Tuesday, 12 January 2010

Lobbying and de-regulation: an IMF view

Paul Sweeney: The IMF – not known as a progressive organisation – recently published a research paper which showed that those US financial institutions which were involved in the risky loans triggering the global financial crisis in 2007 were the very ones which were most active in lobbying against stricter regulations on excessively risky financial activities.

The paper is called A Fistful of Dollars: Lobbying and the Financial Crisis. It was written by Deniz Igan, Prachi Mishra, and Thierry Tressel and has just been published (in December 2009). The authors claim that “to the best of our knowledge, this is the first study documenting how lobbying may have contributed to the accumulation of risks leading the way to the current financial crisis.” It’s a bit technical, so some readers may hop to the conclusion, on page 27.

The firms most engaged in lobbying against financial regulations also received a disproportionate amount of financial bailout cash from the Bush administration in late 2008, when the total collapse of the US finance sector threatened.

In Ireland, we know how strongly opposed Seanie Fitzpatrick (Anglo Irish Bank), AIB and all Irish banks were against regulation. Regrettably, those in positions of power in Government, in Finance and the Financial Regulator heard them and sat on their hands.

Personally, I was strongly opposed to the de-regulation frenzy in Ireland in the false boom between 2001-2008. For example, back in 2005, Peter McLoone (then President of Congress) and I were the only two members of the 16-member National Competitiveness Council to oppose the low direct tax and anti-regulation views of the other members of the Council in a Minority report on the Competitiveness Challenge in 2005 (p27). We said that we did not regard “the regulation of business and the labour market as ‘burdens’.”

The Council extolled the low regulation regime in Ireland. The report of the majority said “one of the strengths of the Irish business environment over the past decade has been the light administrative and regulatory requirements faced by firms particularly compared with other EU countries.” It went on to cite financial services as one of the most successful internationally trading sectors which was attracted here because “the level of regulation on Irish industry is perceived to be light relative to many of the other countries benchmarked". It also stated that “regulations are not perceived to significantly inhibit product market competition in Ireland.”

The main 2005 NCC report then warned of the danger of “rising regulatory compliance requirements” and of the need to check the “Growth of “Red Tape” (capitals!) and what it called the “Regulatory Compliance Burden” (again, capitals!). It also said Ireland’s rankings were deteriorating, due to increased “regulatory compliance requirements” and the “impact of recent corporate governance legislation in particular.”

In hindsight - these extracts shows how strong the anti-regulation (and anti-tax) environment was in Ireland! In a long introduction, Taoiseach Bertie Ahearn gave the report a strong endorsement, though he focused mainly on productivity, the low income tax regime and “managing our public finances responsibly.” He also boasted of our “enviable fiscal position!” No wonder the regulators took their cue and sat on their hands. And the Irish economy crashed to the ground.

If the IMF can examine part of the reason for the implosion of banking in the US, then here we do need a Commission to see why the whole Irish banking system collapsed and also to review the response to the crisis. It needs to examine how a whole ethos can develop and envelope an economy. It should examine why other voices were seldom heard against the development of such a dominating ideological perspective - one that was ultimately so destructive. Diversity of opinion can help to ensure that it can never happen again.

1 comment:

Paul Hunt said...

@Paul Sweeney,

Your call for a Banking Commission of Inquiry adds another influential voice to the list of those calling for an inquiry, but the IT today reports that the Taoiseach has ruled out any immediate inquiry until, possibly, much later in the year. And even if an inquiry is established one can be sure that the Government will ensure its TOR and remit are constrained to minimise any investigation of its culpability (or that of previous administrations).

At root this is - and always has been - a policy and governance problem. The people gave their consent in free and fair elections to be governed in this manner. It is now time for the people to pass judgement and for a new government to institute an investigation leading to the necessary reforms.

As I indicated in another thread on this blog (in response to Michael Taft) I believe the trades unions and progressives should organise a mass petition requesting the Taoiseach to seek the President's permission to dissolve the Dail.