As you would expect from somebody prominent in the Florentine arts scene, speeches by Lorenzo Bini Smaghi, the Italian on the European Central Bank’s executive board, are usually elegant.
In a lecture today at the Università di Siena, he took as his starting point the memorable comment by Chuck Prince, former head of Citigroup, in 2007 that “as long as the music is playing, we’ve got to get up and dance”. He then went on to explore the question of why in much of the economy, regulation favours insiders by creating barriers to entry, but in the financial sector it was the other way around and rewards were greater for those in the non-regulated sector.
Before the crisis, the result was a downward spiral in which “the increased profitability of the financial sector over the years has encouraged lobbying for further deregulation of the industry, which then leads to still greater profitability and even more lobbying pressure”.
The correct response, Bini Smaghi argued unsurprisingly, was better supervisors. He favoured their greater independence, more international cooperation and more accountability. But he ended on a gloomy note, reflecting on what is apparently becoming an increasing worry at the ECB: that banks think they can simply return to the status quo ex ante. Bini Smaghi concluded: “What is really needed then, to quote that famous phrase, is somebody who will ‘take the punch bowl away just as the party gets going’ again; somebody who has the authority to slow the music down.”