Too Complicated To Regulate

Early last month our dear PM LHL said at a dialogue with businessmen in New Zealand that regulating the financial industry too tightly is 'not always feasible'. Specifically, he mentioned that today's financial markets are too complex to separate the commercial and investment banking systems.

He apparently has forgotten that the world's financial systems had operated perfectly well (and prudently so) for decades until precisely the different roles of these banks were conmingled. This likely started when the Glass Steagall act was repealed in the US and ushered in the era of increasing self-regulation in the banking ector.

And as we know today, it has been downhill ever since, the excesses of which finally came to a head in 2008 with the implosion of Bear Stearns and Lehman Brothers.

I find it incredible that he said that Singapore's government's approach to deal with this potential systemic threat to the financial system from the risks resulting from mixing commercial and investment banking is "to build up the nations (ie: Singapore's) reserves instead (of properly regulating and separating the functions of such banks) in anticipation of such events (banks blowing up like Lehman)".

What PM Lee is effectively saying is that HDB prices need to be kept high so that we have enough government reserves to rescue banks when their risky and over-leveraged bets in the financial markets fail. The services traditionally provided by the banking sector has always been of a parasitic nature to the larger body of the economy. The diversification of its role into investment banking, largely fueled by greed has changed the nature of its role in the economy to such an extent, that now the banking parasite has become more important than the host! Hence the occurance of Too Big To Fail bailouts of banks across the developed world, principally the US, Eurozone and from much earlier, Japan.

Apparently, we are not immune either. We have a President who is an ex-banker (OCBC) and who was quoted as saying that "securitization is a good thing" (for banks of course!). This in reference to CDO's, that financial weapon of mass destruction fingered as having triggered the current financial crisis back in 2008.

If the financial industry has indeed become too complex to regulate, then the logical thing to do is to simplify it. If the regulatory authority, MAS does not understand what is going on, what hope does the ordinary citizen have? MAS cannot abdicate its responsibility to ensure that whatever the financial industry is doing does not adversely impact the interests of the public. That is its sole reason for existence in the first place: To protect the public's interest.

MAS is not there to facilitate the financial industry in profiteering by exploiting the public with complicated "investment" products. If that were the case, we might as well do away with MAS altogether (and save the public a whole lot of money
paying their salaries). The financial industry can take care of itself very well and would profit far more easily if MAS were not around in the first place!