Australian Lefty on Politics, Governance, Science and Info Management

Highly recommended Economist article: finance regs

Posted by Dave Bath on 2008-03-28

It’s well worth reading the nuanced article "The regulators are coming" (subheaded "Now that investment banking is backed by the state, it needs re-regulating. Carefully") in The Economist 2008-03-27.

Note that it said re-regulating, not merely regulating.  Deregulation of the industry over recent years was flawed.

I’ll give a few quotes, but the subtle arguments and caveats about the nature of the required regulatory regimes are excellent.

The task of making financiers pay for their mistakes would tax St Peter himself.

But what do you do when risk and reward are skewed? When Bear’s shareholders gain at the taxpayer’s expense? Or when the other investment bankers and their shareholders take on that extra bit of risk, knowing that they keep all the gains, but that the state will shoulder some of the losses?

The article goes on about the ideal of letting bad financiers go bust, ruined by the reality of the entanglement and dependency of the wider economy on confidence in those prone to piracy.  My preference is to disentangle such dependencies.  Finance is not a fundamental human need like food, water and energy.  If it’s so essential to a modern state, then the state must have control, including limitations on profits just like they do for electricity.

As for better regulations, The Economist wants them, but recognizes they are no panacea.

Civil servants, however dedicated, cannot outwit the combined forces of the world’s bankers.

In exchange for its new risks, the state must protect taxpayers by tighter regulation of any institution too entangled to fail.

And the final caveat from one of the few intelligent and honest journals that believes in free markets?

The system is accident-prone, but it rarely makes the same mistake twice. Take comfort from that if you dare.

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22 Responses to “Highly recommended Economist article: finance regs”

  1. zombinol said

    So if a bank borrows money and loans it to consumers for housing loans and the bank gets into trouble paying its loan and is rescued by the government with public money, shouldn’t all the loan repayments to the rescued bank from the consumers be a legitimate tax deduction for those consumers?

    Or how about the public money being repaid back to the government and treat it as a loan, even at interest free the government get it back?

    Or how about this one, imagine, and this might sound pretty far fetched, but what if a whole pile of people couldn’t pay their home loans or credit cards and the government uses public money to rescue them, at least the government would recoup 10% instantaneously from GST on the transaction and would be no worse off than giving it to a bank?

    When isn’t public money the publics?

  2. Raf said

    Banks don’t fund loans from their borrowing. They are only required to have a certain amount of equity on their balance sheet, normally 10-15% sometimes lower.

    So they can borrow 10 and lend 100. This is how the money supply has exploded. In New Zealand M3 has increased almost 100% in the last 7 years.

    That is absolutely preposterous and the clear and unambiguous cause of all these problems we are facing now.

    “It’s all about cash, cash money, cash money, who’s making all the money”

  3. […] is in response to Dave’s post on a new wave of financial regulation. It’s a great 5 minute potted history of money to a […]

  4. Dave Bath said

    Actually it’s not that the banks (and others) made loans for housing that is the reason for government bailouts. What the loans are for doesn’t matter… the government bails out those privateers (who don’t believe in government interference anyway!!) because we are too dependent on them.

    Aaaaahhh…. for the days of the old PROPERLY state-owned banks, like the Commonwealth, the State Bank of Victoria, …

    I’ll be writing more on the proposal for an “Aussie Mae” by Josh Gans soon: I think it’s a good idea if we MUST continue the current system, but a better way is to relieve pressure on the little guys by increasing the social wage (and using the same government credit rating to do it as Gans would, but get more value from it!)

  5. zombinol said

    But government bailouts are funded by loans to the Federal Reserve or if they occur here the Reserve Bank of Australia.

    As far as I understand that just means a transfer of debt from the Banks to the Government, which makes the governments position worse and more vulnerable to be dictated to by the Reserve.

    This means double interest will be paid to the Reserve, the interest of the original loan from the banks and then the subsequent interest from the loan to the government for the bailout.

    The scene is setting up for a grand depression, the Reserve can always call in the loans from a Bank but how do they call in the loans from a Government, how much is sovereignty worth?

    Its all a scam, these Reserve Banks are not owned by Governments and the Reserve loan value is not 100% based on a commodity like gold, from what I can deduce only 10% of reserve currency is backed by a reserve commodity, then when a bank loans through Fractional Lending only 10% of the retail loan value is based on the Reserve loan value. So 1% of cash is backed by a commodity and 90% of the inflation in our economy is caused by this.

    See my bigger post at Rosettamoon.

