What would you do if…

… you see worldwide financial and economic problems triggered by a poorly regulated sector of the US economy?

a) Propose to scrap all the regulations in the same sector of the UK economy?
b) Do something else?

If your answer was (a), congratulations – you too are John Redwood.

Yes, I’ve been reading once more the Conservative Party policy proposals he and his group came up with.

This time, please turn to page 60:

Mortgage Regulation. We see no need to continue to regulate the provision of mortgage finance, as it is the lending institutions rather than the client taking the risk.

10 out of 10 for ironic timing because what have we seen with the problems in the US sub-prime mortgage market? Yup, you’ve guessed it, it turns out the risk isn’t just borne by the lending institutions, but it is spread all through the international financial markets. So, for example, pretty much anyone in the UK with a private pension plan gets hit by the impact of problems in the US mortgage market (via declines in the UK stock markets, etc).

Nice to know that John Redwood thinks more of the this sort of stuff would be a good thing, hey?

(PS One of the other fallouts of the lack of proper regulation of mortgages in the US is that it’s become a very profitable area for criminals. The FBI estimates that in 2005 criminal proceeds from mortgage fraud topped $1 billion.)

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  • I don’t think so Tristan, because the primary causes of problems have been (a) mis-selling (the equivalent of people being conned on the doorsteps here into dubious new gas or electricity contracts) and (b) criminals.

  • Question: what would you do if you see worldwide financial and economic problems triggered by a poorly regulated sector of the US economy?

    My answer: prepare to be able to buy a home after years of being priced out.

  • Guido, a) would only be the thing to do if your view of liberal philosophy is dogmatic and absolutist, which while obviously incoherent, strangely perverse and utterly paradoxical, is exactly Redwood’s view.

    Some deregulation would perhaps be benefitial if targeted at specific areas, but it is not theoretically (and in practise, never) desirable to reach complete deregulation – there is after all the framework of the market itself to be considered.

    I also disagree that the cause of the crisis is primarily down to either (or solely) mis-selling and criminals, although both are clearly parts of the problem.

    I would argue the primary cause is down to the long-term effects of over-enthusiasm for an inflationary macro-economic policy coupling with the globalised nature of financial markets and institutions to create a cycle of debt growth which has turned into a self-perpetuating bubble.

    This market has simply become unstable as it reaches the limits of sustainability. And naturally enough it is the most insecure sectors that are hit first.

    Under current conditions of the expansion of the freedom to move goods, services, capital and labour the effects of inflation have been generally masked, but the Asian crisis in the 90’s has lead to distorted interest rates as the armoury of anti-deflationary policy tools were used (particularly by Japan), with the consequential creation of the destabilising (but highly profitable) yen-carry trade and a constant supply of easy credit.

    The shake-out of bad debt is the result of this cheap money working it’s way through the system and a wake-up call to the world of finance that short-term benefit often has a long-term cost.

    It is a criticism of western leaders that they have failed to engage with this and other distortions over the past decade, as we have reached a state of volatility where some individuals and institutions are begining to suffer and general inequality is being further exaggerated.

    Hopefully reinvigorated ASEAN cooperation will help iron out these economic inconsistencies.

  • Yellow Warrior 28th Aug '07 - 7:22pm

    This is a warning to people in the UK who have mounting debt. I would also point out that Liberalism does not mean a free all in a very risky market. It also should not mean that stupid people should be unproctected because it is “Liberal” to be free market….dear me I’m sick of that argument against any government intervention. Well done to the author for pointing out how dangerous and out dated Redwood’s proposals are. Keep it up.

  • Like many people, Guido has confused liberalism with libertarianism.

    Redwood is an old-fashioned Tory libertarian, who thinks economies are to be run on the basis of devil-take-the-hindmost, and those with the sharpest elbows should always take the lion’s share of the rewards, in a world totally devoid of regulation.
    I believe liberals (and Liberal Democrats) would hold that, while markets are generally good and should be facilitated, governments should intervene to ensure that no-one is left behind, that those who would destroy others for their own benefit are not allowed to do so, and that the rewards of market-generated prosperity are fairly distributed among all those who contribute to it at whatever level (and those who are unable to).

  • 7

    ‘I would also point out that Liberalism does not mean a free all in a very risky market. It also should not mean that stupid people should be unproctected because it is “Liberal” to be free market….dear me’

    Can’t keep up with the ever changing & numerous descriptions of Liberalism as each Lib Dem member has a differnt one,no wonder the electorate is so confused

  • Don’t worry your little head about that Jim – Just read the way the Government has become little lord echo of Vince Cable and look at the Lib Dem shadow cabinet proposals.

    As for Conservatism – it’s that that’s brought us to this mess – both blue Labour and blue tories! By the way do they have a philosophy any more – or is it just an intellectual adjunct of the Lib Dems – ie Lib Dem lite!

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