Why regulation fails: Baby P and Northern Rock

Without wishing to trivialise the former, there are eerie similarities between the tragic case of Baby P and the failure of Northern Rock. In the banking sector, the FSA, which has virtually unlimited regulatory powers, uses extraordinarily detailed rulebooks in order to seek the needle of abuse in the great haystack of financial transactions. Meanwhile, the obvious was missed and nobody understood how to use relevant powers to achieve important objectives at the crucial time. In the case of Baby P, the Every Child Matters agenda has everybody monitoring everybody else looking for the needle of minor mistreatment in the great haystack of child-adult relationships. Once again the obvious is missed and the authorities are paralysed by indecision at the very point when they should take some action.

In both cases, in various ways, the free institutions of civil society, which should have primary responsibility in monitoring economic and social relationships, have become subservient to statutory authorities whose attempts at perfecting society and the economy through ever-more detailed regulation are failing disastrously. Indeed, this is a basic Hayekian situation. The knowledge that is needed to regulate private behaviour is naturally dispersed and cannot be centralised in regulatory institutions that lie outside the market and civil society. If the state stuck to dealing with criminal behaviour it might make a better fist of it.

As a Hayek disciple I hate centralisation. But is the self-discipline of individual players in the market, ensured by fear of bankruptcy, enough to remove any need for central regulation , not only by governmental bodies, but even by the financial services industry? Peter Booth needs to expand on his comment.

I was not making the case for no regulation here. But detailed regulation of investment transactions etc should be returned to the market (Exchanges etc). Given our current monetary system, there is a role for regulation of banks but it should focus on the systemic risk to the payments system. This is the price banks pay for access to lender of last resort facilities. You could have unregulated banks completely outside that system. That would be very liberal compared with the current position.

As a Hayek disciple I hate centralisation. But is the self-discipline of individual players in the market, ensured by fear of bankruptcy, enough to remove any need for central regulation , not only by governmental bodies, but even by the financial services industry? Peter Booth needs to expand on his comment.

I was not making the case for no regulation here. But detailed regulation of investment transactions etc should be returned to the market (Exchanges etc). Given our current monetary system, there is a role for regulation of banks but it should focus on the systemic risk to the payments system. This is the price banks pay for access to lender of last resort facilities. You could have unregulated banks completely outside that system. That would be very liberal compared with the current position.

Post new comment

The content of this field is kept private and will not be shown publicly.
Type the characters you see in this picture. (verify using audio)
Type the characters you see in the picture above; if you can't read them, submit the form and a new image will be generated. Not case sensitive.

IEA Brexit prize

Invest in the IEA. We are the catalyst for changing consensus and influencing public debate.

Donate now

Thank you for
your support

Subscribe to
publications

Subscribe

eNEWSLETTER