According to Dr.
Lawrence Ball on a recent episode of “Squawk Box Europe,” inadequate regulation
will bring about the next financial crisis.
Dr. Ball, an economics professor at Johns Hopkins University and author
of the book, The Fed and Lehman Brothers:
Setting the Record Straight on a Financial Disaster, getting rid of
regulations such as the Dodd-Frank Act lays the groundwork for an economic
meltdown of cosmic proportions.
The problem here
is that we both agree and disagree. Yes,
unless either Capital Homesteading or a program that is Capital Homesteading in
all but name is implemented, there is probably an economic catastrophe
coming. No, it will not be the result of
under-regulation. We are not, however,
saying that there is too much regulation.
It is actually
not a question of regulation at all. It
is a systemic issue, one involving what accountants call “internal
control.” Internal control relates to
the design of the system itself, whereas regulation deals with whether
something was wrong. It’s the difference
between a fact (knowledge) and opinion (judgment).
Perhaps a large
part of the problem is the failure to integrate the principle of subsidiarity
into the issue. By taking control away
from the system itself and the people who “subsist” in the system, the matter
was taken over by outsiders who, as opponents of increased regulation quite
correctly point out, are not interested in whether the system does what it is
supposed to, just that nothing goes wrong.
Unfortunately,
those who protest increased regulation do not, as a rule, advocate returning to
internal control, but as little control of any kind as possible, internal or
external.
Perhaps a few
definitions will make this clear. Internal controls are the
mechanisms, rules, and procedures implemented by a company to ensure the
reasonable integrity of financial and accounting information, promote
accountability, and inhibit fraud.
Besides complying with laws
and regulations, and preventing employees from stealing assets or committing
fraud, internal controls can help improve operational efficiency by improving
the accuracy and timeliness of financial reporting. Regulation
is a rule or order issued by an executive authority or regulatory agency of a
government from outside the system and having the force of law.
To explain the
difference, suppose you don’t want banks creating money for questionable in-house
securities loans or in-house loans for non-productive purposes. The regulatory mindset says you pass a law
against in-house creation of money for questionable securities loans or loans
for non-productive purposes. It remains
okay to make in-house loans, but they must be legitimate loans, just as they
would be for outside customers.
 |
| Signing of Glass-Steagall in 1933 |
And that’s the
problem. What is illegal is not making
in-house loans — i.e., a bank loaning
to itself for its own projects — but making bad
in-house loans. The issue for the
regulators is not that an in-house loan was made (a matter of objective fact), but whether those who authorized
the loan knew it was bad, made an honest mistake, or was a good loan gone bad,
all of which are matters of opinion.
The systemic —
internal control — solution is radically different. Where the regulatory approach would forbid
only bad in-house loans, thereby potentially tying up an investigation and
prosecution forever in arguing over intent and other facts extraneous to the
act itself, the internal control approach is to forbid all in-house loans. Period.
This was the
rationale behind Glass-Steagall. Instead
of trying to decide which in-house securities loans were good, bad, evil, or
indifferent, banks were forced to separate their commercial banking operations
(the money creating function) from the investment banking operation (the
financing operation).
The problem was
solved. No one had to worry about an
in-house loan being good or bad, conflicts of interest, or anything else in
that regard because in-house loans became illegal per se. It was the fact of a
loan, good or bad, that was forbidden. Someone’s opinion as to the loan’s
subjective quality or lack thereof., was irrelevant
The bottom line
here is that the only way to optimize the possibility of a well-regulated
financial system is first to have a system to regulate! Even that, of course, is not likely to
forestall a financial catastrophe if the system does not mandate an elastic and
asset-backed currency of a stable and uniform value — and that cannot be done
if the reserve currency is backed with government debt and the value is allowed
to float according to the ability of the issuing government to make good on its
debts.
#30#
