Financial crisis, scapegoat and regulations

Comments on Jagjit S. Chadha “Is the love of finance the root of all evil?” 24/07/2009, http://www.eastasiaforum.org/2009/07/24/is-the-love-of-finance-the-root-of-all-evil/

I like this article. I find it fascinating and can’t help from commenting, though I didn’t rush in doing it earlier on after my first noting it.

Although it is against the current wind blowing heavily, it appears to be more sober analysis than most very loud noises calling for this and that.

While there may well be a case for strengthening some financial regulations, there is a real danger of overdoing it and over-regulation of the financial sector, at the expenses of efficiency and suffocation of innovations.

It is true that the world main financial and banking system came near collapse. But what were the main direct causes? It was the subprime problems and the malpractice of selling subprime mortgages in the US to the largest degree, wasn’t it? Imagine what would have been if there had not been those malpractices in which people without the ability to pay were given more 100% loans of the equities they bought, at very low interest rates.

International imbalance in saving and consumption may have contributed to the financial problems in the US. But, I would argue that the causal relationship is by no means inevitable and what had occurred in the US should have been avoidable in the first place.

For example, the US could have used the low interest rates afforded by excess international savings to invest in more productive sectors and areas, or even other countries, that would generate much higher returns and enhance the well beings not only in the US, but also other countries.

This in an indirect way would be similar to the argument of readdressing the patient and non-patient internationally discussed by Chadha in this article.

So I agree with Chadha that the size of the financial sector was not necessarily the problem. If looking at the worldwide, savings are not necessarily too high, because there are so many countries, mostly developing ones, have extremely low level of physical capitals and need to increase investment and accumulate them. Even in some advanced economies, infrastructures may need to be upgraded or replaced.

I find the argument that too much savings amusing, but can’t help laughing at it. When there are problems, it is easy and tempting to find a scapegoat, whether there is any justice to it or not is irrelevant to most people.

The financial and economic crisis is such a case in unprecedented scale.