Brash vs Gould

does an excellent rebuttal in the NZ Herald to a call by for more regulation. Some extracts:

But Gould implies that the crisis was caused by “free” and unregulated markets, especially in the financial sector. This is quite simply nonsense. Banks may be relatively lightly regulated in New Zealand (where there is no banking crisis), but they have been highly regulated in the United States and Europe for many years.

Worth thinking about. And then talking about the US regulations:

In many ways, this intensive supervision by official agencies made matters worse by leading bank customers to assume that banks were effectively “guaranteed” by Government, thereby enabling banks to operate with levels of capital well below those regarded as prudent in earlier decades. Perhaps even more serious, intensive supervision led some bank directors to suspend their own judgment, and believe that they were behaving prudently provided they were observing all the rules.

Often a problem – a minimum standard becomes a target.

Gould seems not to have noticed that the crisis emerged not in the essentially unregulated hedge fund industry, or even among private equity funds, but in the most highly regulated part of the financial sector, namely banking.


Gould argues that “Government involvement in the management of the economy is essential”, implying that that has not been the case in recent decades. Again, that could hardly be further from the truth.

Government taxation and spending make up some 40 per cent of total economic activity in most developed countries, and in all developed countries regulations of one kind or another tightly control what businesses can do.

It’s not exactly libertarian heaven with the status quo.

Gould in any case asserts that fiscal policy is more important than . I would not want to get into a debate about which is more important – both are important. At its most basic, monetary policy is essentially about preserving the purchasing power of money.

Unless that is achieved within some tolerable limits, money can’t fulfil its important roles as a unit of account, a basis for transactions, and a store of value – just ask the Zimbabweans!

When people argue for a bit more inflation they are arguing for a bit less purchasing power.

With the benefit of hindsight, monetary policy was probably too loose in recent years, in some countries at least.

This is the irony – interest rates were probably too low, causing too many people to borrow.

We also know that, in the nineties, the United States Government started putting pressure on American banks to lend to borrowers of quite marginal creditworthiness to prove that they were not discriminating on the basis of race.

It is often the best intended policies that have the worst results.

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