Posted by: mulrickillion | January 21, 2012

Finance in Parrot Talk, Part III

By Anthony de Jasay, Libarary of Economics and Liberty, Jan 2, 2012 —

This is the third time in succession that this column presents opinions concerning money and finance which appear superficially plausible but only become firm truths when enough parrots repeat enough times what their masters in Brussels, Paris or at the International Monetary Fund (IMF) declare. The most recent occasion for the Parrot choir to hit fortissimo was the October 8-9 "last-chance" Brussels summit to end all summits and save the euro at least until the imperative need for another last-chance summit emerges in a few months’ time.

Safety First, Dearly

Britain went into this summit moderately concerned about the future of the euro, the money of its largest trading partner, but also anxious about the regulatory zeal of Monsieur Barnier, the Commissioner for the internal market, and his distinctly non-liberal brains trust with its instinctive dislike of the City of London. Confronted at dawn with a complicated and in part puzzling draft agreement more or less accepted by 26 of the 27 drowsy government delegations, the British asked for exemption from certain regulatory aspects, a demand angrily refused by the French President. By the unanimity rule, the 26 willing governments are thus prevented from amending the Union’s basic treaty as desired by Germany (an amendment that may have taken several years to ratify and survive referendums in several countries), and must be content with intergovernmental agreements. The former would hardly be stronger than the latter, but perfidious Albion is loudly blamed for vetoing it.

France is behaving like the jilted bride who becomes embittered, and Britain like a clumsy lout. Each side blames the other and claims that the other has dealt itself a losing hand. The bad blood may last a couple of years but not more, for France needs British friendship to counteract the overwhelming weight of Germany.

Meanwhile, the regulatory steamroller is advancing, flattening the international financial landscape at a cost that lays between the stratospheric and the astronomical. According to HSBC and Barclays, two of Europe’s half-dozen giga-banks, "ring-fencing" their retail operations to insulate them from the hazards of the investment banking side, will cost them up to 2 billion euros per bank in extra information systems and lost synergies. The added safety is problematical. The Financial Times of December 9, 2011 reports that world-wide financial service companies are hit with an average of 60 regulatory changes every working day, a 16 per cent rise over last year and no let-up in sight. Regulators announced 14,215 changes in the 12 months to November 2011. Compliance departments have to cope with an annual increase of up to 20 per cent p.a. until at least 2013. The Dodd-Frank bank reform act in the United States and the Basel 3 rules in Europe are chiefly responsible. In addition to burgeoning compliance costs Basel 3’s jerking up the required solvency ratio of the banks from 7 to 9 per cent in a matter of months is, despite protestations to the contrary, putting on a "credit crunch" in Europe that is turning the danger of a 2012 recession into a reality at a cost in needlessly lost output of the order of 150-200 billion in one year. . . .

Anthony de Jasay, Finance in Parrot Talk, Part III | Library of Economics and Liberty

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