It’s ironic that it took a central banker to point out just how ridiculous it is for politicians in Europe or the US to lecture bankers about financial responsibility. These are the same folks who almost universally spent profligately during the boom and failed to prepare for the global economic downturn.
If not for the power to tax and print money, they’d be as broke as Lehman Brothers.
The central banker in question is one Mojmir Hampl, the vice governor of the Czech National Bank. Writing in the European edition of the Wall Street Journal today he points out the absurdity of politicians berating bankers for imprudence:
The financial sector is also often berated for not setting aside enough reserves in good times to have something to live off in bad times. But even here, politicians provide more of an example to be avoided than a model of virtue. There have been few times so good for public budget management as the “great moderation” years of solid growth and low inflation that preceded the present crisis.
Yet in 2000-2007 the vast majority of EU countries ran substantial budget deficits. The EU used to make a great show of its commitment not to let government deficits in individual member states rise above 3% of GDP in bad times. In the good times now behind us, budgets were supposed to be balanced or even create reserves on average. Thanks to the creative thinking of EU finance ministers, however, this criterion was converted into an admissible threshold not just for bad, but even for good times. And even this more-lax criterion has repeatedly been infringed in many countries in both the east and west of the EU (see the nearby chart).
Of course, there’s something far more at stake here than just pointing fingers about who was more irresponsible during the bubble years. Right now, especially in Europe, politicians are engaged in a takeover of banking practices on the grounds that they are too important to be left to bankers. But since the evidence is that they were no better at assessing risk or preparing for a downturn, this takeover is unwarranted.
Actually, it is a lot worse than that. It is downright dangerous. You see, when bankers make mistakes–and they made a lot of them during the bubble–they do not all often make the same mistake to the same degree. Thus, it appears that Goldman Sachs and JP Morgan were far less exposed to the US real estate market than Lehman Brothers and Citibank. The executives at these institutions had competing ideas about the likely outcomes of different corporate strategies and were free to pursue these different courses.
The real problem, both in Europe and the US, seems to have been a herd behaviour among many bankers. There was not enough competition between different strategies. The ideas informing top bankers were too few in number. So when banks started failing, we quickly learned that their failures would be highly correlated because their investment strategies had been highly correlated. (Much of this correlation of strategy was the cause of earlier rounds of regulation.)
Political solutions, of course, not only encourage a herd mentality, they demand it. When Obama gathers bank heads in the White House to discuss lending and compensation, we shouldn’t be surprised if we get bankers thinking along the same lines. By their very nature regulations homogenize business practices. Instead of competing ideas about banking, we wind up with institutions governed by the idea of the regulators and politicians–the very people who were so imprudent about their own budgets during the boom.
“Regulation is nothing more than prescribed herd behaviour,” Hampl writes. “Sometimes it is a good thing and sometimes it is not. In any event, the same straitjacket will also bind those financial institutions that did not follow the herd and emerged victorious from the crisis.”
The situation is made even worse by global regulation or regulation coordinated internationally. In a complex world where nobody really knows what policies are the most prudent, a diversity of regulations set at the national level allows for a kind of regulatory experimentation. It’s not so much that this regulatory diversity will necessary produce the most efficient or correct regulatory scheme. But it should at least insure that one mistake doesn’t break the world. Global accords do exactly the opposite.
So the next time a politicians begins preaching about the irresponsibility of fat cat bankers, we should point out that he’s likely got some whiskers and a bulging waistline himself.