Free market economy

Government and politics have been very much interlinked in the past year or so, especially with the recession. The possible collapse of HBOS was seen as being such a threat to the British economy that state intervention had to take place, and competition rules were waivered to enable Lloyds TSB to take them over and merge the two companies to create the Lloyds Banking group. This went against the fundamental principles of the free market economy and the British government is increasingly doing this ensure that large institutions do not fail thus leading to thousands of jobs being saved.

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However, they also saved RBS injecting billions of public funds into this company. The criticism that has arisen is that the consumer is now left with less choice in the banking sector and Brussels has raised these concerns on numerous occasions (FT 27/10/09, P. 22, “Brussels verdict sets precedent for rivals”). The argument coming from the EC is that the state bail outs are giving these companies an unfair advantage in the financial sector and are squeezing other companies out of the market.

As a result the EC has ordered the breakup of these financial institutions to try to increase competition. Northern Rock was bailed out and nationalised and was ordered to be broken up to ensure the mortgage market was competitive. This action is hoped to ensure more companies enter the mortgage market thus giving consumers more choice in their mortgage payments (FT Weekend, Money, 31/10/09, P. 1, “Rock split to increase competition”). The government has also moved to make sure the past mistakes in the financial sector of excessive banking bonuses and risks are not repeated.

They have intervened by proposing and passing laws to make sure of this. Recent the Chancellor, Alistair Darling, proposed that the Financial Services Authority be given the power to punish traders and banks that reward excessive risk with massive bonuses (FT 16/11/09, P. 1, “FSA given extra clout to punish city crime”). This is an example where by state intervention in the law of the consumer culture could actually be a good thing. If banks are discouraged from these risky practices the theory stands that the collapse of the financial system will not happen again.

However the counter here is that all the talented bankers will just move abroad and a “Two tier” system will emerge in the sector (FT, 30/10/09, P. 1, “Wall St fears two-tier pay scale after ‘heavy-handed’ FSA action”). To conclude, the regulations as set out in Articles 81 and 82 of the EC Treaty are necessary to ensure the principles of the free market economy are adhered to. The fact that they are enshrined in EU competition law and rigorously enforced is good for the consumer.

The problem with these laws is proving where companies have violated them as they are always most certain to launch appeals when they are found to be in violation and this is a protracted and long legal process. With regards to enforcement in the various sectors by the different regulatory bodies, this is a good thing also. The fact there are bodies specific to each sector ensures the people tasked with carrying out investigations and enforcement have the knowledge relevant to that sector and do not waste time studying a sector they have no idea about.

Again though, it can work two ways, there are the arguments that there is too many public bodies that regulate in each sector and it can cause unnecessary confusion and bureaucracy. Political intervention is in direct contravention of the principles of the free market economy but is a necessary evil in some cases, especially in the current climate of the recession we find ourselves in. It saves jobs and ensures companies do not collapse.

It is a double edged sword though. The government nationalisation of banks has led to less competitiveness and the excessive rules that have been proposed for the banking sector with regards to bonuses are potentially scaring away the most talented bankers.

References: http://www. ft. com/cms/s/0/eb453b3a-af97-11de-ba1c-00144feabdc0. html? nclick_check=1 , “Watchdog proposes curbs on spread of ‘Tesco towns’