Vladimir Lenin was wrong about many things, but his maxim about the Soviet Union’s bureaucratic state apparatus — “better fewer, but better” — was undoubtedly right. Perhaps more than anything, the USSR demonstrated the flaws of rigid central planning. And yet, at the very heart of Western free markets, it not only survives — it flourishes.
Today’s financial rules often seem designed to maximise inconvenience for individuals carrying out small transactions. Despite the stupendous number of business regulations, however, the big events often seem to be missed. The collapse of Silicon Valley Bank (SVB), the bank of choice for large numbers of tech companies, is just the latest to surprise us.
On Saturday, more than 200 UK tech companies, worth £3.5 billion in venture funding, riled themselves up into a state of panic. They wrote an open letter to the Chancellor warning that they now face an “existential threat”, and suggested that the Bank of England’s attempts to downplay its impact showed “a dangerous lack of understanding of the sector and the role it plays in the broader economy”.
The truth, however, is that shocks like this are inherently difficult to predict. Indeed, it is more or less impossible, unless the central regulator is omniscient. The losses which have caused SVB’s collapse, for instance, seem to have arisen from the bank making complicated bets on interest rates and getting them wrong. It’s easy enough to explain after the event — but it’s very hard to anticipate.
And so Lenin’s maxim springs to mind: it’s better to have a few bright minds capable of thinking outside the box about the resilience of a system than legions of box tickers designing myriad rules which purportedly eliminate risk.
A similar issue confronts Rishi Sunak ahead of his first Budget tomorrow. Apart from the SVB crisis, two financial developments haunt his financial programme. They are both bad — and they both stem from a misguided attempt by regulators to control risk.
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