Saturday, September 27, 2008

The US financial crisis and the consequent loss of trust

The Balance of Payments, Australia and the sub-prime crisis continues to be one of the most visited posts on this blog. I have now updated the analysis somewhat in in a post on my personal blog, Saturday Morning Musings - longer term impact of the US financial crisis.

From a long term perspective, one of the worst outcomes of the financial crisis is the loss of trust in business and in management. The crisis itself is all about loss of trust between institutions, a loss that has brought the financial system to a halt. However, the crisis has also further eroded community trust not just in the financial sector, but in the broader business sector. We will all pay a price for this.

I have tried to argue in favour of less business regulation because of the way it increases compliance costs. The current crisis makes this hard and will certainly see an expansion in finance sector regulation.

I do not think that anybody could argue, at least it would be very hard to argue, against the need for improved regulation in the US so far as the financial system is concerned. There is little choice when a sector imposes costs on all, threatening to bring down the entire global financial system.

The difficulty that then arises is to find the best way of doing this. I do not think that the US has a good record in this regard because of the way that that US regulation designed for the big imposes compliance costs on all.

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