More regulation is the wrong way to tackle the recession

23 02 2009

They may not agree on much,but the EU governments managed to agree this weekend that more regulation of financial markets is needed. This focus on regulation has now become the default position,along with the more populist campaign against bankers’ bonuses, of governments which do not know what to do to fix the recession.

There is a paradox in the current recession, but it is not the often quoted one about ‘the paradox of thrift’. The true paradox is that governments are calling for more regulation and less risk,when it should be the other way round. The avoidance of risk, along with the desire to make more money, was behind the rapid growth of  hedge funds. By spreading the risk of investments across the world economy the intention was to avoid over exposure to any one group of investments. These hedge funds attracted wealth on a grand scale.

Meanwhile, the latest figures on venture capital in the UK  show that relatively tiny amounts of money have been put into innovative new businesses. The culture of risk avoidance, which is endemic in the UK and not limited to the economy, is a far greater threat to the future of the economy than under regulated markets.

The underlying problem of the world economy is the disequilibrium between the increasingly productive east and the underproductive west,hence the growing indebtedness of the west to the east. The focus on regulation is the wrong policy at the wrong time.

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4 responses

24 02 2009
Fiona McConnell

Hi Robert,
I agree with your views above re culture of risk avoidance in UK limiting innovation, and would like some further thoughts as to other barriers to innovation in the West. Part of the disequilibrium between west and east in terms of ability to innovate is the limits in the west caused by the existing massive and expensive infrastructures created by organisations/industries over their many years of doing business.

When Senior Innovation Manager for the UK Retail Bank at Lloyds TSB, the largest barriers to introducing innovation were created by:
1. 95% of budgets being taken up in maintenance of existing systems
2. Costs of making changes to/adding new functionality to existing systems to enable innovative customer offerings prohibitive – making it impossible to create business cases that would be profitable in the 1-3 year terms required.
3.Existing systems were built on a command and control structure, so core systems were not designed to enable innovative offerings based on Web 2.0 concepts. Investment in existing systems meant there was no will within the company to build a new platform on which to base these type of innovative offerings

I have seen on a weekly basis new internet based companies offering innovative propositions that we proposed at LTSB, but were unable to pursue as the barriers presented by the investment in existing systems were too great to overcome.

I propose that the situation with East and West is similar – the East can be more innovative because they do not have to overcome the barriers created by existing investment in infrastructure – often, it is much cheaper and easier to build from scratch. The west becomes less and less productive as more and more resources are required just to maintain bloated and no longer fit for purpose systems, designed to meet the needs of customers 30 years or more ago. The east invests it’s resources in building new systems that are cheaper to build and maintain and are fit for the purpose of meeting the needs of current day consumers. Higher ROI and productivity results.

As to the barriers created by regulation in the UK – please don’t get me started:)

Cheers,
Fiona

25 02 2009
Rob Killick

Hello Fiona

Your description of some of the problems is on the spot. The deepening divide between productive eastern economies and decaying western ones is at the heart of the world crisis,although it has taken the form of a banking crisis. which has confused the issue. The problem is that pumping more money into propping up uncompetitive western businesses only delays the need for restructuring. it is possibkle that the crisis may force a rethink about the UK economy and where investment should be taking place, but it is hard to see where the leadership for this can come from at the moment. Our government is dividing its time between firefighting the financial crisis and scapegoating bankers , it can’t leave much time for thinking ahead.
One thing it could be doing is enabling large infrastructure projects,such as nuclear power stations or upgrades in the transport system, things which require government action to get moving. But the political will to do this,and to face down the anti lobbies seems to be lacking.

25 02 2009
neil craig

Here is a bllog I did on getting out of recession http://a-place-to-stand.blogspot.com/2008/11/getting-out-of-crunch.html
Essentially it requires cutting the 50% of our economy that is government spending. Cutting the regualtions that mean our public projects cost 13 times what they so elsewhere. Allowing the market to build lots of nuclear power stations before the lights go out (& stop preventing other new industries springing up). X-Prizes.

Taken all together i have no doubt that would not only get us out of recession but unto unparalled (for the UK & perhaps even for the world) growth.

25 02 2009
Fiona McConnell

Hi Rob,
Thanks for your thought-provoking response. Good point about the infrastructure projects – I agree that there does seem to be a lack of vision and leadership at the political level.

I have been watching with interest the differing approaches taken by the Government here and In Australia (my home country). While the British government has focussed almost entirely on the banks in their attempts to sort out the economic crisis, apart from the paltry 2.5% reduction in VAT, they have done very little to stimulate the economy at the consumer level.

The Australian government on the other hand, has been handing out money left, right and centre to pensioners/benefits recipients and now to everyone on less than $40k pa. This money has enabled people to pay down debts (thus reducing bad debts in banks), spend to ease the decline in the retail sector (thus reducing business closures) and save (thus increasing the deposits available to banks to fund lending). This has had the side-benefit of increasing confidence in the economy (and, of course, the government). As anyone who has studied high school economics knows, reducing taxation has a much more limited effect, which takes longer to impact, on stimulating the flow of money.

The focus of the UK government on businesses rather than consumers, will in my opinion, deepen and lengthen the recession. They seem to be very out of touch with the people they were elected to serve.

Having recently read “The Corporation – the pathological pursuit of profit and power” by Joel Bakan, and watched with interest how well the Nationwide Building Society are faring in the current economic crisis, I have been thinking that the customer/member/owner form of corporate structure, is a much sounder basis for longer term business success and stability. And given the mess that a lot of our infrastructure is in, possibly a more viable alternative to managing large scale infrastructure projects, currently run by the government. Imagine how different our public transport would be if TFL/bus companies/rail networks were accountable to customers rather than the government/shareholders?

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