Essays in Honour of Charles Goodhart, Volume Two
Edited by Paul Mizen
Discussion of ‘Is there a Goodhart’s Law in ﬁnancial regulation?’ and ‘Working with market forces’ Dirk Schoenmaker 1. INTRODUCTION I started to work with Charles on ﬁnancial regulation at the LSE Financial Markets Group in the Summer of 1991, just after the collapse of BCCI. Charles has always been very mindful of the fact that failures can (and should)1 happen and that supervisors will be criticised for it, rightly or wrongly. Both Andrew Sheng and Michael Foot seem to acknowledge this point from practical experience. The origin of Charles’s work on regulation is twofold. First, in his masterpiece ‘The Evolution of Central Banks’ Charles showed that central banks started oﬀ in their micro-capacity as crisis managers (lender of last resort) and that only later the macro-monetary policy side of central banks came to prominence (Goodhart, 1985, 1988a). Second, with the establishment of the SIB, the legal predecessor of the FSA, in the mid eighties, Charles became involved in the regulatory debate on the economics of regulation and started to write on issues such as the costs of regulation (Goodhart, 1988b). I have learned much from Charles about the central bank roots of regulation and will ﬁnish my discussion with some unsettled issues in that domain. In Chapter 9, Andrew Sheng argues that Goodhart’s Law helps to explain why ﬁnancial regulation can fall short in its target to achieve ﬁnancial stability. In Chapter 10, Michael Foot shows how the regulator may work with market forces. The supporting arguments are...
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