Politics

The “Stabilitator” – Rise of the Knee-Jerks

The British government wants the BOE to be the "stabilizer” for the British financial system. Alas, the plan is merely another political knee-jerk reaction.

Story Highlights:

  • The British government plans to give their central bank an official mandate for maintaining financial stability.
  • They wish to "ensure authorities can act quickly and decisively" to address financial issues when things get wonky.
  • Though well-meaning, this merely paves the way for knee-jerk reactions and government tinkering in free markets.

________________________________________________________________________________________

British politicians are in a tizzy—or as they say, "having a wobbly"—over recent economic and market events. Specifically, they're lamenting what they view as a too-lengthy response time in rescuing Northern Rock from the brink of dissolution. As such, Brits feel something must be done to either avoid future similar events or react more quickly when they happen.

Their solution: A knee-jerk reaction to mandate unimpeded future knee-jerk reactions via dubbing the Bank of England (BOE) the "financial stabilizer" of the UK. (Oh yeah, don't forget the obligatory sacrificial scapegoat sacking of soon-to-be former BOE governor John Gieve.)

Darling Plans Biggest Shakeup of BOE Stability Powers Since '97
By Gonzalo Vina, Bloomberg
http://www.bloomberg.com/apps/news?pid=20601087&sid=ankQcOT89cPU&refer=home

We're sure some of those who nervously stood in line to liberate their savings from Northern Rock believe this is a grand idea, as do politicians interested in public opinion. And in their defense, we have seen some innovative and appropriate steps taken by central banks recently, and we'd like them to retain this ability. But isn't it a bit silly to expect any one person or entity can be charged with stabilizing financial markets? After all, history shows us time and again, given some time, free markets are capable of stabilizing themselves—much better than any outside force. Sure, it would be nice if we could vote to abolish financial turmoil. But it's unrealistic and downright anti-capitalistic to expect ever-stable financial markets. Natural free market ebbs and flows will cause failures, no doubt, but they also spark innovation and prosperity to a much greater degree.

And what does "financial stability" even mean? No volatility at all? No risk? All ups and no downs? Flatness in perpetuity? And what happens at the slightest hint of instability? Will the BOE unleash the full force of their super-human financial stabilizing powers? Will capes and tights be involved? We shall see.

So how will the plan work? Each year, the chancellor will send an open letter to the central bank's new stability committee. The committee will have qualitative objectives to meet, whereas before, the focus was on a numeric target. But one question: What drives these objectives? Did they find some clairvoyant being who can predict what troubles the financial system will face in the coming year? All in all, the plan reeks of feel-good plan-for-this, plan-for-that solutions. But we know capital markets have a knack for delivering the very scenarios that can't be foreseen. The way we handle such situations—or don't handle them—helps shape our economy, so we must tread lightly with such "financial stabilization"—perhaps known better by its true name, "more government regulation." No one likes uncertainty, but when it comes to free markets, be careful what you wish for.

This episode is worth watching as it develops, as are all major policy changes. In the meantime, you should read this take on the UK's move towards "financial stability"—we enjoyed it.

Hands Up Those in Favour of Financial Stability
By David Wighton, The Times
http://business.timesonline.co.uk/tol/business/columnists/article4167805.ece

If you would like to contact the editors responsible for this article, please click here.

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.