The lesson is clear: a public safety net of central bank lending and government intervention in the financial sector is of course necessary. But the moral hazard it creates must be counter-balanced by strong regulation and adequate supervision.
Chairman Hoogervorst , head of the Netherlands Authority for the Financial Markets, wrote an article in European’s world analysing the European financial supervision reform.
The ‘moral hazard’ of some EU governments’ bank bail-outs must now be counter-balanced by tough regulations and more effective supervision. He sets out the key targets for reform
Economic liberalism seems to have been shaken to its foundations now that intervention by governments in the financial sector is no longer a dirty word. Yet a closer look at the origins of the credit crunch quickly reveals that the crisis is not rooted in liberal economic orthodoxy, but stems instead from activist macro-economic policies that originated in the toolboxes of market sceptics.
The excess liquidity that undermined the world economy during the past decade was to a great extent caused by highly activist, old-fashioned “Keynesian” monetary and fiscal policies around the world. Monetary policy has been too accommodating, with the result that very low real interest rates led to asset bubbles. Fiscal policy in the U.S. was lax as the result of America’s expensive wars in Iraq and Afghanistan, coupled with the Bush Administration's huge tax cut. At the same time, many European countries chose to ignore the Stability Pact, even though times were good.
The lesson is clear: a public safety net of central bank lending and government intervention in the financial sector is of course necessary. But the moral hazard it creates must be counter-balanced by strong regulation and adequate supervision.
There is widespread support from economists and policymakers around the world for greatly improved financial regulation. The focus needs to be on structurally improving regulation nationally, regionally and on a global scale. Initiatives like the reform plan put forward by U.S. Treasury Secretary Tim Geithner, various European Commission initiatives and the G20 agenda reflect the international sense of urgency that all appropriate measures must be taken. Multilateral organisations like the Financial Stability Forum, the International Organisation of Securities Commissions (IOSCO) and the IMF play an important role in the reform of financial supervision. But yet more supervision will be needed in areas like credit rating agencies and over-the-counter derivatives. The market for credit default swaps would benefit from enhanced transparency and clearing by a central counter-party.
He concluded by saying that genuine reform of financial services supervision and closer cooperation within the EU is indispensable for our future economic well-being. The crisis is too important and far-reaching to waste the opportunity to take appropriate action. We can discuss how and to what extent we need to cooperate more closely, but it is beyond doubt that we need to find effective arrangements for more harmonised regulation and supervision of the financial market and its players.
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