Wednesday, November 25, 2009

Fluffy Regulation leads the way for Political Banking

For very long, it has been said that private business and politics should not mix. Like that old saying of “don’t mix business with pleasure”. I have my doubts about the accuracy of the old saying...but of the former I have none. It is indeed tragic when such a mix takes place. It is far worse than teens wearing Ugg boots in heated summer! Yes, that bad!!!

Now, the Public Choice School explains that although in both economics and politics it is the same people who act, they are moved by different incentives in each case. In the political arena the concern is maximizing election votes. So, they tend to fulfill the short-term requests of pressure groups to achieve this goal. Alas, in economics the concern is to generate as much profit as possible, which in a free economy is achieved only by fulfilling the consumer demands.

Ever since the present crisis was unveiled it is been said that more, puffier, fluffier, stronger (no, I’m not talking about 80’s overly sprayed hairdos) regulation is the much needed solution to prevent it from happening ever again. Think again and get back at your history books, wasn’t it the regulators with endless baloney regulation who got us there in the first place?!

BBC had reported that several banks “saved” by the “Stimulus Package” are now undergoing a politization process. As if it wasn’t enough of responsibility been accountable to the company’s stakeholders, the report also adds “ has become clear that the banks will have to negotiate with more and more lobbyists, unions and campaign groups as government-owned companies are forced to become more responsive to issues in the public interest.” The sole more important responsibility of a private enterprise is to make profit for its owners (this, by no means imply it will be done through unethical behavior, so hold your guns anti-profit people!)

However, given the banks accepted the taxpayer’s money to bail them out of their mistakes, they will have to deal with claims as ridiculous as this: “Royal Bank of Scotland Plc has been targeted by indigenous groups from Canada. They aim to stop RBS from lending money to companies that invest in oil sand extraction in northern Canada.” On the Cadbury hostile bidding by Kraft, the bank is receiving the following claim “Trade unionists and Labour Party politicians have demanded to know why a bank that is majority-owned by the U.K. people is helping out with the dismemberment of a fine old local company.”

There is an underlying and unfortunate issue here. This very same lobbying process that is seeing bankers act like polititians, will see bankers in a future crises turning to polititians to save them again. They won’t be taking their lending decisions based on productivity, but instead in social groups complains. They will be lending money to people who won’t be fit to pay and -Yes, you have guessed that right- a new chain of insolvency will come our way…yet again.

Read the full report here...wait no, I meant here!

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