In my Monday column for the FT I take issue with the view that what went wrong in financial markets had nothing to do with regulatory failure, and make the case for tightening some rules, and creating some new ones.

When the crisis in US and global financial markets started to unfold, so began the incantation of two default opinions. One: regulation is the answer and we must have more. Two: regulation is the problem and more would be worse. With all that chanting to be getting on with, neither choir has time to look at what has happened. Which is as well: the details might call for some thought.


I am a pro-market type, whose stock-in-trade is to warn of the unintended consequences of hasty or excessive regulation. In the present case, however, we are badly served by our usual catechism. This time, elements of large-scale regulatory failure are indisputably at the centre of what has happened. If, for the sake of leaving our prejudices in peace, we deny the obvious, we bring our regard for markets into disrepute and have nothing to offer by way of an intelligent policy response.

Financial crises rarely have a single cause and the current one is no exception. But with all due respect for the complexity of the matter, can anybody deny that the US market for subprime mortgages was a critical component? And can anybody apart from Alan Greenspan, former chairman of the Federal Reserve, look at the way this business was conducted and argue that it was adequately regulated? At the origination level, fraud was a factor, to be sure – and fraud is illegal, with or without new rules. But indefensibly bad practice was widespread, too, by originators that were lightly regulated or completely unregulated. Much of this bad lending was preventable by ordinary standards of prudence – and to say so is not the wisdom of hindsight. The late Edward Gramlich, a former Fed governor, gave ample warning of this regulatory lacuna.

He was right and Mr Greenspan was wrong. The subprime mortgage business needs more regulation. There, was that so hard?

You can read the rest of it here.