  6. zombinol said

    …funded by loans FROM (not to) the Federal Reserve….

  7. Caldwell malt said

    Lively debate in here i can barely hear myself think!!

    As I advance into my twilight years and sip brandy and puff cigars its good to have a laugh at you young folks struggling with the countries finances. Young Zombinol is quite correct and there is no money to speak of, it got ferreted off to pay for the war and those AWB blighters got off scott free as well. Another suprise is that there is nothing to protect your precious super funds because the body that should do this APRA is a load of poddle cock and is run by a bunch of half baked bankers that could never get a gurnsey in the RBA…no, not like the good old days when a pound was worth a pound of sugar and a dollar could buy you dinner at the Savoy.

    Not point in re-regulating anything before you understand the – illegality in the firsyt place of the regulations…yes the best thing any politician could do would be to set up a state bank or a new volksbunk (peoples bank)…like the volkswagon…cheap and accessible but horribly dangerous if the exhaust pipes leak!


  8. Dave Bath said

    Caldwell malt:
    “good to have a laugh at you young folks”
    I’ll accept that if you are a GREAT-grandfather, but if you aren’t, I’ll consider “young folk” as a pretty insulting label given that I’m a grandfather and therefore qualify as a “grumpy old man”.

    I learnt distance in inches, feet, yards, chains and miles.  I’d go shopping for my parents with shillings or florins (a shilling for a pint or half loaf): you only needed notes for a big shop.  A sixpence would give you a decent sugar fix, a shilling would get you pie (free sauce) and a small sugar fix, bread and milk was delivered to your door, and the milko would let you give the horse a carrot or apple.

    At school, from grade 1 boys, could be strapped (girls hit on the backside with a ruler), from grade 3 we used nibs and inkwells.

    Yep. State-owned banks are good. If the state props up a business, it should receive the same equity as would a commercial third party propping up a business.

  9. Caldwel malt said

    With greatest respect Mr bath I was probably straddling a penny farthing when your pop was still a twinkle in your grand fathers eye! I was a senior captain in industry (and successful) while you and your many friends here were no doubt remonstrating yourself half naked at those lude popular concerts of the seventies, Sunbury and the like…puffing away on those illicit materials that were quite the fashion of the day. Its refreshing that these mind altering substances left enough of your faculties you can still remember the measures of the good old days. I was a young lad when the PMG man strung the copper wire from the pole outside our fitzroy cottage, into the lounge illuminating our nights for the first time ever…those were the days.

    Dont be a grumpy old man…you have these new and hip ideas..shake the cage sonny while you still can!


  10. Dave Bath said

    Caldwell malt: said “I was a young lad when the PMG man strung the copper wire from the pole outside our fitzroy cottage, into the lounge illuminating our nights for the first time ever…those were the days.”

    If you were getting power for lights from the PMG then SOMETHING was really wrong (and I wouldn’t drop the phone in the sink!)

  11. Caldwell said

    Such frivolous details Mr Bath…congratulations on tripping up an old timer with a fading memory…back then i was skinning rabbits, working with the pan man, and more…we did what we had to and whether the PMG man or the MBW man or the publican around the corner helped out the jobs got done..such irreverance for the pioneering fathers! I am enjoying your site though!

  12. zombinol said

    Caldwell malt, a young pup like me finds your banter humorous in deed, and I too was always taught to be cautions, drawing from your advanced years of insight, could you tell us who owns the RBA? and when will the neu global depression be implemented by the central banks, before or after victory is called in on the biggest game in town – Iraq?

  13. Caldwell said

    Ahh! If I had the energy to reach the top shelves of my library i could help you out Mr Zombinol.
    When I was chief clerk of the Bank of Australasia we kept our cash in an old fashioned vault – remember those, it was the smell of fresh notes that kept me loyal to that bank for near twenty years and NEVER did I dip my fingers in the till and if you scoundrals start digging my good name you will find my dismissal was related to unauthorised ledger activities in the vault with my assistant (miss Vaughn) and not related to any unauthorised or hasty withdrawals!….sorry back to your question my mind dithers when ever i think of those days.

    The last time I had any influence with that bank it was pretty easy to make some extra pounds by lunching the governor on the day of his bond issues, get him tizzled on expensive cognac and then stroll down to the exchange and well…you know…play the market..same applies these days young man but if you want to play in that club you will need the right ‘memberships’….if you come down to the Melbourne Club you will find me by the fire at 8.30…I can certainly introduce you to my some of my friends including the good premier Brumby and some senior counsel that look after my remaining fortunes. And dress up for the event young man and mention my name at the door…after we have shaken hands i will be glad to illuminate you into the ways of the worlde…Iraq settlement…yes almost due but what can an old codger like me do with these bonuses anyway!!

