UK Financial Times Call for Finance Regulations
Subject: UK FINANCIAL TIMES WRITERS CALL FOR GREATER REGULATORY DISCIPLINES OF FINANCE SECTOR - DEMOGRAPHIA
Martin Wolf within this article FT.com / Columnists / Martin Wolf - Why regulators should intervene in bankers’pay suggests that there is an urgent need for greater disciplines and a more effective regulatory framework for the Banking system. He states –
“No industry has a comparable talent for privatising gains and socialising losses. Participants in no other industry get as self-righteously angry when public officials – particularly central bankers – fail to come at once to their rescue when they get in to (well deserved) trouble.”
He goes on to say……
“These are the only businesses able to devastate entire economies…….I now fear that the combination of the fragility of the financial system with the huge rewards it generates for insiders will destroy something more important –the political legitimacy of the market economy itself – across the globe. So it is time to start thinking radical thoughts about how to fix the problems.”
“The big points here are that, first, we cannot pretend that the way the financial system behaves is not a matter of public interest……and second, if the problem is to be fixed, incentives for decision makers have to be better aligned with the outcomes”.
Mr Wolf’s article follows an earlier one in the Financial Times FT.com / Comment & analysis / Comment - Bankers’ pay is deeply flawed by Raghuram Rajan, former Chief Economist of the International Monetary Fund, who said –
“Even so, most readers would suspect something is not right here. Indeed compensation practices in the financial sector are deeply flawed and probably contributed to the ongoing crisis”.
Mr Rajan describes the ability to create wealth as “alpha” -
“A venture capitalist who transforms an inventor, a garage and an idea in to a fully fledged, profitable and professionally managed corporation creates alpha…..A third source of alpha is financial entrepreneurship or engineering – creating securities or cash flow streams that appeal to particular investors or tastes. As long as the investment manager does not create securities that exploit investor weaknesses or ignorance (and there is unfortunately too much of that), this sort of alpha is also beneficial, but it requires constant innovation”.
The reality is that “true alpha” –in the sense of the ability to innovate, solve problems and manage the processes involved in creating wealth – is a rarity. Very few have this ability. Mr Rajan explains how instead people within the finance sector (and it occurs elsewhere too) have to date been paid excessively for “fake alpha” – where there has been the appearance of excess returns, but in reality the “tail end risks” have been ignored or hidden. Essentially – selling “toxic rubbish” as top quality and secure investment product.
Understandably – with these “incentives”– the finance sector has been a huge supporter of urban property inflation, oblivious to the great harm being inflicted on often the most vulnerable in the community, “flogging” excessive and poorly structured mortgage and consumer debt. The Marketing Departments of these organisations (sometimes referred to as the Economic Departments) have even gone to the extent of referring to urban “inflation” as “growth” as I outline in my recent article Scoop: Housing Affordability – The Shift To Reality .
The extent of the “urban inflation” of the 227 major urban markets of the Anglo world (USA, Canada, United Kingdom, Ireland, Australia and New Zealand) will be illustrated in the 2008 4th Edition Demographia International Housing Affordability Survey, due for release midnight Sunday 20 January.