Regulators are making much of macroprudential tools to prevent future bubbles. But regulatory capture remains an obvious risk.

Will the new emphasis on macro-prudential or financial policy lead to its own problems in time? Following an era in which policy-makers focused far too exclusively on monetary policy as their key option – ignoring the build-up of assets bubbles and the impact of lax fiscal policy – we are now heading towards a world in which technocrats reign supreme and are gifted with a treasure trove of tools and gauges.

In the UK, the new financial system stabiliser is called the Financial Policy Committee; in the US this function comes under the Financial Stability Oversight Council.

There is no question that leaving everything to the market and allowing credit supply to run out of control is a failed approach and needed fixing. In the UK, credit supply accounts for 97% of money supply while banknotes, coins and central banks deposits account for a mere 3%. This shows how a central bank relying on monetary policy alone is on a hiding to nothing and cannot do its job properly.

But the underlying philosophy of monetarism is that things go better when governments leave economic decisions to the markets and just guard the sanctity of the currency. With the new emphasis on being proactive there is the chance to both avert future financial crises… and to cause them.

The underlying philosophy of monetarism is that things go better when governments leave economic decisions to the markets and just guard the sanctity of the currency. With the new emphasis on being proactive there is the chance to both avert future financial crises… and to cause them

One cause of the financial crisis was regulatory capture when the regulators come under the influence of the sector they are supposed to be policing. In fact, it was the politicians who got captured too. The UK's Labour government basked in financial sector tax revenues (former chancellors of the exchequer compare it to the earlier bonus of North Sea oil) and in the US subprime lending was encouraged as a way of introducing poor families to the American dream.

The danger is that governments capture the new macro-prudential bodies and turn them to political advantage – lowering risk weights for favoured sectors such as social housing and small and medium-sized enterprises.

In the UK, Bank of England governor Mervyn King has been fighting the proposal for a powerful oversight board, presumably because he fears political interference. In the US, the Financial Stability Oversight Council reports to Congress and is chaired by the treasury secretary. How long will it be before their actions are compromised?

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