The reality is that global high finance is de facto a set of interlocking cartels that divide the market among themselves and use their advantages to keep out competitors. Cartels can extract huge premiums over what would be normal profits in a functioning market, and part of those profits go to keeping the cartel intact: huge PR efforts, a permanent recruiting circus drawing in top academic talent; clever sponsoring of, say, an ambitious politician\’s cycling scheme; vast lobbying efforts behind the scenes; and highly lucrative second careers for ex-politicians. There is also plenty of money to offer talented regulators three or four times their salary.
Capitalists have an expression for this, and it\’s \”market failure\”.
Well, no, that\’s not called market failure. That\’s rather more reserved for something that cannot, even conceptually, be dealt with by markets. It\’s a bad market, a distorted one, certainly.
Here is the source of so many of the perversities in modern finance, and the solution is not only to denounce those who can\’t resist its temptations, it\’s to take away those temptations. That probably means smaller banks, smaller and independent accountancy firms and credit-rating agencies, simpler financial products, and much higher capital requirements.
But when you\’ve got a bad market, one cartelised, it\’s necessary to ask why it is so. And the usual answer is that regulation, whether private or public, prevents new firms entering said market.
Could be the firms themselves simply refusing to trade with new boys. Or it could be government regulation that prevents new boys from entering the market. And it\’s pretty important to find out which. Because if it\’s government regulations then the solution is to have fewer regulations.