Passing The Buck

Someone somewhere may well read this post and shake their head with exasperated condescension, or sigh at how naive I am to wish the world to be such a simple place. However, I am going to attempt to argue that just such people are very much part of the problem. But I am getting ahead of myself: first to set out my stall.
I had a little Twitter rant the other day about bond traders and their seemingly short sighted desire to cause a sovereign debt crisis. The argument being that by increasing the price of sovereign debt, they are increasing the chances of a sovereign debt crisis, which will mean they are less likely to see a return on their investments. Obviously, they won't lose out, as they will have bought credit default swaps to insure against a country going bust. And of course the price of those credit default swaps goes up the greater the risk is of a country going bust. Obviously, insurance companies have to price their products according to risk, so they get the credit ratings agencies to calculate the risk of a country going bust for them. The credit ratings agencies look at the amount of debt a country holds and what the bond traders are charging for that debt and decide on the risk of a default. So it is a self-perpetuating cycle, that amplifies the jitters of those involved into massive gains or losses, potentially ruining the economies of nations. Of course those involved in the process don't make massive losses, they have made sure that there is no chance of that. However there are losses and gains built into the system, so who pays for them? You do, you schmuck. Not only do your taxes go into paying back the money that your government has borrowed, but the money that was lent in the first place came from your pension scheme, or ISA, or other savings scheme. So you fund the system at both ends, yet the amount of your tax that gets spent on paying back bonds does not equate at all to the rate of return you will see on your investments. Obviously there is a need for companies to make a profit, but there seems to be a problem with the fact they can make a profit when the losses occur at both ends of the chain. It's odd that so much has been made of governments bailing out banks when government debt has been an essential part of the investment mix for years, quietly turning profits for financial institutions, and allowing a 'safe' investment vehicle for people nearing retirement. The current financial system needs sovereign debt to function properly, which cannot necessarily be a good thing. If we are replacing the welfare state with a system that relies at least partially on making money from government debt, what are we actually gaining? By 'we' I mean taxpayers, not the 'wealth creators' who profit from this situation and make sure that their money remains largely untaxed.
Anyway, the people who do profit from this system excuse themselves by stating that they didn't create the system, and that they are just reacting to market pressures. Brilliantly, they are instantly absolved of any responsibility, making it a classic victimless crime, except of course it isn't a crime. The significant lobbying power of the financial services industry ensures that time after time any legislation that may threaten their ability to exploit whatever market they chose is kicked into the long grass. The result is that it is only people who do not listen to the financial services industry at all who make new legislation, and because of the lack of dialogue, it is not very good legislation. This in turn fuels the view of those in financial services that politicians are not competent to regulate the system. In many ways of course they are right, our economic systems in their entirety are now so complex that economists struggle to explain them fully. It is easy for traders to understand the influences on their specific product, but as they have little concerns for the effects of that product beyond profit making, they cannot be considered to have a 'big picture' understanding. The economists who do look at the big picture can't agree on how it works, so how are we supposed to know what the effects of certain products are?
In such a climate, politicians can perhaps be forgiven for regulating the symptoms without any real understanding of the cause, but that doesn't mean they do any good by it. Self regulation would be much better if anyone had any enthusiasm for it, but they don't. The city's enthusiasm for self regulation is just a pretext for its enthusiasm for no regulation. You don't ask an alcoholic to look after your cellar.
So we are at a regulatory impasse: the only people capable of understanding the detail sufficiently have no interest in the big picture and the people whose concern is the big picture rely on others who only understand theory or poachers turned gamekeepers. I sometimes think that the solution might be arrived at if we all study economics, but I'm not sure: knowing the theory hasn't worked for anyone so far, so all of us knowing the theory is likely to just cause more confusion. Also, knowing the theory won't get us any closer to understanding the details, or understanding the relationship between the two. So we have to go one way or the other, either financial products must have clear definitions of their influence and impact if they are to be licenced, or they must only be allowed if they are simple enough for a politician to understand. And that's pretty simple.