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'Stockholm Syndrome' Blamed for Regulatory Woes

“Stockholm syndrome” – in which captives become sympathetic to their captors – is to blame for the “extremely limited” efforts at improved regulation seen since the financial crisis, according to a 14-country study to be released on Thursday.

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The report, compiled for the Bertelsmann Stiftung foundation, concludes that the financial industry’s lobbying power “reconstituted itself rather quickly”, while national policymakers had often “shifted the blame” and the responsibility for regulation to multinational bodies.

The study also argues that the crisis may have shifted the global power structure decisively in favour of emerging markets, many of which were better prepared for it because they had learned the lessons of the 1990s Asian crisis.

The non-partisan foundation backed by the Mohn family, which controls Bertelsmann, the German media conglomerate, will present the study at a Washington event sponsored by the Financial Times on Thursday.

While highlighting the relative decline of the US and UK economies, it noted that “governments in major developing countries have become much more adept at preventing crises in their territories” because of fresh memories of the Asian crisis.

China, Russia, Indonesia and South Korea were quickest to shift to “a state of alert” when hit by the crisis, according to the report, which highlights South Korea’s “green new deal” and China’s investment in healthcare reform as rare examples of using the crisis for longer-term restructuring.

The report seeks lessons for the next international crisis from “a period of extraordinary policymaking under stress”, from September 2008 to September 2009, taking in the collapse of Lehman Brothers and the race to put together stimulus and bailout packages around the world.

Measures to prevent panic, contain unemployment or support consumer confidence “seem to have averted an enduring recession, though some were hastily crafted, poorly implemented and even reinforced structural imbalances,” it says.

The effect of stimulus packages now rests on “the ability to take collective psychology into account” to generate confidence, rather than on hard economic data, it concludes.