Wednesday, 6 August 2008

Norther Rock and Financial Regulation

Northern Rock

Northern rock’s problems have their roots entirely in New Labour’s Ponzi economy. As follows:-

Economic Management and the Transfer to the Bank of England for the Responsibility for Inflation.

The FSMA 2000 brought in Brown’s tripartite regulatory system. By now you will all have realized that this is a disaster. The division of responsibility never works. But the major (deliberate?) error was to target inflation to the entirely flawed CPI. This lead to rampant asset price inflation because the price of money was too low for too long. No account was taken of money supply or house prices. Hence we have a bubble and a huge amount of home equity withdrawal funding current spending. Marks out ten? 0.

Financial Regulation.

Enter the comedy that is the Financial Services Authority. Here we have the classic clueless Quango. In my view its political purpose was to (a) put all financial services problems at one remove from the Treasury and No10 and (b) to provide a type of ‘nationalisation lite’. Its powers are extensive and its rulebook prescriptive. And being as how it operates in a free market it is doomed to fail. Hence Northern Rock. Marks out of ten for Brown? 0.

The Hidden Effect of Over-Regulation.

If you over-regulate the over-regulated abrogate responsibility to the regulations. Box ticking to satisfy the regulators replaces the application of common sense. Consider Northern Rock. As a financial adviser one component of what I do is to seek out and arrange mortgages for clients. I admit it, I get them into debt. Now, I have been around in this business some time. When looking at house purchase for first time buyers Northern Rock offered some eye watering deals at up to 125% of current valuation. It does not take a genius to realise that if the housing market collapses both the lender and the borrower are in trouble. With house prices at levels never before experienced we have been advising against buying a house – especially if you are a FTB – for about the last four or five years. And we have never advised any client to do so with a 125% mortgage, always insisting that they had at least a 5% and preferably 10% deposit. Clearly we were in a minority.

Personally I have never given a stuff about the regulations or regulators. My view is that if you do the job right you will automatically comply. Doing the job right really means applying some common sense.

So we judged that Northern Rock was doomed. This is despite all the regulatory assurances that it was a sound company who knew what it was doing and was well financed. We are a micro business based in the provinces. What makes us so clever? Well, I do not think we are. What I think is that the pseudo confidence given by the strap line on all regulated businesses – ‘Authorised and Regulated by the Financial Services Authority’ – leads most people to abandon their own judgement. Hence they join the merry go round. Regulation is therefore the source of its own inflation. More and more regulation leads more and more people to stop thinking.

This lack of thinking applies in spades to most politicians of most colours but especially to Socialists. The answer of course is to severely reduce regulation and make caveat emptor apply. People will then think before they act and my peer group will not be so ready to steer clients to dodgy businesses just because they have regulatory approval.


Anonymous said...

Do not call me a berk again. Thank you (~:

Mark Wadsworth said...

Agreed. I have uncovered hard evidence of the FSA's criminal negligence in this regard.

Re your comment at mine on public sector tax/pensions, did you ever do a proper post on this? That might save me reinventing the wheel.

Lola said...

Re MW - I have lots and lots of writings and thoughts on public sector pensions reform, but to be frank, I have rather lost the plot with it all. I have just made a post on your blog setting out a very short recommendation that might spark some further debate. Lola