“Cameron tried to pin too much regulation for the crisis.”

Stands to reason, dunnit? To take another perspective for comparison, if the government repealed criminal laws, there would be less crime because there would be fewer laws to breach. That would cut the need for policing and reduce the numbers put into prison, two systems which are costly to run. With the fiscal savings, taxes could be cut. How daft can you get?

Alan Greenspan – previously chairman of the Board of Governors of the US Fderal Reserve Bank – put his finger on the regulation issue:

“Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief.”
http://online.wsj.com/article/SB122476545437862295.html

The question is what to do if bankers in the quest for bonuses from their employers contract deals and trades that not only end up accruing losses for their employers later but do so on a scale that risks the solvency of their employers and thereby threatens the systemic stability of the financial system.

Cameron hasn’t addressed that question. For an industry insider who makes a more detached assessment of the issues, try Henry Kaufman: The Road to Financial Reformation (Wiley 2009). One of the telling points that Kaufman makes is that ownership of institutions serving the financial services markets has become far more concentrated over the last two decades. More banks have become too big to fail so bankers know governments will be forced to bail out the banks if they fail: the implication is that while banking gains will be privatised, losses jeopardising solvency will be socialised – a sure recipe for disaster.

The recent financial crisis was a replay on a much bigger scale of the consequences of financial institutions in America gambling with other peoples’ money:

“The US Savings and Loan crisis of the 1980s and 1990s was the failure of several savings and loan associations in the United States. More than 1,000 savings and loan institutions (S&Ls) failed in ‘the largest and costliest venture in public misfeasance, malfeasance and larceny of all time.’ The ultimate cost of the crisis is estimated to have totaled around USD$160.1 billion, about $124.6 billion of which was directly paid for by the U.S. government, which contributed to the large budget deficits of the early 1990s.”
http://en.wikipedia.org/wiki/Savings_and_Loan_crisis

Lessons weren’t learned from that debacle – which I first read about in an academic text published in 1996: D Campbell: Incentives (Cambridge UP). Admittedly, that is not popular reading but it’s the sort of book that treasury officials and central bankers ought to read.

Another important insight is that there are increasingly many financial instruments being traded which lack transparency because of complexity. This is the point that Warren Buffett was making back in 2003:

“The rapidly growing trade in derivatives poses a ‘mega-catastrophic risk’ for the economy and most shares are still ‘too expensive’, legendary investor Warren Buffett has warned.”
http://news.bbc.co.uk/1/hi/business/2817995.stm

And this is why these issues are crucially important for the City:

“The worldwide volume of foreign exchange trading is enormous, and it has ballooned in recent years. In April 1989 the average total value of foreign exchange trading was close to $600 billion per day, of which $184 billion were traded in London, $115 billion in New York, and $111 billion in Tokyo. Fifteen years later, in April 2004, the daily global value of foreign exchange trading had jumped to around $1.9 trillion, of which $753 billion were traded daily in London, $461 billion in New York, and $199 billion in Tokyo.”
Krugman and Obstfeld: International Economics (2006) p.311

I really can’t believe that Cameron and his advisers understand what is at stake.

Going back to the old argument that shifting a division of the Bank of England into the specialised Financial Services Authority meant that the regulators lost respect (or something) and meant it impossible to “call time on debt”.

It seems bizarre when a) the trigger for recession was purchasing complex securities built on worthless US sub-prime which bankers assumed had zero risk (and sidelined those in their organisations begging them to see sense); b) the propogation of the banking crisis was due to business models over-reliant on wholesale money markets rather than more reliable sources of finance; c) misadventure in M&A explains e.g. RBS’s massive failure.

This – and their lassez faire approach to the crisis and hostility to fiscal stimulus save automatic stabilisers – makes me seriously worried as to their capability to manage the economy out of recession, and to take the necessary action to safeguard against this type of crisis in the future (they still believe that banks need less regulation and supervision, and that this will work combined with a BoE financial regulator that “has authority” whatever that means). Hopefully HMT civil servants can talk some sense into them once the lack of charisma of Brown in comparison to Celebrity Cameron drives them into power.