Thoughts on Future Financial Regulation

by: Oliver Cromwell

Over the last few months, bankers have begun to be held accountable for the current financial crisis by Congressional and Parliamentary committees in the UK and US. It is not a pretty sight.

Having thought about the process at length, I conclude that politicians are just about the least appropriate members of society to hold bankers (a subset of financiers) accountable. This is because I believe that politicians bear a marginally greater responsibility for the crisis than financiers.

This is why. It represents my view only.

In order to understand the crisis and put it into context, it is necessary to go back to the basics.


The raison d’etre of politicians' is power. Politics is the exercise of power. Lord Acton said:

Power corrupts and absolute power corrupts absolutely.

In order for a politician to exercise power, first they must get elected. In order to get elected in "vote me rich" democracies like the US and UK, they have to do two things. Firstly, they have to appear to be electable by conspicuously doing things. It is not necessary to solve the problems they are trying to address. But they must look busy. As that well known political commentator Groucho Marx observed:

Politics is the art of looking for trouble, finding it, diagnosing it wrongly and applying inappropriate solutions.

Secondly, they must find more money than their rivals for political office in order to complete policies to benefit the electorate. They use four ways to do this, one of which is to borrow money. Financiers have access to money. Politicians use financiers to gain access to money. This is a symbiotic match made in heaven.

The main raison d’etre of senior persons working in finance is to get obscenely rich, as quickly as possible, whilst staying out of jail, and, if necessary, at the expense of all other members of society and against the national interest.

The main raison d’etre of just about everybody else in society is identical to that of senior Wall Street persons, except delete “obscenely” and “if necessary, at the expense of all other members of society and against the national interest." This is the human condition. It has ever been thus. I put myself in this category.

Financiers and politicians are both predators, but of different types. They are mutually dependent. Although politicians profess to represent the interests of the voters who elected them and the interests of the nation to which they belong, the reality is that, in most societies that describe them selves as democracies (those of the UK and the US included), being elected subordinates all other considerations. This latter point is important enough to repeat.

Being elected subordinates all other considerations.

Once having been elected, the opinions of the electorate are of negligible importance to politicians until the next election.

Politicians are quite content for financiers to get obscenely rich provided politicians can get elected and exercise power. If politicians can get rich at the same time then this is a bonus but is of secondary importance. In order to get elected. Politicians perceive they are more electable if they preside over a successful and growing economy. This is probably true. This infers having huge amounts of cheap credit available to allow the economy to grow. Politicians have limited power to control their own economies especially since the evolution of privately controlled central banks. The banker, Meyer Anselm Rothschild (1743 to 1812) said:

Permit me to issue and control the money of a nation and I care not who makes its laws.


1. When politicians need to pay for war or implementing policy they have four ways of doing it.

a. Raise money through taxation. This is generally not popular with the electorate and it is the electorate that gives politicians access to power, but only at election time.

b. Borrow money. The US and UK mostly borrow from any party that will lend to them whether domestic or international. There is a limit to how much a government can borrow. This is, for the US and the UK, a very large amount of money. If the budget deficit is too large, lenders may not be prepared to lend to the government and it may be perceived by the electorate as financially incompetent and the electorate will not re-elect the government to power, at least not until the next election.

c. Inflate the currency. This is easy with fiat money and much more difficult when the currency is pegged to some standard such as gold. Nicolas Copernicus, in 1525, said:

Nations are not ruined by one act of violence, but quite often, gradually, and almost imperceptibly, by the depreciation of their currency, through excessive quantity.

All currencies decline in purchasing power with the passage of time. In Grand Illusion: The Federal Reserve (Part I), James Quinn states the following:

When the average American is told that the dollar has lost 95% of its purchasing power since the inception of the Federal Reserve in 1913, he looks at you with a blank stare and starts wondering whether American Idol is on TV tonight. The systematic inflation purposely created by the Federal Reserve silently robs the average American of their standard of living.

The purchasing power of the Pound Sterling has declined similarly.

Inflation is popular with all governments in democracies in that it has the effect of transferring the money from the pockets of the people to pay for projects of the government with the minimum of inconvenience to the government. Inflating the currency reduces the value of government debt and reduces interest payments on that debt . The US and UK economies are currently at the point of experiencing deflation. That is why politicians will do everything in their power to turn deflation into inflation.

Some members of the population do not realize that inflation is eroding their purchasing power. Wages and salaries tend to keep pace with inflation. Persons in work tend to notice a reduction in their purchasing power, less. Savers and persons on fixed incomes will be under no illusion about how inflation has reduced their purchasing power. Most people will realize when inflation is excessive and will consider a government which engineers excessive inflation as financially incompetent and it is the electorate that gives politicians access to power, well at election time anyway.

d. Stimulate the economy so that more tax can be raised. This can be achieved by starting a war, Quantitative Easing or cutting interest rates. War tends to be unpopular with the majority because it is expensive and citizens get killed (others do get rich). Quantitative Easing is a high risk monetary strategy in a deflationary environment since, when the velocity of money achieves a certain minimum value it will result in inflation and possibly hyperinflation. Cutting interest rates is not popular with savers and it is the electorate that gives politicians access to power, well at election time, that is.

