After the 2008 financial crisis the era of laissez-faire neoliberalism was declared dead by everyone from Nicolas Sarkozy to Joseph Stiglitz to Alan Greenspan.
The enhanced regulation and supervision of banking and financial markets that followed — including the Dodd-Frank Act, tighter Basel bank capital rules, and the establishment of European supervisory authorities — were meant to put an end to the financial Wild West that had caused the collapse of Wall Street and almost of the global financial system.
An era of heavy-handed regulatory oversight dawned.
Not so stringent
Over time, as the dust settled, the toothlessness of some of the legislation became apparent.
Dodd-Frank turned out not to be the strong, overarching regulation that had been promised. While it was effective in some ways (the introduction of the Consumer Financial Protection Bureau, for example) it did not reduce inequality or level the playing field as had been hoped.
Basel, too, has proved disappointing at preventing excessive risk taking.
Neoliberalism, it appeared, survived.
The rich continued to get richer, the poor continued to suffer and the populist movement that rose from this led to the election as US president of Donald Trump — a champion of laissez-faire regulation.
During his four year reign Trump did his best to unpick Dodd-Frank and deregulate the US financial markets as much as possible. He largely failed, but the attempt showed the direction of travel.
Then, when the Covid-19 pandemic struck and the only logical course of action was to abandon the anti-regulatory agenda and impose strict rules and guidelines on the public, it was once again claimed that neoliberalism was over.
Government intervention was evidently necessary when problems became extreme. Record unemployment and overrun hospitals showed that a market-led approach would not suffice to halt the spread of the virus or minimise economic damage, in the US, UK or elsewhere.
Short memories
Yet, as in 2008, forceful government intervention has proved short-lived. This month, Jeremy Hunt, the UK's chancellor of the exchequer, introduced the Edinburgh Reforms, a set of over 30 regulatory reforms and reviews prompted by Brexit, on areas as diverse as securitization, short selling and the rules on Packaged Retail Investment and Insurance-Based Products (PRIIPS).
The wide-ranging proposals have a distinct deregulatory slant, with an overt emphasis on making UK markets competitive.
It might seem an oxymoron to suggest that introducing 30 reforms is deregulatory. But if the underlying intention is to loosen the rules governing almost the entire financial sector, it is.
Suggested securitization reforms, though vague, are intended to stimulate more activity by weakening constraints.
Similarly, the government call for evidence on proposals for short selling suggests it will rip up the EU rule and replace it with something that allows more freedom.
Another target of the reforms is ringfencing. This rule, pioneered by the UK, compelled very big banks — the seven with over £25bn of deposits — to separate their domestic High Street retail and commercial operations from their riskier investment banking arms.
The aim was to insulate ordinary customers, the government and the economy from any future crisis that might arise in investment banking.
If retail and investment banks were forced to have their own governance structures, their respective boards could focus on the risks inherent in their own activities and align better with the needs of their customers.
Not listening
A bonfire of regulations is not only unwise — it is not what people want.
A Finance Innovation Lab survey found that fewer than 9% of the UK population want banks and other financial institutions to have less regulation.
Appetite for deregulation is lower still among people who voted Conservative in the 2019 General Election, just 8% of whom support it. Among Brexit voters only 5% want deregulation. In the north of England, only 6% do.
Even Andrew Bailey, governor of the Bank of England, has called on the government to slow down its deregulatory agenda, saying the rules were put in place for a reason.
Hunt insists the reforms are proportionate to the market and has vowed to press on.
But this agenda is taking serious risks with the stability of the economy, weakening the protections established after the financial crisis.
Rather than focusing so intently on removing EU legislation and fostering competitiveness, the UK government would do better to turn its mind to creating a more resilient financial system with adequate safeguards.
The financial sector has not lost its power to blow bubbles and burst them, spreading havoc far and wide. Only vigilance by regulators can mitigate this risk. If they relax their grip now, and the system blows up again, this time no one will be able to say they had no warning.