Lie-Bore

For over a decade, it has been clear that the financial system around the world is sick. Although productivity in the macro-economy continued to improve during this time, it has not affected prices of financial assets – paper that is being traded by the crooks in glass towers in major cities. The primary reason is the loss of confidence of the public in both the regulatory regime in force as well as the market makers. The rule makers have aided this behavior by making two sets of rules – one for the big crooks and another for everybody else.

It is time this stopped. Both the regulators and the perpetrators have to take full responsibility for what has happened and what continues to happen. The “financial invention,” of this decade – the idea that some institutions are “too big to fail,” is at the heart of this stalemate. If the regulatory regime differentiates between market participants based on their size, most will agree that it is fraught with the problem of moral hazard. The cost of this implicit bailout guarantee is enormous and it has kept a lid on the value of financial assets around the world – making capital expensive for innovators. This in turn has slowed innovation in real markets. With capital drying up – the center of gravity of R&D shifted back to the behemoths with cheaper money but they have a dismal record in innovation. This feedback between financial and real markets may amplify further with recent events and this has disastrous consequences for the economy.

Regulatory incompetence and the lack of consistent application of market principles are destroying the dreams of an entire generation. Tackling this has to be the highest policy priority.