2. You might assume that since the public elects politicians into power that the public would have some influence over their politicians. Not so. In the UK and US, the reality is that whoever and which party is elected, once elected, they are effectively safe until the next election and they will always use the 4 mechanisms explained above no matter who they are or what their political persuasion in order to maximize their chances of election/re-election. Thus in the UK and US, mostly there is no real choice in who to elect. When necessary, all UK and US governments will use all or some of these tools to the point that using them further would render them unelectable.

3. Financial crises are not a modern phenomenon. They have occurred with surprising regularity since Julius Caesar was a lad and, for a long time before. Some of the major bubbles include the Dutch Tulip Bubble of 1637 and the South Sea Bubble in 1720. They occur with monotonous regularity at difficult to predict intervals. There would appear to be a minor crisis very roughly between three to fifteen years separated by major crises over multiple decades. (Some students of finance claim to have detected a 75 year cycle for major crises). The last major crisis before our current crisis was precipitated by the Wall Street Crash of 1929. The depression this created lasted until the outbreak of World War 2 in 1939. War production stimulated the US economy which then grew out of stagnation.

After World War 2, the pre-war depression and the huge economic pain it caused was very much in the mind of the world community. Bretton Woods Conference was put in place to develop protocols for financial regulation with the objective of preventing future financial crises.

4. Presiding over a growing economy is so important to being elected that it is in the interests of politicians to ensure that regulation, which is difficult in itself, is made impotent (e.g. the Madoff scandal where Markopoulis presented a meticulous brief to the SEC in 2005 which proved remarkably accurate. Despite this, the SEC somehow failed to uncover the alleged fraud and in the final event, Madoff confessed). Regulators are less well qualified and less well paid than the persons they are required to regulate. They are always forced to play catch up. No government of any party in the US or UK has withstood the temptation to geld the regulation process in some way during their stewardship, since Bretton Woods. Shah Gilani wrote an excellent blog chronicling how financial regulation has been eroded in the US since Bretton Woods. The same thing has happened in the UK. Martin Hutchinson has documented deregulation in the UK since 1979.

Financial Regulation: Bretton Woods to the Present

1. The finished Bretton Woods protocol was sound for its time and provided a rational starting point for the problems perceived at that time. Since Bretton Woods, the greed of the financial sector has caused it to be innovative in finding ways round the regulation process. It has been the prime mover of changing the regulation process with the enthusiastic cooperation of politicians because politicians benefit from a growing economy. Financiers do this by eroding the power of regulation using the death of 1000 cuts method, employing the tactic of aggressive lobbying of Politicians. They are pushing against an open door.

2. Hedge funds and derivatives have grown substantially since Bretton Woods and financiers have persuaded politicians that these need not be regulated. It is alleged that $516T of derivatives exist in a world whose Gross Domestic Product is $50T. The vast majority of derivative transactions are financial organisms whose only objective is to generate ever greater commissions for financiers. Financiers are effectively gambling with other peoples’ money whilst they themselves are insulated from risk. These transactions fail to benefit the world economy, in any meaningful way.

Financial Regulation: The Future

1. In order to properly analyze the topic of regulation, it is first necessary to discuss the ‘no regulation’ option. Thus, it is necessary to consider the possibility that boom and bust is good for the economy and the majority of the population actually enjoy and benefit from recessions.

Certainly some people get rich in crises but the majority of people suffer a reduction in their standard of living and there is social unrest which destabilizes society and has the potential for breeding political extremism. It seems to me, that a major contributing factor to the present crisis is that greed has dominated regulation and that the greed and fear balance needed for a healthy financial sector has been absent in the recent past. I conclude that, boom and bust should be prevented and that a more coherent and functional regulation system for the worlds financial systems needs to be developed.

2. Only governments, most likely in concert with other governments can introduce a new financial regulation process. This is because legislation is necessary in order to introduce new regulation. Furthermore, the global nature of finance needs to be taken into account when creating improved regulation.

3. In the absence of any other mechanism for raising the money to implement their political programs or any constraints on the the four methods they use currently, governments will be compelled to use the mechanisms they currently use including to rely on the financial sector to raise money for them in the money markets.


1. Financiers have behaved with greed, stupidity and incompetence to the point that they have substantially damaged the economy of the whole world. I beg you to consider, dear reader, the possibility that politicians are slightly more responsible for the current crisis than financiers. Politicians have allowed, intentionally, regulation to be incrementally hamstrung since Bretton Woods under pressure from financiers. Politicians have rushed, lemming like, into globalization and new technology without consideration of unintended consequences, particularly in the long term. The solutions they are prescribing for the current crisis are lacking. These seem to more appropriate to the preservation of the reputations of politicians and senior financiers, a wish not antagonize bank shareholders both domestic and international and to preserve the income and pensions of senior financiers, than restoring the health of the economy quickly and efficiently e.g. TARP and the bail out of AIG .

