Friday, June 10, 2011

Calling Deregulation a Mistake, German Finance Minister Reflects on the Nature of the Financial Markets

The nation-state has indisputably lost its monopoly on regulation, said Germany’s Finance Minister Dr. Wolfgang Schäuble, but on the other hand no one wants a European super-state that would just be an attempt to transfer the monopoly on regulation characteristic of the outdated nation-state to a larger unit. In remarks at the Brussels Economic Forum, he said that something unique is needed, something sui generis.

While the Minister’s remarks were in the context of how to stabilize the European Monetary Union on a lasting basis, he also more broadly spoke about the nature of the financial markets. It was clearly a mistake to deregulate the financial markets as much as possible, he noted, since markets aggregate the decisions and acts of human beings and, like human beings, they need regulations and boundaries to act responsibly.

In the Minister’s view, the belief in rational markets was less a scientific fact than a religious faith. Their limits became visible during the financial and banking crisis in 2008. Markets work well, he observed, but they do not always act rationally since human beings do not always act rationally. Human beings and therefore markets cannot responsibly deal with unlimited freedom, emphasized the Minister.

Financial markets today are a world apart from financial markets in the past, said the Minister. Today, financial markets can and do react in seconds to new information, but they frequently no longer reflect and analyze the information properly. No one could have foreseen that technological advances would change financial markets for good, he said, but not always for the better. Instantaneous communication has lead to instantaneous execution, which has lead to volatility beyond anything that could have been foreseen.

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