Re-regulation the Maginot Line of the financial sector

February 12, 2010

By Todd Hirsch
Alberta Business Columnist
Troy Media

CALGARY, AB, Feb. 12, 2010/ Troy Media/ — Immediately following the crash of Wall Street, nationalization of European bank, and TARP bailouts in the US, governments around the world were struck with a zealous enthusiasm to regulate – or more accurately, re-regulate – the financial sector.

Now, more than a year later, not much has materialized other than a lot of talk. Aside from tinkering with some rules on executive compensation (which is really not the issue at all), the US government has been distracted with  other issues like health care reform and renewed threats to domestic security.

Those calling loudest for tough new regulations on banks and financial institutions have been frustrated with Washington’s inaction. But they should save their lobbying efforts for more constructive causes. Re-regulation may in fact be needed, but it’s not the lack of regulation that is wholly to blame for the mess in 2008 and 2009. And in fact, tough new regulations may be even worse if they prop up a false sense of security.

Ineffective strategy

Regulation may be what war buffs would call a Maginot Line. Back in World War II, France intended to keep out the invading Germans by establishing a line of defense along the border, which was called the Maginot Line after the French Minister of Defense Andra Maginot. However, it was strategically ineffective as the Germans went around the line, invaded Belgium and proceeded relatively unobstructed.

The events that led to the near-collapse of the global financial system in September of 2008 weren’t caused simply by a lack of good regulation. Events were motivated by politics, greed, and a lack of financial literacy. And none of these things will go away because of new regulations.

American politics was partially to blame for the enormous over-build in the housing market and the real estate bubble of 2003-06. We like to beat up former US President George W. Bush and former Federal Reserve Chairman Allan Greenspan for prompting the gluttony of housing, but it actually started under the Clinton administration’s policies promoting home ownership in the 1990s. It was reasoned that home ownership was good for America, good for voters, and good for Washington. Following the tech bubble meltdown and 9/11, ridiculously low interest rates kept the housing monster satisfied and prices kept rising. Then things turned sour, and the market skidded into the ditch.

Some of the blame also lies with US consumers, many of who did nothing particularly wrong except for the fact that they didn’t understand the terms and conditions of mortgages. Financial literacy is a serious problem. Sure, it could be argued that mortgage lenders and brokers had a responsibility to ensure home buyers clearly understood that monthly payments would “reset” at some point, and that given their income levels, they’d eventually foreclose. Consumers, however, can’t be left let totally off the hook. They need to take ultimate responsibility for their over-consumption of housing. Some of that will take more education and literacy on financial topics like mortgages.

A case of simple greed

But above all, blame for the crisis of 2008-09 lies with plain and simple greed. Regardless of the religious text or historic documents you read, greed has been a major theme in humanity’s struggle. The lax regulations in place may have made it a bit easier to be greedy and get away with it. But like the invasion around the Maginot Line, greed can move around almost anything that stands in its way.

Through the storm, Canada’s banking sector remained the envy of the global financial community. But even Bank of Canada Governor Mark Carney and Canadian Finance Minister Jim Flaherty have worried recently about rising levels of household debt and potential problems homebuyers could see when mortgage rates start to rise. Tier-1 capital, the core measure of a bank’s financial strength from a regulator’s point of view, held by Canadian banks is in excellent shape, but if Canada wants to keep up with the Big Boys of the financial world, it may have to put up with new regulations and tighter restrictions as well (even though we’ve been setting the example to follow).

A tighter regulatory regime for global financial institutions can be expected at some point. But those pushing for reforms shouldn’t get their hopes up too high that the problems will be solved once and for all. Like the Maginot Line, a new the regulatory regime may only provide an illusion of protection.

Greed, if left unchecked, will find a way to circumvent any new set of rules.

Todd Hirsch is Senior Economist with ATB Financial.

Channels: The Calgary Beacon, February 13, the Guelph Mercury, February 16, Fox Creek Times, February 24, 2010

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