The prescribed solutions are creating a moral hazard in the form of a privileged class i.e. the financial class who are protected against the consequences of their greed, stupidity and incompetence by the tax payer who is not protected in any way against the greed, stupidity and incompetence of politicians and financiers. This lack of fairness in society will lead to civil unrest and political extremism.

My judgment is that the prescribed solutions probably will not work, in the same way that they have not worked in the past. They will extend the period of the financial crisis and myself, my children and my grandchildren will be paying through taxation for the bailouts of today into the conceivable future. It is logically indefensible to prescribe a solution to a crisis caused by borrowing, which requires more borrowing. Politicians in the US have encouraged home ownership for political reasons whilst ignoring economic reality.

2. I see little vision from politicians describing the world they should be aiming to create in the future, which would give direction to the solutions that are being sought today. For example, what targets do they envisage for savings, government and private sector borrowing, levels of imports and exports, export of jobs and how the world's financial system will operate in the future etc.

3. A snail has more chance of surviving the center of a super nova than the common vested interests of government and the financial sector agreeing to efficient new financial regulation. That is, regulation that will reduce the probability of future crises to acceptable levels. (I propose, since I suspect it is probably impossible to completely eliminate them, the target should be, one major event per 200 years and one minor event per 30 years ) An efficient regulation system would constrain the ability of politicians to raise money. It is certain that politicians will bluster about the need to improve regulation but this will be primarily to convince the public that they are worthy of re-election and the reality will be minimal change. An efficient regulation system will reduce the volatility in the financial system. Volatility helps financial traders to make profits.

4. The only way that boom and bust cycles will be constrained to acceptable levels is, firstly, by fundamental changes to current financial and political institutions. In the short term, a government of national unity would help to deal with the immediate crisis followed by changes to the way the legislature is elected. Politicians should only be elected for one term not exceeding five years and be knowledgeable and competent in a number of a range of useful disciplines. Lobbying should be prohibited. Any new regulatory ground rules should be very simple so that it is more apparent when they are being abused and gives competent regulators a fighting chance. Regulators need to be given respect and appropriate powers by government. New mechanisms for raising money for governments need to be put in place that do not rely on financial markets and the corrupting symbiosis between politics and finance. Limiting government income to taxation alone is one way of doing this. There are many other changes that need to be made also which are too detailed to be included here. These should be the subject of a separate blog.

Secondly, there will also need to be changes to western style capitalism including the banning of fractional reserve banking and a return to currencies that cannot be debauched easily by politicians and financiers i.e. linked to a commodity that has unchanging value like precious metals. The changes that are needed here are also far too detailed to be included here and should be the subject of a separate blog.

I conclude that the chances of the necessary changes to political and financial systems happening are negligible. I predict that the main concern of those whose responsibility it is to frame new regulation, is to engineer a return to the status quo where taxpayer monies can be extorted by failed zombie institutions from government (including their ex Wall Street employees) to the detriment of the rest of the economy, with the minimum of inconvenience to themselves.

President Thomas Jefferson said in Letter to Secretary of the Treasury Albert Gallatin 1802:

I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the people of all their property until their children will wake up homeless on the continent their fathers conquered.

I invite the people of the US to consider that President Jefferson’s apocalyptic vision exists today. It has always existed to some extent, but it really accelerated in 1913 with the creation of the Federal Reserve. This is a privately controlled organization. It is owned by the 12 regional Federal Reserve banks, which are each in turn owned by a combination of regional banks, commercial banks, foreign banks, and miscellaneous individuals who have inherited pieces passed down through generations. It was created as a response to a financial crisis, to reduce the risk that such crises would never happen again. It was created by lobbying of politicians by financiers.

The reality is that the financial world has been less stable since its creation and a strong argument can be made that the Federal Reserve has made the crises, that have occurred, worse. For example, the maintenance of low interest rates for long periods which was instrumental in causing this credit bubble. Furthermore, the power exerted by the Federal Reserve on the US economy is growing. It has powers not granted to the government eg being able to withhold information.

Henry Ford warned :

It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.

The world economy is now held hostage by an elite banking cartel, whose reckless pursuit of speculation and bloated profits, has precipitated a breakdown of the global financial system, and is arguably plunging the world towards a Great Depression.

I think that I have just persuaded myself that it is time to head for the hills.

It is not my objective to persuade you to accept my argument. It is my objective to clarify my own thinking. Do not accept my arguments and assertions, but figure out what you believe and challenge me where you think I might be wrong. We both might learn from the experience.

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