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.