I am travelling to the US and UK to discuss my ideas on monetary policy with some of the best economic minds in the world, including former World Bank chief economist Joseph Stiglitz, Harvard academic Jeffrey Frankel and IMF chief economist Olivier Blanchard.
“Banking system is fraught with moral hazard,” says former Kiwi regulator.
“Inevitable that regulators will push retail banks to core functions
I met yesterday with David Mayhew, currently a London barrister working briefs regarding the scandalous manipulation of the Libor rates by Barclays.
David was born and raised in New Zealand before embarking upon a successful career in London. You may know him as a former member of the New Zealand Securities Commission, and he was the Commissioner for Financial Advisors.
He has fascinating insights on what has gone wrong with banking in many parts of the world.
He summed it up by saying that the authorities around the world went along with retail banks fusing with merchant banks, then gobbling up ever larger proportions of income and wealth, because they believed banks were creating value in the economy for the benefit of nations.
Events in recent years show they were not. The profits were fictitious. In the end, many of the banks managed to privatise large increases in profits and then socialise the losses which had been disguised.
He believes the current system is fraught with moral hazard, probably caused by retail banking services being subsumed by the ostensibly more profitable investment banking arms of major banks. The dominance within banks of interests loyal to the investment branch, rather than depositors, meant the fortunes of the banks were divorced from the interests of their depositors. The hazard they caused to retail depositors by investment banking practices was small beer to those who were in control of the banks.
Given that the privileges and profits enjoyed by the big banks from investment banking were allowed based upon the erroneous view that value was being added, it seems inevitable that regulators and economies will push retail banks back towards their core functions, and require them to avoid the moral hazard that bank bailouts have shown arise from highly leveraged and risky investment banking practices.
New Zealand has to date been spared the worst excesses of banking practice around the world, but the fresh look overseas at what separation there should be between retail and investment banking may translate to rules internationally that have relevance in Australasia too.
This is yet another dent in the increasingly discredited “efficient market hypothesis” which underlies National’s economic management. They say let markets rule themselves and a thousand flowers will bloom. Sell off SOEs, deregulate the RMA and all will be okay.
Yet the economies that have done the best in recent decades not only regulate where necessary but also use the power of the state in concert with private enterprise to ensure their economy thrives. The ‘voodoo economics’ derided by Mr Joyce have worked in economies which are now more successful than New Zealand.
http://www.positivemoney.org.nz/
If control of creating money is left with the private banks rather than brought back under control of the government then no matter what changes you make the economy will always collapse. I doubt any of your discussions even mentioned banning fractional reserve banking though.
The government never needs to borrow money as it commands the entire resources of the country. As this is true it can thus print the money it needs and then use taxes to maintain monetary value, i.e, controlling inflation. Under this scenario banks must become savings and loans only. That means that banks can only loan out what they have on deposit and once loaned out the person who deposited it can’t withdraw it until it has been returned to the deposit with the interest or loss.
Do those things and then we may just start getting a rational economy. Keep going the way we are and the economy will continue being irrational and creating a huge amount of poverty while a few get very, very rich.
Hilariously one year out from the collapse a merchant bank I have some knowledge of switched from bonus payment to retention payments. Nothing has changed.
“New Zealand has to date been spared the worst excesses of banking practice around the world, but the fresh look overseas at what separation there should be between retail and investment banking may translate to rules internationally that have relevance in Australasia too.”
So the problem is not universal. Shouldn’t the things that worked in NZ and Aus be exported rather than importing regulations that solve a problem we never had?
I’d have thought we should be vigorously protecting what has worked rather than taking the risk of encouraging well meaning knee jerk regulations suited for other jurisdictions that might make our system less secure, or less flexible (which is really important, because if you restrict banks’ ability to lend, you are restricting the ability to borrow as well, which might stifle development).
So was Major Douglas and Social Credit on the right track. I understand Walter Nash had some similar thoughts once. Certainly the established banks and political parties poured scorn on the ‘funny money’ philosophy.
The point is.. ‘beware the experts’, as once they begin to fathom the system the ability to make easy profit must be huge.
What does our very ‘successful’ currency trader leader really know?
“New Zealand has to date been spared the worst excesses of banking practice around the world, ….”
Maybe they have just not yet come to light.
Is it true that New Zealand has no bank inspectors?
Seems that the IMF is also now in favour of positive money:
http://www.positivemoney.org.uk/consequences/power-democracy/
How did the banks get away with it? Perhaps because our elected officials let them.
The Banksters and their sycophants deride any sane approach to money practices that work for the people and country.
The corrupt hijacking of the money system by the private banks has been destructive force for wider society while enriching a small clique and their families.
