Introduction
In the current debates on financial reforms we often encounter the aphorism regarding the danger of fighting the last war. Because pervasive financial reforms are predominantly reactions to recent events, the perceived causes of the last crisis tend to attract the attention of reformers.
Being right in fighting the last war requires the firm belief that the preexisting strategy was substantially sound, needing adjustments but not a radical redesign. Calling attention to the next war means trying to understand how the recent defeat was the product of a strategy based on the wrong understanding of the art of the war. If the previous financial regulatory framework were considered structurally unfit to contain the explosive effects of endogenous dynamic forces, a radical financial reform would be necessary If the financial sector were considered as only part of the problem, further reforms should be called in.The discussions that have arisen or been reignited by the recent crisis and the adopted or planned reforms have followed the two above strands. Reforms have tended to mend, not revolutionize, the previous regulatory framework. To a large extent they constitute a compromise between those calling for harsher measures and the milder position advocated by the industry, with both camps accepting the essentials of the previous approach. The other strand variously singles out structural weaknesses in the general design of public intervention, at international, regional and national levels.
Economists are accustomed to division. Another aphorism says that if ten economists are asked to interpret a passage of the Bible, they will produce ten different interpretations, eleven if one of them wereJohn Maynard Keynes. However, in our case economists may be grouped in two significantly different clusters, so that our interest should lie in understanding what causes the main division.
Keynes offers an explanation based on the ideas of past economists and political philosophers that should also apply to our subject, with politicians, financiers and the civil servants of regulatory and supervisory authorities among the main actors.At the present moment people are unusually expectant of a more fundamental diagnosis; more particularly ready to receive it; eager to try it out, if it should be even plausible. But apart from this contemporary mood, the ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas. Not, indeed, immediately, but after a certain interval; for in the field of economic and political philosophy there are not many who are influenced by new theories after they are twenty-five or thirty years of age, so that the ideas which civil servants and politicians and even agitators apply to current events are not likely to be the newest. But, soon or late, it is ideas, not vested interests, which are dangerous for good or evil. (1936, 383-84)
Section 2 follows Keynes’s argument offering a discussion on the theoretical roots of the current approach to financial regulation and supervision. However, section 3 argues why, at least for the topic taken up in the present work, we may dare to disagree with the previous passage on the relevance of vested interests.1 Section 4 presents an alternative approach to financial regulation based on Minsky’s ideas. Section 5 briefly concludes.
2.