Can Financial Markets be Controlled?

by Howard Davies

The Global Financial Crisis overturned decades of received wisdom on how financial markets work, and how best to keep them in check. Since then a wave of reform and re-regulation has crashed over banks and markets. Financial firms are regulated as never before.
 
But have these measures been successful, and do they go far enough?  In this smart new polemic, former central banker and financial regulator, Howard Davies, responds with a resounding ‘no’. The problems at the heart of the financial crisis remain. There is still no effective co-ordination of international monetary policy.  The financial sector is still too big and, far from protecting the economy and the tax payer, recent government legislation is exposing both to even greater risk.
 
To address these key challenges, Davies offers a radical alternative manifesto of reforms to restore market discipline and create a safer economic future for us all.

136 pages, Hardcover

First published March 6, 2015

Reviews

[Kevin · Rating 4 out of 5]

In "Can Financial Markets Be Controlled?", author Howard Davies writes about the events and policies which contributed to the 2008 Global Financial Crisis.

When attempting to understand and rehash the major themes and thesis of any treatise, it is important to backtest against the author and its history. While Davies background is in academia (LSE) and regulation (the FSA in the U.K.) his conclusion to the title's question airs on the side of increased internal responsibility for private banking, rather then forceful control by public authorities.

This proclimation is nuanced through an examination of topics relevant regulatory bodies and their tools. Davies pinpoints four areas of advancement for regulatory bodies, specifically, an increase in capital requirements for banks, macroprudential regulation stemming from multi-lateral governing bodies, the creation of "living wills" to prevent future 'Too Big to Fail' (TBTF) scenarios, and an increase in the openness and transparency of private entities in the financial sector.

In multiple instances throughout the text, Davies points his finger at what he frames as "an overreach of leverage" by private institutions. The solution? – more regulatory actions like the Basel Accords worked to prevent system failures by creating countercyclical capital buffers

Outside of the regulatory sphere, Davies asserts that their are other areas of focus that may be able to prevent major recessionary periods. In this sense, Davies focuses on fixing international trade imbalances, making governments less dependent on public debt, decomplexifying the financial regulatory structure, curbing the growth of credit (by designing a new tax code which favors equity over debt), and international convergence on accounting standards. Many of these issues have become central to 2017 politics. In this sense I find it interesting that this book was published in 2015 – before major market events like Brexit and Trump.

Despite the conclusion that private sector discipline is more important then public sector regulation, Davies is far from a market purist. The regulations which he pushes for, while small, work to raise the barriers to entries for financials firm. In my opinion, this leads to a state of "imperfect competition" – pushing the market away from its natural equilibrium.

While I thoroughly enjoyed this piece and Davies' insights into financial markets, I believe a better question to ask may be "Should Financial Markets Be Controlled". To that question – I believe that the answer is no. With the emerging forces of decentralization, automation, and blockchain – we may quickly be moving into a world where people will be able to 'opt-out' of the public safety net. With this in mind – maybe we should all brush up on out Austrian economists!

[Neil H · Rating 4 out of 5]

A lucid macro account of what went wrong in GFC of 2007/08. What were the initial impetus for the market privatisation, credit expansion, global surplus with the speculation of housing and securitization of risk bundles. How institutions, governments, shareholders, inequality etc....are all interconnected. And when the the financial sector drew in the creme of graduates who could be placed in other industries to provide meaningful social, technological, political returns are lured by monetary returns and status of the financial sector dabbling in unsustainable returns. Then we have hinged the future of the economy not on future entrepreneurial and innovative stabilisation of our work but on speculative and over leveraged risks leading to dangerous economical malaise.

[Tuna · Rating 4 out of 5]

Howard Davies wastes little time in getting to the point of this book. Though the answer to the title is as ambiguous and difficult to answer as anyone would imagine it to be, I believe he provides many great points for how an eventually better financial market ought to be. Particularly, that though there needs to be more regulation, having too much regulation would be disastrous. Additionally, that the regulation ought to be one that should protect the public and private, and that it should be ethically driven. I was surprised to read that there were banks that didn't treat people politely. My bank I go to are all so kind hearted and nice people that make you want to do business there. I believe the document linked to in the book about how a bank ought to be is a good one to read. Additionally, I liked the summary statement that a bank ought to be well run and the analyses provided on what it was that made some banks not fail during the crises.

What is left ambiguous however is the question of how much regulation is enough, how much risk should a bank be willing to take, how much should the top performers in banks be rewarded. The politics issue was another part that suggested that too much regulation or rather regulation for global banks would be difficult and inconsistent. Similarly, politics would want banks to take more risk so that people in ethnic minorities and lower financial situations could become homeowners. It seems that some risk is needed if the certain sectors of the economy need to grow.

I think its a great book entertaining dialogue on the matter and one that is good for anyone who has some interest in understand the financial crises could read. Some terms, abbreviations, theories, and rules werent defined so non bankers may have to look them up briefly to get a full understanding.