  14. Raf said

    Actually the RBA (as is the RBNZ) is wholly owned by the government and therefore the people.

    This, my erstwhile colleagues, is the achilles heel of the fractional reserve system so beloved of Mr JP Morgan and his buddies who started the Federal Reserve Bank.

    If a political party were to be elected with a mandate to return full monetary sovereignty back to Parliament then it could be done.

    See how much money the banks make from this sovereign right and imagine how that would look on the people’s balance sheet.

    Have a watch of the youtube video on my blog. It’s a real hoot even for you old timers :-)

  15. Caldwell said

    I may be an old timer but I can still operate this world wide web thing and if you think I wont find out about youtube you have another thing coming…my great greatson i’ll have you know works for Macquarie Bank and is up with all this nonsense you people chatter about! I hope this video is not the unravelling of the great Morgan family, just because he instrumented a great depression for financial gain does not mean he did’nt have the best interests of America at heart. As I was saying I learned how to shoot and skin rabbits during the depression and how straighten out bent nails. Last month at the club I was praising my friend Paul Keating for coining those ever so wise words…’the recession we needed to have’…now there was a young man who did what he was told!

  16. zombinol said

    Where is the proof the RBA is owned by the Australian Government other than what the RBA now say on their web site?

    I’m still not convinced that the RBA is owned by the Australian Government, even though the RBA have changed their Role web page in the last week. Since 2001until early this week it said wholly owned by the Commonwealth and now it says wholly owned by the Australian Government!!!

  17. Dave Bath said

    You’ll have to check the legislative instruments that created the RBA.

    BTW: I love the term “Commonwealth”, implying the interests of the citizenry rather than the executive.

  18. nigel said

    Yeah Raf, wheres the ‘beef’, hope this is not just based on what the website is saying? And hey, if the RBA is owned by the Australian Government how come it has’nt been sold yet?

    I like the term commonwealth as well but the term citizenry sucks big time.

    Anyway, if anyone here is members of the Melbourne Club I would be interested in chatting to Mr Malt about it, sounds like he knows more than any of us on the subject!

  19. Raf said

    Ok guys you have me. This is the best i can for the “beef”

    It reminds me of an episode in the late 90s in London when i was member of a money reform group. there was an attempt to discover who owned the Bank of England. Seems to have been really hard to find this out. its shareholders were two nominee companies….one rumoured to be the rothschilds. or is it the nassau family?

    who knows?

    one thing is for sure and that is that Parliaments gave up their rights centuries ago but they could take them back easily.

    Why hasn’t this happened? well that is the question……money and power go hand in hand. you can all draw your own conclusions but Australia and more so New Zealand have the best opportunity to make this happen.

    So write to your MPs..the Governor, the Finance Minister, Mr Rudd..and ask for a detailed account of the ownership structure.

  20. nigel said

    Whats staggers me is the mindless rhetoric in the Australian press that offers no insight into our coffers or banking. This issue dovetails with the republic debate – look at the economic reforms that will need examining them…will we still have a ‘governor’ of the reserve bank, a ‘royal mint’…what about the role of the governor general?

    In the last few months I have not heard back from 1/Rudd 2/Garrett and 3/Penny Wong or 4/Bob Brown…even though I provide balanced and even coverage of them on my rosettamoon blog site. I have phoned Rudd’s office but its much the same as trying to get through to decision makers in the polit-bureao!! Hell – maybe they are the same thing!!!

  21. Raf said


    Demand answers from your MP. Its madness when you think of the actions of ANZ that no one is putting the banking and monetary system in the spotlight. But of course that is how it has survived for so long. There’s always too much layering on top of the truth.

    Does representative democracy exist still? or is Parliament a world of its own.

    Have you check out the American Monetary Reform Act? And also the EDM that has been circulating in the UK Parliament (dating back to a suggestion I made in 2001).

    Also check out this video

    The Bank of Canada is supposedly owned by the people.

  22. nigel said

    Did representative democracy ever exist or was it always just a figment of the publics imagination? I just got an answer back from the Australian Mint after I asked them have much coinage we have…another simple question I thought anyone would be entitled to and I get this response:

    “The Mint is unable to divulge the cost of either Australia’s or another
    countries coinage. These matters are of a commercial nature.”

    I would have thought this was a matter not only national signifigance but also national interest.

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