John A Lee wrote profusely about the situation and actively pursued changing the banking system in NZ during the first Labour Govt. The State housing was financed by the Govt “printing” the money and this helped families, the wider business and farming communities and got NZ on its feet to recover from the depression.
Nash, Frazer and Savage did talk but were reticent to act. Nash’s enthusiasm wilted after a visit to London, the hub of world banking and the clan of Banksters. Politicians are very vulnerable. There is nothing new.
The rippoff imposed by the banks could be easily neutralised but politicians are weak and easily got to by powerful [rich ] influences that control what outcomes are possible. John A Lee was removed from the party.
Another fearless warrior was Norman Kirk who defied the Banksters and set up a super scheme where the Govt held the money not the parasitic finance sector. National’s next election campaign with American backing was a viscous affair.
Should Labour be brave enough to fix the problem then it will mean conflict and facing extreme resistance both at a public media level and personal attack not visible to the public.
Banks should have no right to lend money they don’t have or own. Impose 100% reserve.
The Govt has every right to run a bank, issue loans and has a duty to do so.
Money supply created by Govt for social programmes and infrastructure, needs to be controlled but would be less inflationary that private bankers “creating money” out of thin air for their own profit, as they do now.
The Moa in the room is that no debate on this happens. Everyone is running scared of those in control.
There is one Parliamentarian at the moment who shows courage in this area of speaking out against the “establishment” who organise banking practices for their continued control and stripping out of societal equity.
The Banking system is a sham fashioned to feed and “elite” few complete with off shore facilites to structure their finances for favourable small tax payments.
The so called hard times where we are told belts must tighten as our debt rises and banks profits boom, yet it is the banks who are creating our debt. They also lend out our money overseas , overnight while we sleep. If the world banking goes down while we slumber then so will our dough.
Already the banks have ring fenced our assets in absence of regulation to prevent this, so should they be liquidated our assets will not be accessible by the liquidator nor us.
And that is only what we can see as much of the banks operations are not public information.
Meanwhile Key who belongs to the clan continues to run up our debt and run down the country.
If Labour can’t find courage to change our money system for the better then at least support others who may have what it takes to clean out the Banksters, leeches and vermin.
Fix the root cause of our money problems.
I think we are all getting the message, but you haven’t answered the question, to which I would add, and why do the electorate continue to be seduced by National’s swaggering? Reaching those people that stayed at home last election and letting them know it could be different would reassure me we won’t have National again
Mr Parker,
It is heartening to read a post addressing one of the main issues facing all people in NZ and world-wide (in Western countries at least).
Great to hear that you are talking to Mr J Stiglitz, I believe he was a person who could see the Asian Crisis developing prior to it occurring and gave some warnings regarding it (which were ignored), such ability to foresee an event indicates that he has more understanding of the financial sector than, say, the governor of the federal reserve in the US, who appeared to have no knowledge of the signs of bubbles developing, nor how they end in crashes. (If his response to the Mortgage crisis in the US is to be believed) Stiglitz doesn’t appear to mince words about the weaknesses of the current financial system we have and I am very happy to hear that a NZ politician is taking the time to speak with someone so insightful.
I would be interested in reading a response to many of the comments on this page, Draco’s, John W’s & Louise’s (to name a few) they bring up relevant questions and present potential pragmatic approaches to addressing the problems we are facing in the financial sector and I haven’t yet heard a decent argument for why such approaches are ignored by our politicians.
David – You ignore the role of government interventions in the market that lead to the crisis. For instance, in the U.S. there was the change to the Community Reinvestment Act (CRA) (the first private securitization of loans were of CRA loans), to make banks prove they were making efforts at lending to the ‘underprivileged”, which led to the creation of the subprime mortgage market in the US, HUD directives to Fannie and Freddie, beginning in 1994, which produced a gigantic spate of government-insured subprime and nonprime lending and securitization, the innumerable regulations that had, since 1936, “canonized by decree” the judgments of the three major rating firms and the 1975 S.E.C. decision to confer legally protected status on the three extant rating agencies, the Federal Reserve keeping interest rates low for five years after the dot com crash and the credit expansion it fostered and the role of the capital requirements under the Basel accords. Read Jeffery Friedman’s paper A Crisis of Politics Not Economics: Complexity Ignorance and Policy Failure for more detail or his book with economist Wladimir Kraus Engineering the Financial Crisis: Systemic Risk and the Failure of Regulation which demolishes the “moral hazard” interpretation of the crisis.
