When the G-20 is calling to “ensure that all financial market products and participants are regulated or subject to oversight, as appropriate to their circumstances”, one has to wonder why such regulation would be needed. Without doubt, financial stability is essential for a smooth growth in wealth creation. Financial markets are a tool, and not an end in themselves, “supposed to perform certain vital functions which enable the real economy to be more productive”
However, when calling for more transparency, accountability, simplicity and disclosure, as often suggested, one has to wonder in what sense such information can be a source of financial stability. In fact, economic theory is divided on this point. Regulation can have a double meaning referring to different visions of the economic system. Therefore the question of regulation has to be analysed with regard to the economic debates which have been running for nearly 300 years now. Actually the question underlying the different types of regulation can be summarised in the following way: “Are variations in the relative price system the only source of information necessary in order to achieve financial stability?”
From the answer to this question one will be able to differentiate the different kinds of regulation principles needed and the institutions in charge of such an oversight. It will be possible to notice that some regulatory principles proposed could damage the European integration process whereas it seems that the present financial turmoil would call for a more integrated, global European regulation.
Read the contribution elaborated in the frame of FEPS expert group on hedge funds