The Ethics of Banking: Conclusions from the Financial Crisis (Issues ...

From Big Bang Deregulation to Big Bailout 169
(Treasury Chief) and the other architect of the Big Bang, Cecil Parkinson, the former
Secretary of State for Trade and Industry, both cabinet ministers under Margaret
Thatcher, have since become members of the House of Lords. Nigel Lawson maintains
that, “The notion that banks would get as big and bloated as they did was totally
unexpected.” 31 The assertion that the financial crisis is only a crisis about the size
of the banks which could have been avoided if banks had been smaller, is another
vain attempt to justify the theory that a revolutionary, big-bang-like reorganization
could have been appropriate as a policy for deregulating the finance industry. A vital
reason for the adoption of the Big Bang theory of total deregulation of the finance
industry was the hoped-for strengthening of the City of London as a world financial
center. 32 Great Britain obviously pursued this strengthening of the City at the cost
of stability of the international financial system. The idea of lifting financial regulation
with a Big Bang in order to prime the pump for economic growth, to create
advantages for London as a financial center, and to strengthen it through the deregulation
revolution in the financial industry of the 1980s and 1990s, was confounded
byreality–afatethatbefallsmostrevolutions.
The consensus that underlay Big Bang deregulation was that markets are practically
infallible if they are left to operate undisturbed by state regulation. The error of
this position was either an error of economic theory, a failure to perceive the functional
conditions of financial institutions realistically, or an error of will, a refusal
to look reality in the eye. It was not a mistaken political consensus, as the British
Prime Minister at the time of writing, Gordon Brown, assumed. 33 Consensus does
not, as Jürgen Habermas and certain democratic politicians seem to think, constitute
truth. Markets are the best way to coordinate the supply and demand of economic
goods and services, but they are a very long way from producing perfect rationality
or even infallibility or truth, because the individuals that make up markets are not
infallible in their economic decisions. The herd instinct, adverse selection, moral
hazard, etc., are well known constraints on the rationality of behavior in the market.
To take the example of the Catholic doctrine of papal infallibility as a comparison
with the idea of the infallible market: neither the Pope’s sense of reason nor the
consensus of Catholics could justify the claim to infallibility. This could only happen
31The Wall Street Journal Europe, Vol. 27, No. 42, Tuesday, March 31, 2009, p. 1 and 32,
here p. 32.
32The American policy of deregulation to strengthen their financial centers put pressure on regulatory
authorities in other financial centers such as Paris and Frankfurt to reduce regulation in their
own centers so that regulatory bureaucracy did not become a competitive disadvantage. This can
be seen as a deregulation competition between financial centers which led to ever lighter regulation
of the financial markets. SINN (2009), p. 175, calls it a “laxity contest” (“Laschheitswettbewerb”).
He reports that a high-ranking official from the French regulatory authority commented at a conference
in October 2008 that the authority had made it a principle not to approve anything that
could not be understood by at least one person on his staff. They had not been able to abide by
this policy, however, because they feared that any delay in authorization would cause a competitive
disadvantage vis à vis the British or Germans (Ibid.).
33Cf. “Kurswechsel in Großbritannien. Wetteifern um harte Regulierung” [Political U-turn in Great
Britain. Vying for tough regulation], Frankfurter Allgemeine Zeitung, (March 18, 2009), No. 65,
p. 13.