Regulation. There is a dilemma with regard to regulation of the financial sector. In principle, regulation should be a set of rules that governs behaviour in the financial sector, that states what behaviour is acceptable and what is not and what is legal and what is illegal. All this should be done independently of the economic cycle but in practice that is not what happens. It is best described by Warren Buffet’s statement that it is only when the tide goes out that we can see who is swimming naked. In other words, it is only during a financial crisis that regulatory weaknesses are revealed, and this leads to cries for more and better regulation. When the economy turns up again, there are demands for the relaxation of those regulations. This rather suggests that the flow and ebb of regulatory pressures may unintention-ally be part of the problem. This is the conclusion of an interesting paper by IMF economist Jihad Dagher called ‘Regulatory Cycles: Revisiting the Political Economy of Financial Crises’ which explores this subject in considerable detail. He notes that there is a definite correlation between economic upswings and periods of deregulation and suggests that regulation implementation is pro-cyclical rather contra-cyclical. In other words, it is all about the timing of regulation and its implementation makes the problem worse, not better. It is difficult to know how to escape this inbuilt pro-cyclicality of regulation. It would be a very brave politician to stand up at the bottom of financial crisis and say that we should relax banks’ capital requirements and not tighten them. In 2009, it was clear that the banking sector had been operating with too little capital for quite some time and the regulators were rightly castigated for missing this. But it is equally clear that forcing banks to build up their equity capital base since then has contributed to the weakness of the recovery. It is equally clear that now that we have a strong recovery kicking in, now is not the time to relax regulatory pressures. But with the current occupant of the White House showing little or no understanding of economics, it is unlikely that anything will change.