Anyone who studied the Federal Reserve in the lead-up to our current financial crisis knows this is true.
For those of you who didn't study the Federal Reserve, the Fed was lead by Alan Greenspan and it was responsible for both monetary policy and bank supervision.
Mr. Greenspan was a firm believer in the idea that market discipline is superior to bank supervision. As a result, he had the Fed bank supervision one up the UK's "light-touch" regulation with "no-touch" regulation.
After all, there was no reason for the Fed to do any supervision as the market would do the supervision and do it better than the Fed. We know how that has worked out with the financial crisis that started in 2007.
What Mr. Greenspan forgot is that where there is opacity there is no market discipline.
Sunshine is the best disinfectant as it allows market discipline to occur, but market discipline doesn't work when there is a veil of opacity instead. The BoE's Andrew Haldane describes banks as "black boxes". Black boxes that have not been subject to market discipline for several decades.
Banks are black boxes with this veil of opacity because the financial regulators have a monopoly on all the useful, relevant information in an appropriate timely manner.
George Osborne's reform of the financial system risks putting too much power in the hands of the newly appointed Bank of England governor,Mark Carney, a former Bank policymaker has warned.
As Osborne attempts to salvage his reputation with a tough autumn statement, Adam Posen said the expansion of the Bank of England's empire to include City regulation, coupled with the fawning response to Carney taking control next summer, could encourage Sir Mervyn King's successor to abuse his influence.....
"You just don't want to put too much power in one person's hands. And the new rules means the UK governor has enormous amounts of power and discretion," Posen said in his first UK newspaper interview since leaving his role on the Bank's monetary policy committee in August.....
"Notwithstanding that he is obviously well qualified, experienced, bright and hard working, sharing many of Mervyn's best qualities. But any individual given that much power … what's going to happen?"...
The US economist was also critical of King's handling of the financial crisis. He suggested the governor was too slow to react to the credit crunch when it first began with the collapse of Northern Rock and likened him to former US Federal Reserve chief Alan Greenspan, who failed to see the crisis coming.
"Like Greenspan, he probably stayed too long and was probably too set in his ways when history changed. There was this sense of enormous accomplishment, and of being at the pinnacle, with everyone treating him like the great maestro, just as they did Greenspan, so it was very hard for him to shift gears when times changed."....On a different topic, namely the existence of the Blob (aka, politicians, financial regulators, treasury, the City of London and its lobbyists) in the UK.
Last year [Posen] put pressure on the government to go further and take control of Royal Bank of Scotland and Lloyds to expand the amount of credit in the economy. But he met with intense opposition from inside the Treasury to his ideas, he said.
"The Treasury didn't want anything that supposedly interfered with market functioning, which I found strange when the markets weren't operating very well. They also didn't want anything that might interfere with the sale of Lloyds and RBS, which I find hard to understand when they won't be selling them for quite a while. Officials also argued that taking control of the banks to be more interventionist would fall foul of EU state aid rules, which is not something the French or Germans worry about.
"None of these reasons make any sense. I think there is just a lack of will inside the Treasury to take control of the banks, whether that is a political decision or based on an economic view I don't know. But the entire British economy is now living with the consequences," he said.What Mr. Posen ran into was the Blob. It was clearly not perceived to be in the interest of the City of London to have Lloyds and RBS fully taken over.