I am expecting contributions from other readers to publish here before ships leave the harbor.

The search for a new monetary policy series recommended a new institutional regulation as conclusion. I have received a couple of comments on this recommendation. One came from my dear friend Baha Karabudak, prominent expert on competition and regulation in Turkey. He has been teaching undergraduate and graduate courses in these areas in the Middle East Technical University and Bilkent University. Following the greeting phase, his letter said:

“In your series on the search for a new monetary policy among others, you stressed ‘that Turkey shall go back to the inflation targeting regime for the sake of monetary policy, that it is possible to strengthen the regime in a way that also regards financial stability and that new regulations including the transference of certain powers of the BRSA to the CBT shall be introduced.’ As one of your ‘senior’ readers, I want to put forth some points without touching much upon the fields of your expertise as the sake of monetary policy and inflation targeting regime. Please let me list those:

As you also have stressed, the BRSA is one of the authorities the main duty of which is to regulate and supervise the financial system. It is a sector regulator; the scope of its authority does not cover the entire corporate sector as the Competition Authority, for instance. Like its counterparts in other countries, it regulates the entry and exit in the markets it is responsible from, sets the rules applicable for enterprises which are to engage these markets, keeps a close eye on enterprise activity to control whether or not the rules are fulfilled, and imposes sanctions when necessary. With this perspective, the BRSA can be considered as one of the “by products” of the 1999 crisis, such as the financial market regulators established in the US following the chaos of the post-depression period of 1929.

However, it may be incorrect to associate the presence of such sector regulators solely with the conjuncture, since the state intervention mechanism they serve is based on the presupposition of a structural “market failure” known as “information asymmetry” characterizing these markets. We are talking about the asymmetry between the information that individuals and companies have to provide to financial institutions in order to engage in business with them, and the information they obtained on those institutions. The moral hazard this imbalance between the principle and the agent can give way to severe consequences, which we have witnessed frequently in Turkey and throughout the world. This is why we need regulatory authorities in the first place: to avoid such consequences. Therefore, a solution that offers the transference of the powers of a sector regulator about the credit market to the CBT does not seem feasible given the main objective of the former is defined as maintaining confidence and stability throughout financial markets, ensure the effective operation of the credit system and protect the rights and interests of depositors. On the other hand, to be able to consider uniting the CBT and the BRSA under a single body, we first have to discuss the conditions necessitating the institutionalization of the BRSA as an “independent administrative authority”, as put by Professor Turgut Tan. The theoretical tools we need to achieve this can be seen in the transaction cost approach drawn by Oliver Williamson (winner of 2009 Nobel Prize in Economics) and his antecedent Ronald Coase (winner of 1991 Nobel Prize in Economics), for instance. What is more, taking departure from this point, we can get intuitions about many issues such as the low level of foreign direct investments to Turkey. However, we do not debate the issue with such perspectives. Maybe, poet Behçet Necatigil is right: We are cutting many short, saying time is running out / Ships which we think have harbored are maybe off shore.”

I am expecting contributions from other readers to publish here before ships leave the harbor. I have things to say as well, on Thursday.

This commentary was published in Radikal daily on 07.02.2012