The behavioral finesse generated by our free-market system competitively flourishing in the west with classic common sense and active liberalism - normally emboldened by a minimally intrusive presence of the state - is currently under siege. The reversal of fortunes began with the relatively recent emergence of an aggressive "cops and robbers" mentality largely in response to a rare batch of bad decisions that originally led to the global financial crisis. Though also a way of life by now. Evident in the daily conduct of business between governments and the private sector. Particularly in the EU and the US, this extraordinary malpractice has since developed into an obsessive pursuit of regulation: posing a serious new threat to fundamental freedoms consistent with economic progress.
Steadily, too, things are getting worse with an increasing population worldwide of government regulatory commissions remarkably granted broad legal authority. Included here are the crowds of dirigent euro-bureau-technocrats in Brussels who have already come pretty close to establishing an austerity-depressed and certainly over-regulated under-capacity equilibrium as the new normal for the European economy. Entrepreneurial vigour and initiative, noticeably in retreat in the eurozone, are slowly asphyxiated (with the propensity to invest seen diving to unprecedented lows) by the unforgiving plethora of regulations specifically enforcing so-called compliance: with doubtful legitimacy as well. But, after tearing down the Berlin Wall only a few decades ago, isn't it almost uncanny we should suddenly be so preoccupied today erecting "walls of shame" of our own all over the international financial and economic landscape?
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We are busy succumbing, it appears, to a widespread heavy-weight reglementation that stealthily subverts otherwise vibrant behavioural expectations today: which, as we know, determine the level of tomorrow's economic activity and growth. A nasty piece of work from countless committees and subcommittees "at work", both in the EU and the US, presumably aiming to deal with the occasionally arising "issues" in a free-market system such as insider trading, bribery and corruption, "mis-selling" of complex products, restrictive cartels, etc. Why, however, couldn't these obvious aberrations from the twists and turns of everyday life in business be more efficiently and far more elegantly dealt with in a civilized modern society?
As, for example, by innovatively re-inventing a "moral suasion" policy? In terms both of timely and binding catalytic pronouncements - as part of a wide name-and-shame strategy - subsequently closely monitored and fully publicized by more legitimate sources such as Central Banks or Open Market Operations Committees etc. Hefty fines and other exorbitant pecuniary penalties running into billions (of misallocated resources) are nowadays commonplace instead. Jolting if not also derailing many of today's leading companies - large and small especially in banking and shadow banking - into growth-averse compliance in this increasingly unrealistically regulated new environment. On the other hand, I must say, New York's ambitious banking regulator, Mr. Benjamin Lawsky, should perhaps be commended here for at least turning his sights more on individual "rogue" employees within respectable institutions than automatically campaigning against the institutions themselves.
Today in the US, companies even in an open internet are targeted by an impending "net neutrality" rule that will soon be determining access to their networks. Just as the recently resurrected Financial Services Authority in the UK currently presenting another fresh threat to confidence. Holding close to its chest a still secret schedule and details of an imminent "investigation" of a pillar of the British economy: the motor industry and thousands of its suppliers or subsidiaries. No one knows how far the FSA is prepared to stretch its so-called "consumer-centric" self-determined terms of reference - but no doubt it will be usurping in the process the primary business of the free-market system. Which is to establish independently a fair pricing policy that directly guarantees, say, commission disclosure or quality financial services freely covering the entire industry. But as governments in Europe and the US are even at this stage tightening laws and regulations further backing their "I-say-so" enforcement procedures, this bizarre new attitude, apparently here to stay, translates into persistent and significant falls in aggregate demand that only prolong anaemic economic activity and custom-made uncertainty thanks to over-regulation as such.
I have come across some mind-boggling compliance-related penalties in 2013, also published in the Wall Street Journal, 17-19 January, 2014. I should, if I may, mention a few - in descending order of victimization - that only make sense here as "required reading": JP Morgan Chase ($5.1 billion related to mortgages), Johnson & Johnson ($2.2 billion related to drug marketing), SAC Capital (1.8 billion for insider trading), Transocean ($1.4 billion for Gulf oil spill), UBS ($885 million for mortgage-backed bonds), RBS ($612 million for interest-rate complications), Total SA ($398 million for alleged bribery), Weatherford ($252 million also for alleged bribery).
Similar penalties or fines, of course, are almost everywhere else routinely imposed. For example, over-zealous regulation is also spreading with a vengeance to the world of professional medicine and hospitals in the west. And, quite alarmingly, too, I may point at a "law" in the City of Westminster in London that a hamburger can only be served "well-done" to a stunned public.
But, as a rule, nothing is ever contested in the courts because litigation costs fly sky-high - this way leaving behind endless uncertainties frustrating the business community as a whole.
Perhaps most characteristic is the shocking case of Deutsche Bank. Even after agreeing to pay €1.4 billion to settle a lawsuit over "due diligence concerns" with the US Federal Housing Finance Agency in late December last year, continental Europe's biggest bank remains today ensnared in a cobweb of "non-compliance" litigation and restructuring costs that weigh heavily on its financial market performance. With profits in a downward slide as a result, the bank is now poised to cut assets (i.e. shrinking its balance sheet) by $332 billion trying to comply with yet stricter rules - joining this way Barclays PLC in the UK and UBS AG in Switzerland. Directly confronted, in other words, together with so many others, by a contemporary Damoclean sword spreading stifling over-regulation invariably enveloped in luminous fog at best - as a real disservice to better days ahead.
Equally destabilizing in the meantime has been one huge pile of available unspent cash, close to $3 trillion, amassed by a certain number of large companies, cautiously adopting a defensive posture per se also drastically cutting their net investment during the six-year austerity-ridden economic crisis. Dashing hopes that using these enormous funds would encourage additional private investment expenditure to stimulate the global economy. The prevailing new ethos of relentless "corrective" state interference - coupled with typical more complex legislation often loaded with practically incomprehensible regulatory jargon - seemed reason good enough.
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An ultimate challenge consequently facing free enterprise today is how to avoid being sucked into a strait-jacket of dictated "behavioural orthodoxy" - at the risk always of ending up eviscerated by mega penalties from crusading regulators lurking everywhere. Reflecting this growing threat is the "novelty" of Compliance Departments mushrooming as powerful internal watchdogs promoting "self-corrective attitudes" within just about every company doing significant business in the west. And so, free enterprise under stress and duress - another total contradiction - has by now become the fashionable new way of pursuing "prosperity" in the west.
In the circumstances, the 2014 Index of Economic Freedom released this year, as I vividly recall, on Tuesday 13 January by the Heritage Foundation has aptly risen to the occasion. The index measures a nation's real commitment to free enterprise. And apocalyptically leading the determining criteria are "government regulation and taxes". The Index has knocked the US out of the world's top 10. Reaching the refreshing conclusion that countries achieving higher levels of economic freedom "consistently and measurably outperform others in economic growth, long term prosperity and social progress".
A mere glance nevertheless at the multiple constraints intricately developed in the current Basel III or Third Basel Accord following Basel I and II - i.e., the global regulatory standard to be enforced on bank capital requirements or "bank capital adequacy" plus a collection of (stressful) stress-test details which will hopefully accurately reflect complex market liquidity trends together with a daunting bouquet of many other "guidelines" included - to be fully implemented by 31 March 2018 - quickly eliminates hopes of prosperity returning home any time soon. A veritable field-day is more probable for an even greater army of regulators, both in the EU and the US, to continue misallocating resources possibly running by then into hundreds of wasted billions - at everyone else's expense.