Underlying the discussions on the financial crisis or British politics is a basic question. Should the light touch of self-regulation be replaced by a heavier hand? The question does not of course lend itself to a generic answer. It has to be responded to on a case-by-case basis. But it does raise a generic concern.

The current problems have not been created by the absence of regulation. The financial institutions have always been bound by rules and procedures and politics by convention and precedent. The problems have arisen because of systemic weakness and in the case of the financial sector by the inability of the regulators to understand the technical complexity of the products that they had been empowered to regulate. The concern now is that in responding to these problems the authorities will blur the distinction between regulations that determine the relations between the market and the state and regulations that address the technical issues.  The latter will require a precise definition of what is to be regulated; it will need technically qualified people and the rules of the game will have to be unambiguously clear. The former on the other hand does not need such precision. For it will be about the allocation of the balance of power between the market and the government. It will be about who, what and how resources are allocated.

The pendulum has over the past decade or so swung decisively towards the market. A cottage industry of one-liners has been generated to affirm this fact — ‘the end of history’; ‘geography is history’; ‘the communications revolution’, etc.  The concern is that the pendulum might now be pushed to the other extreme. Already trade protectionism is part of the vocabulary of many governments. Were this to happen and were the creativity, entrepreneurialism and of course the arrogance and greed of the typical Wall Street banker to be shackled as a result, it is likely that future Bill Gates or Steve Jobs may not find it easy to bring their new ideas and products to fruition. It is worth pondering the reaction of a grey-suited middle-aged, congenial high street banker to a financing proposal from a Harvard drop out.  Would he consider it or would he politely show the young person the door with a few unsolicited homilies on the virtues of a completed degree.?The fact is that most of the recent revolutions in business (viz. Microsoft, Google, Bharti, Dhirubhai Ambani, etc) have been facilitated by bankers that stretched their support beyond simply those companies with legacy assets and conventional leadership (viz. IBM, AT&T, the ‘license raj’ Indian industries).  There is a lot that can be said about the positives of personalised banking. But no one can claim that it was the stimulus behind innovation and entrepreneurship.

... contd.