That was the central question posed at this year’s Globes conference on Capital Markets and Finance, held in the lavish David Intercontinental Hotel in Tel Aviv (if ever one wondered where the 1 percent go for conferences, I can say with some certainty that this is it; between speakers, the conference included luxurious breakfast and lunch spreads, free lattes, noon-time cocktails in the main room and beer on the pool deck overlooking the Mediterranean. But back to regulation…)
The debate over regulation can be a shrill and exhausting one. In the United States, or example, Democrats blame deregulation on the 2008 financial crisis from which the world is still struggling to recover. They’re not wrong. Republicans blame regulation for eating into competitiveness and creating unbelievable levels of red tape and extra work for financial institutions and businesses. They’re not wrong either.
Economists note that financial institutions and governments are in a constant arms race over regulation. Banks and investment firms exert massive efforts looking for loopholes in the law and creating newer and more complex financial products to try to make a profit. Try as it may, the government can’t keep up; passing legislation takes too long, and governments lacks the resources and manpower of the financial giants they seek to regulate. If they try to head off risky trading with widd-reaching laws, they can stifle business.
In the meantime, the government must also compete with other countries and their regulation; at a certain point, businesses will set up shop in a less regulated environment because there’s more money to be made there. That’s one reason countries try to work together to install international financial standards, such as the Basel accords.
While there are serious questions regarding specific forms of regulation, the broad political debate often veers into ideological drivel.
Imagine, for a moment, the same debate occurring over parenting. Imagine one authoritarian parent, who believes that rules and boundaries must be set at every level of a child’s life. Another, a free spirit, believes that children should find their own way, learn their own rules, and be responsible for their own mistakes.
Who is right?
‘Without clear boundaries and tough rules, children will run amok, fail to learn discipline, never develop the tools they need to get ahead and constantly act out, not to mention get themselves into trouble or, worse, physically hurt,’ the authoritarian parent would argue, as their child wanders as far as their short leash allows.
‘But wait,’ the free spirited parent might object. ‘Too many rules can stifle a child’s creativity, prevent them from having any fun and turn them into a very unlikable, boring, unsuccessful person. Kids can learn on their own how to stay out of danger and what to eat and find their own paths.’ Such a child would never innovate or think out of the box, and certainly could not be happy, even if they do not survive until their teenage years with all their original bodily parts intact due to lack of parental protection.
Neither sounds like a good formula. The idea is not to be pro- or anti-rule, but to decide on the right balance, building strong boundaries in some areas and allowing the child room to have fun, learn, and flourish on her own in other areas.
Governmental economic regulation is much the same way. While people tend to fall into pro- or anti-regulation camps, the idea is finding a good balance.
That’s why it was so refreshing to hear Shmuel Hauser, Chairman of the Israel Securities Authority, speak on the matter. Instead of arguing for regulation or deregulation, as other speakers did, Hauser argued for more of both - in differing areas.
Strong regulation, he explained, is one reason that Israel survived the financial crisis and has thriving capital markets. Continuin to build greater oversight in accounting, economic dividends, trading and credit ratings will actually help build trust to draw in foreign investors, Hauser said.
But in certain areas, he added, it is unnecessary and reduces international competitiveness. Deregulation would benefit the economy if it, for example, differentiated rules for small and large companies and applied new regulations on a slower, clearer schedule.
It''s good to have a level-headed technocrat in the position to make such decisions. The ideologues could learn some valuable lessons from him.