To explain the financial crisis you have to explain why so many bankers engaged in the same behaviour at the same time (and they’re gweedy won’t suffice). There is no systematic risk if only a few players engage in such behaviour they will fail or change and it won’t pose a threat to the whole system. That is if there is sufficient heterogeneity in it. However, what regulations do is push the financial system toward greater homogeneity and hence put it at greater systematic risk. What occurred in the lead up to the crisis is that government intervention led to a spate of subprime mortgages, low interest rates led to credit expansion, the capital requirements under the Basel rules coupled with the canonization of the ratings agencies judgements via regulation led bankers to load up on GSE-backed and double and triple A rated subprime securities. Lower rated riskier securities have higher yields. They could have chosen to hold higher yielding more risky assets if they were so gweedy, but they chose lower-yielding less risky ones the overwhelming majority of the time. See data on banker’ risk aversion here. The judgements and confidence in those securities was at it turns out not well-founded and it all came crashing down.
To quote from Jeffrey Friedman’s book.
“they’re gweedy [sic] won’t suffice”
Why ever not?
Is that because, in order to be more accurate, you have to add additional factors such as; they were also too ignorant, small-minded, sociopathic and blinded by their own narrow self interest to think or care how their actions would effect others, too?
SJW – Regulators and politicians too can be greedy, small-minded and blinded by their own lust for power.
Ignorance was the main explanation proffered by Jeffrey Friedman. In fact he termed it radical ignorance. But it was ignorance of both the bankers and the regulators. We must recognize that regulators too can err, but the difference is that their judgments with the weight of law behind them replace the many and diverse heterogeneous judgements of capitalists, with a blanket judgement that if wrong can have disastrous consequences. That is precisely what happened in the financial crisis and the disastrous consequences of the regulatory errors which caused the financial crisis are all too apparent.
QTR
The link you provided contains a response that was uppermost in my mind:
“If bankers were involved in making high risk investments into low risk investments, then buying a lot of that supposedly-but-not-really low risk investment doesn’t make them risk averse.” (Mr Dean Croshere,)
This corrupt practice, along with innumerable other forms of corruption, was explained very clearly in the award-winning documentary “The Inside Job”
…and I haven’t noticed the film-maker being sued for defamation yet…Strange-being such a high profile film, one would think that such devastating accusations might be followed through with serious litigation from the wealthy sector that the accusations were being leveled at.
Perhaps they wouldn’t have a case?
As for greed, even the managing partner at C.Hoare & Company, Mr A. S. Hoare is leveling that accusation at his fellow bankers and citing it as a cause of the current problems in the British Finance sector.
http://query.nytimes.com/gst/fullpage.html?res=9803E5DA143FF937A25754C0A9649D8B63&pagewanted=all
SJW – The ratings agencies assign credit ratings. As it is noted above the three major ratings agencies Fitch, Moody’s, and Standard and Poors, were effectively given oligopoly status in the U.S. in 1975 by the SEC. The result of which is that their financial success did not depend upon giving accurate ratings. In effect their profits were guaranteed by the government. As Jeffrey Friedman noted in his book:
Regulatory capital requirements were based on the ratings agencies’ judgements with lower capital requirements for highly rated bonds incentivising the banks to hold those highly rated bonds. And the higher requirements for lower rated bonds contributed to a dangerous downward spiral when the crisis began. As Friedman notes “triple-A CDO bonds from 2007 vintage were, on average, downgraded to CCC+ by 2008 producing a 4,900 percent increase in the capital required for these bonds”. You can see how that contributed to lending channels drying up.
QTR
No system will work when dishonest and corrupt practices are not only ignored they are rewarded.
No system will work when greed is greeted with as much reward and adulation that it is currently enjoying.
I consider that calling for less regulations of a type that safeguards damage from neglectful or downright corrupt practices, at such a time as we are experiencing the above, to be foolhardy if not entirely motivated by narrow self interested parties whom stand to gain the most from such non-regulation.
I consider what we are experiencing with the ongoing financial crises (when did it start 30 years ago?), is the inevitable consequences of a foolhardy political approach that was set up with huge influence from the very sectors that taxpayers are now bailing out world-wide.
I am delighted to hear a handful of NZ politicians are acknowledging that this political approach has failed. I gather they are brave, considering who and what (big money) they are speaking out against and I am grateful for those speaking out and consider that such bravery is a sign of hope that things may improve.
When massive gains are made surrounding collapses, it is hardly feasible that ignorance is the author, nor confusion.
Collapses are a part of the cycle of extreme wealth gathering.
The victims are widespread and include some of the gamblers in the public eye.
Most of the wealth in NZ has been made by stealth and corrupt practices. NZ is as crooked as anywhere else in the world, the problem is these practices are deemed acceptable here in NZ by the authorities especially if you belong to the upper echeleons of society.