Anorak News | You can’t regulate the banking system just by regulating the banks

You can’t regulate the banking system just by regulating the banks

by | 9th, May 2013

THOSE Big Bad Bankies, screwed up the entire world economic system and impoverished us all. Of course, what should happen is much greater regulation of what the banksters are doing with or money.

Which might even be true in fact. However, the problem is that you can’t actually regulate the banking system just by regulating the bankers. Because there are all sorts of companies out there that have money and which can and will step in to do business when we prevent banks from doing it.

Hedge funds using debt-trading strategies honed on Wall Street are expanding at a record pace as they profit from risks big banks are no longer taking.

In this case it’s the hedge funds: they’re building up what is called a shadow banking system. One that mimics what the banks do but isn’t subject to the same rules and regulations. Which is something of a problem of course.

If all this banking is now taking place off outside the banks then the people who regulate banking aren’t actually regulating banking. They’re only regulating that part of banking that is taking place in the banks.

I’m afraid that there’s no real solution to all of this either. We could regulate the entire economy but as generations of trying to do so (from the Ottoman Empire through to the socialist idiocies of Eastern Europe) show us that’s likely to make us all much poorer than we need be. And of course we do indeed need some regulation: but it might be better to keep the regulation light so that banking does exist in the banks that we are regulating.

Tough problem to which, as I say, there’s almost certainly no easy answer and there might not even be a reasonable one.

Posted: 9th, May 2013 | In: Money Comment | TrackBack | Permalink