Tuesday 26 June 2012, 09:30
There will always be greedy people around banks," says Niall Ferguson "after all they are where the money is - or should be."
"But greedy people will only commit fraud or negligence if they feel their misdemeanour is unlikely to be noticed or severely punished."
In the second Reith Lecture in his series The Rule Of Law And Its Enemies economic historian Prof Niall Ferguson tackles the subject of financial regulation - and the need to drastically prune it.
Prof Ferguson argues that the financial crisis that began in 2007 had its origins in over-complex regulation.
Many economists - and members of the public - disagree and believe lax regulation was a major cause of the financial crisis. They blame President Clinton's repeal of the restrictive Glass-Steagall Act in particular.
But they have misunderstood the problem, says Ferguson. He says the major events of the crisis would still have happened even with Glass-Steagall in place. Instead, he says, misconceived regulation was a large part of problem.
Because de-regulation is not bad. It is bad regulation that is bad. Banks were key to the financial crisis - and banks were regulated, he observes.
The more serious failing, Ferguson continues, is the feeling of impunity within the banking industry. This is not an issue of deregulation, but non-punishment. There was a failure to apply the law. The list of people jailed for their role in the USA's sub-prime crisis is "laughably short," says Prof Ferguson.
Extra compliance is not the solution, he says, because adding rules upon rules upon rules removes the need for banks to simply ask themselves "are we doing the right thing?"
Plus, the principal beneficiary of tighter regulation will not be the economy - but the legal profession. Lawyers, he says, will gain lucrative business explaining to financial institutions what the increasingly dense rules mean.
Simplicity is the best defence for taxpayers and citizens, says Niall Ferguson, as it is the only way to ensure a complex financial industry becomes less fragile. Discretion should replace compliance. Combined with this should be strong central banks, run by people of wisdom and experience - and proper punishment for those who break the rules.
Niall Ferguson's second lecture, The Darwinian Economy, will be repeated on Radio 4 on Saturday, 30 June at 22:15 BST.The third lecture in the series, titled The Landscape of the Law, will explore the rule of law in comparative terms - and its role in the development of countries such as China. This will broadcast on Radio 4 on Tuesday, 3 July at 09:00 BST.
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