Red Tape
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.

Philip Booth 154x154

Academic and Research Director, IEA

Philip Booth is Academic and Research Director at the Institute of Economic Affairs and Professor of Finance, Public Policy and Ethics at St. Mary's University, Twickenham. From 2002-2015 he was Professor of Insurance and Risk Management at Cass Business School. Previously, Philip Booth worked for the Bank of England as an advisor on financial stability issues and he was also Associate Dean of Cass Business School and held various other academic positions at City University. He has written widely, including a number of books, on investment, finance, social insurance and pensions as well as on the relationship between Catholic social teaching and economics. He is Deputy Editor of Economic Affairs and on the editorial boards of various other academic journals. Philip is a Fellow of the Royal Statistical Society, a Fellow of the Institute of Actuaries and an honorary member of the Society of Actuaries of Poland. He has previously worked in the investment department of Axa Equity and Law and was been involved in a number of projects to help develop actuarial professions and actuarial, finance and investment professional teaching programmes in Central and Eastern Europe. Philip has a BA in Economics from the University of Durham and a PhD from City University.

4 thoughts on “Why regulation fails: Baby P and Northern Rock”

  1. Posted 20/11/2008 at 22:32 | Permalink

    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.

  2. Posted 20/11/2008 at 22:32 | Permalink

    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.

  3. Posted 21/11/2008 at 10:12 | Permalink

    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.

  4. Posted 21/11/2008 at 10:12 | Permalink

    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.

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