I see two potential grounds for concern. The first is the revolving door between the industry and regulatory bodies. This is more prevalent in the United States, where regulators' salaries are very low, especially in the Securities and Exchange Commission and the Commodity Futures Trading Commission. Turnover among senior—and not so senior—people in these agencies is very high. The Fed folk are paid a little better, and stay rather longer. The United Kingdom pays its regulators more, but there is still a lot of "in and out" activity, and more than there used to be. Singapore and Hong Kong have a different model. Their regulators are given market-related compensation packages, and continuity of senior staff is more effectively maintained. My view is that the Asian financial centers have it right.
The second concern is what one might call intellectual capture. While I would strongly argue that the FSA in my day did not favor firms unduly, it is perhaps true that we—and in this we were exactly like our American counterparts—were inclined to believe that markets were generally efficient. If willing buyers and willing sellers were trading claims happily, then, as long as they were "professional" investors, there was no legitimate reason to interfere in their markets. These people were "consenting adults in private," and the state should avert its gaze.
We now know that some of these market emperors had no clothes—and that their activities were far from benign: They could result in severe financial instability and generate serious losses for taxpayers, not to mention precipitate a global recession. That has been a grave lesson for regulators and central banks.
So the charge of intellectual capture is hard to refute. But were regulators surrogate lobbyists for the financial industry? I do not think so, and to argue as much devalues the efforts of many overworked and underpaid public servants around the world.
Howard Davies, former chairman of Britain's Financial Services Authority and a former deputy governor of the Bank of England, is director of the London School of Economics. His latest book is Banking on the Future: The Fall and Rise of Central Banking.
This article comes from Project Syndicate.