own currencies, however, they must repay the debt in euros which is currently strengthing relative to those currencies. The banks at risk include Erste Bank, Raiffeisen Bank, Societe Generale, Unicredit and KBC Bank .

Ireland

A special mention goes to Patrick Neary, until recently Chief  Executive of the Irish Financial Regulator, and his predecessor, Liam O’Reilly, who held the post from November, 2002 until December 2005, along with all the board members of the Central Bank of Ireland from 2002 until 2007. During their terms, there was huge growth in mortgages that were excessive compared to combined salaries of house buyers, in addition to an explosion of speculative lending of banks to property developers and construction companies. Both were substantial factors in one of the most extreme property bubbles in the world and no effective action was taken to restrict these activities. Patrick Neary was recently forced into early retirement – a convenient move by his political appointees.

Bank directors, board members and top executives

Considering the systemic risk of collapsing banks to the entire country’s (and world’s) economy, the possibility of taking legal action should be investigated. Bank directors, board members and top executives have a duty of care to their stakeholders (including the state) which is not compatible with the unreasonable profligacy and risky speculation with depositors’ and investors’ funds that took place. Those who are proven guilty of mismanagment and breach of duty should bear legal responsibility.

People that should be investigated by law enforcement agencies include top management and board members of the following companies: In the United States – AIG, Merrill Lynch, Lehman Brothers, Bear Stearns, Washington Mutual, Countryside and Wachovia. Elsewhere – Anglo Irish Bank and many more. You many think that it is only natural that a commercial organisation, with its shares quoted on the stock market and subject to the whims of shareholders, should aim to maximise profits – except that banks are not normal companies.

Action?

If we are to discourage the kind of behaviour that led us into this mess, the people responsible should be charged with negligence on a national scale.

Governments

The state’s executive, or the government, is usually responsible for appointing the head of the country’s financial regulatory authority. While much blame lies with the government, it must be remembered that it is the people of the country who choose the politicians from whom the government is formed. It is a major disappointment that the people themselves – the electorate – repeatedly voted for the politicians who led us into this crisis. An elected official who becomes comfortable in their position does not tend to actively defend the interests of the people. It becomes too tempting to aim for short term gain to increase chances of re-election at the expense of long term prosperity and well-being.

United States

George W. Bush was voted in twice in succession by the people of the United States. I would not consider him to be the most exemplary of presidents a country could have. His appointees have overseen the spread of subprime lending and the unregulated derivatives market. The US financial system is now in severe distress and its economy is contracting.

Ireland

Fianna Fáil has been main party of coalition goverments of Ireland since 1997, having been repeatedly re-elected, and have, rather forcefully, consolidated conservative politics in Ireland. A prominent member of Fianna Fáil , Bertie Ahern was Minister for Finance and subsequently Taoiseach (Prime Minister) at the time when damaging stimulatory policies were either put in place or extended without adequate checks and balances. In April 2006, at the peak of the property bubble, he made this comment, as reported by Finfacts Ireland:

“Really we should have an examination into why so many people got it so wrong. My view is there’s not a great problem. Really, the bad advice of last year given by so many has maybe made some people make mistakes, that they should have bought last year.”

He and his party have squandered an impressive economic boom that has now faded. Ireland is currently suffering from fears that it may default on its national debt thanks to the effects of a collapse of a huge speculative property bubble.