Excursions into economics

A noteworthy article appeared in the Business Herald last Friday, based on an interview with David Mayhew, newly appointed regulator of financial advisers and “likely” candidate for chairman of the proposed Financial Markets Authority.

Noteworthy for several reasons. 

Firstly, for the extensive commentary on regulatory policy issues.

Other regulators, for example Mark Berry at the Commerce Commission, have scrupulously avoided comment on relevant policy, even in private.

There are good reasons for this.  One is conflicts of interest.  In the article Mr Mayhew is already calling for more regulation (of fund managers) and hints at the need for a bigger budget.

Second, those dealing with a regulatory agency need to have confidence that they will be treated in a fair and open manner: regulators should not put that confidence at risk.

Also noteworthy were some excursions into economics (Mr Mayhew is a lawyer).  He is reported as saying “someone needs to tell Treasury and the Business Roundtable that the Chicago school of economics, and its belief in the efficient market, no longer holds sway …  I think you should say ‘Look guys, you’re history.’”

Arrogant? Not for me to judge.

Chicago economics?  Just one strand of modern economics, but one that is now regarded as quite mainstream.  The U of C economics department has produced more Nobel Prize laureates and John Bates Clark medallists in economics than any other university.

The efficient market hypothesis?  Professor Glenn Boyle, a highly respected financial economist at the University of Canterbury, had this to say about it in a recent lecture on the global financial crisis.  He explains what the hypothesis means – it is a technical proposition – and what it doesn’t mean. (Update: for a similar view, see this interview with Eugene Fama, a name closely associated with the EMH)

Another observation: “markets without regulation deliver bad results.”  But, first, no market can operate without rules, and, second, misguided government intervention can certainly deliver bad results, as we saw with the GFC (think Fannie and Freddie).

The policy argument is always about the quality of the regulation, having regard to problems of incentives and information, regulatory capture, rent-seeking and moral hazard. The initial financial advisers legislation was poorly conceived, as many now acknowledge. 

Investor confidence about security of property rights in New Zealand, including enforceable sanctions against fraud, is very important, but that confidence may not have been advanced by some observations in the article.


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