Lack of market regulation comes home to roost

IT’S been shown beyond doubt that a free market, with little or no regulation, is a recipe for disaster.

The current global meltdown is proof beyond doubt that this is so.

And the great irony is that the economic theories of the long out of favour John Maynard Keynes are back in vogue.

It’s quite amazing that those who despised any attempts by governments to intervene in the markets have been throwing themselves at the mercy of their respective states begging for bailouts in he current financial crisis.

After the crash of 1929, free market advocates argued the reason the Dow Jones index slumped from 1,000 to 40 between 1929 and 1932 was due to the disruptions of the Great War and the emergence of a strong trade union movement, that prevented wages from falling in line with weaker demand.

The reality was the Great Depression started in the United States, not in war-ravaged Europe, where deregulation was the order of the day and where trade unions had little sway.

At the time, just as now, the US banking sector was barely regulated and was also virtually trade union free.

So proponents of the free untrammelled market variety were not allowed off the hook on that issue.

Critics, including Keynes, said the difficulties were due to the virtually non-regulated nature of the banking system and that promoting unregulated markets as generators of full employment and maximum wealth was sheer fantasy.

The debate is about how far governments and central bankers should go in offering succour to the crisis ridden global financial sector.

In its latest bulletin the Central Bank notes the best efforts to date by their fellow bankers to get the inter bank market moving again have yielded very little.

This is directly pertinent to our own situation given moves by the Government to pump €3 billion in preference shares into both of the major banks.

So far injecting money into the banking system internationally has not freed up the flow of credit to the economies of the world.

The inter-bank market is pretty stagnant and very little credit is making its way onto the high street, which is vital if economic activity is not to stagnate.

At this point it looks as if all efforts to restore confidence to the banks have not worked.

That was one of the messages in the Central Bank’s first quarterly bulletin of 2009. In effect it raises further questions about the Government’s move to up their stake in both AIB and Bank of Ireland.

The fear is that once they get their hands on the money the banks will use it to secure their capital bases in order to meet the more exacting global standards on capital ratios and will not use it to lend to the broader community.

If the state’s goal in the short term is to get the banks back lending, then throwing billions of taxpayers’ money in the form of preference shares into the banks is unlikely to work.

We need to find a way to bypass the current lack of confidence and it seems the only way to do that is to nationalise the banks.

The risks to the state would not increase in the short term given that is has guaranteed €400bn of deposits and liabilities of the six Irish banks for the next two years anyway.

If the state does not take full control of the banks it has to make it a condition of its €3bn funding that they will be required to provide credit across the board to the Irish business sector.

Without that condition being laid down the Government will achieve very little for the economy in the long term.

The economy needs access to credit and that has to be the immediate priority of any rescue plan. If it takes nationalisation to achieve that then so be it.