Reaction to the Mansion House speech


So the FSA is to be abolished after all. Good. As I said on CNBC yesterday, most of what the FSA does is useless; the rest is actively counter-productive. Their box-ticking, compliance-heavy, micromanagement utterly fails to see the wood for the trees, and imposes big costs on consumers without actually ensuring the security of the financial system.

I’m also happy to see more powers given to the Bank of England.* Their main role is – or at least ought to be – to ensure the stability of the money supply. But the only tool they currently have at their disposal – the ability to set the base rate – is a blunt one. As Milton Friedman said, it’s like trying to manage the supply of cars from Detroit by setting the price of steel; it has some effect, but is very imprecise.

Now the Bank will also be able to set things like capital requirements, leverage limits, loan-to-value ratios and liquidity requirements, they should do a much better job of controlling the money supply – hopefully avoiding the more severe manifestations of the credit cycle in future. Of course, central bankers are no better than other central planners and will inevitably get it wrong. But perhaps they’ll get it less wrong given a more sensible system than the one we have at the moment.

The inherent limits of central banks are not my only reservation about the new plans for financial regulation. There is a real danger that the existing FSA will simply be redistributed to the Bank of England, a new consumer protection agency, and a white-collar crime unit. The names above the door will change, but the same fundamentally flawed system will remain. Time will tell whether this is the case.

Ultimately, the best way to ensure the stability of the financial system is to control the money supply and remove moral hazard. And the best way to protect consumers is to ensure that we have a competitive banking sector. George Osborne’s proposals are a step in the right direction, but there is much more still to do.

*Before my Austrian friends denounce me as a turncoat, let me be clear: I’d much prefer a free banking system with competing commodity-backed currencies and no central bank. But we’ve got a long way to go before we get there.