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The Forum > Article Comments > Too-big-to-fail banks warp the playing field > Comments

Too-big-to-fail banks warp the playing field : Comments

By Nicholas Gruen, published 8/2/2013

Competing on a level playing field, securitisation might well dominate home lending.

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Informative analysis! So what's the solution?
Nationalize and break up the big four?
So what remains then has to compete much more fiercely, for your and my business?
And, minus the spurious benefit of securitization?
Which really only served to allow bankers to become far less prudent than was economically healthy.
I'm all for capitalism!
But genuine capitalism is supposed to include and involve risk, rather than socialise the losses and privatise the profits.
When credit became too easy and too plentiful, it allowed the price of housing to exponentially escalate!
[The bubble which is the forerunner of the bust and serious economic downturns!]
If we were reform minded and expected to get a return for the capital outlays used by banks to secure their positions?
We would create a brand new peoples' bank.
This should be the only place the peoples' money ought to be invested in the banking sector.
A new level of competition would then ensue, that once again could halve margins, minus the govt bailouts, that propped up too big to fail banks, who used the facilities provided, to gobble up the competition!
A mistake that ought not be repeated.
As for the housing market, we need to replace margins, which have contributed to lack of affordability, with volume. The govt needs to get into the housing business, in order to produce that contractual volume.
Moreover, this very volume and returned affordability, will do far more for bank bottom lines and a virtually stalled economy, than anything else we might reasonably do?
Save investing in our own people and their better ideas!
Rhrosty.
Posted by Rhrosty, Friday, 8 February 2013 11:21:28 AM
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To paraphrase Max Planck, advances in economics may come one funeral at a time!

In the US there's a lot of manipulation from government agencies and the Fed that is creating the current rise in asset prices, particularly in their housing market.

However, this rise in asset prices is an illusion. For some strange reason the Federal Reserve in the US thinks their current very low interest rates and money printing are working to save their economy.

I don’t believe it. I think they are going to end up in some kind of currency crisis or some kind of bond crisis, notwithstanding the current rise in asset prices due to the Fed policy of suppressing interest rates, but for how long?

Like Australia's Reserve Bank, the US Fed realises there needs to be a low rate environment for housing to recover or it’s a huge implosion. The US have thrown underwriting guidelines out the window and they are going to continue with no money down loans or very little equity.

The US Fed also knows that many big banks are technically insolvent, zombie banks. If you mark-to-market their assets, they would be bankrupt.

In the US the Fed and the government will continue to print money to keep housing prices and the big banks from collapsing.

MBS are no solution to the growing crisis in global banking.

How long before this happens on our shores, not long I would surmise!
Posted by Geoff of Perth, Friday, 8 February 2013 2:30:05 PM
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The following statement in the article appears to me to be counter-intuitive:

>>As Professor John Kay puts it: "The principal objective of regulation appears to be to stabilise the existing structure of financial institutions, this goal is in fact a guarantee of further, and potentially more damaging, crises.''<<

I don't get how 'regulation' (if effective - as it appears to have been in Oz during the GFC) can be likely to 'guarantee further and more damaging crises'? I mean, the purpose of bank regulation is to prevent, or at least minimise, crises. In point: Oz, and our major banks have fared well during the GFC, whereas U.S. majors were, and to all accounts remain, in dire straits - a significant difference being the poor, or nonexistent, U.S. regulation of banks and financial institutions (supposedly courtesy of George W. Bush's administration?). And, a large part of the U.S. predicament was arguably caused by sub-prime mortgages and trading in worthless MBS!

In Oz, Rams, Aussie and such were apparently relying on selling packaged MBS to maintain liquidity, and thereby stay in business - and these ended up being gobbled up by the big four banks. So, who was more stable, Aussie, Rams, or the big four? And, who was more strongly regulated? Methinks the big four.

I see the AOFM provides liquidity to the big four by buying their MBS's - as directed by our Treasurer. A new one on me. (Whereas it appears, from the author's piece, that the 'fry' could only sell their MBS's to private equity?) So, if our government is 'propping up' the biggies, why doesn't it have a greater say in how they do business - borrowing and lending rates, and conditions pertaining?

I think regulation should be stiffer, with no government 'propping up', and no MBS's - lenders simply holding securities until maturity (or default). If conditions are amenable, private equity can choose to 'lend' to the banks or the 'Fry' (or buy other equities - bank shares?).

If more 'level', and better regulated, small 'fry' can still have a chance - if competitive.
Posted by Saltpetre, Sunday, 10 February 2013 12:53:16 AM
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Nationalize and break up the big four?
Rhosty,
No need for that but giving the insanely paid CEO's a scare might work a treat.
Posted by individual, Sunday, 10 February 2013 8:47:32 AM
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Saltpetre you stated "In point: Oz, and our major banks have fared well during the GFC, whereas U.S. majors were, and to all accounts remain, in dire straits - a significant difference being the poor, or nonexistent, U.S. regulation of banks and financial institutions (supposedly courtesy of George W. Bush's administration?). And, a large part of the U.S. predicament was arguably caused by sub-prime mortgages and trading in worthless MBS!"

I think the same poor regulation of our banks occurred here in Oz.

In either 2008 or 2009 at least two of our four majors were effectively bankrupt and used a unorthodox 'special' lending avenue opened by the US Federal Reserve to borrow funds, secretly mind you, it was not reported to APRA or the Oz Federal Reserve, to borrow billions of dollars to remain 'liquid'.

This fact was never released to the public, and I find it difficult to believe APRA and our Fed did not know. If they did, why were shareholders not informed because it sure would have made a huge difference to the real (marked to market) value of the banks and therefore their share price.

I think the entire global banking system is rotten to the core and they now play a significant role in influencing government policy and support.

It's similar to our auto industry. Each year Australian tax payers subsidize Holden, Ford, Mitsubishi etc to the tune of $1B 'each' each and every year, why? If these industries can't be sustainable on their own two feet, get rid of them. The same should apply to banks or any other industry that can't financially support itself.
Posted by Geoff of Perth, Sunday, 10 February 2013 11:34:53 AM
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The RBA Credit Liquidity Facility will not be implemented until Jan 2015.Even our inflationary money now gets created as debt by the private banking system.We borrow 30% of our mortgage money from OS banks who just create it from nothing.What's wrong with the RBA computers?

Our inflationary money of 3% of GDP is $30 billion pa.This means we suffer a depreciation of our currency and have to go into debt to pay for it.It is tripple theft by our private banking system.First via currency depreciation,then having to repay the principle and lastly having to repay the interest on the principle.

Since 1980 we have sold off 4 State Govt Banks and the Commonwealth.They used to create from nothing some of the money to equal increases in pop,productivity and inflation.Now our taxes are enoumous to pay for contrived debt by OS Central Banks,when our own RBA should be should be creating this new money to service the monetary needs of Australia.
Posted by Arjay, Sunday, 10 February 2013 2:00:02 PM
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It sometimes seems that government is like a blank screen, on which people feel free to project any wishful thinking. They never seem to reflect whether government, in its nature, is capable of doing what they project onto it. They just assume it can.

If we were to assert that the the tooth fairy should regulate the banking industry so as to ensure financial system stability, we would immediately recognize that as an irrational belief system.

Yet substitute government, and all of a sudden we get this earnest discussion of means, without anyone questioning whether the basal assumption is reality-based.

Notice how all the protagonists so far simply assume that government can do whatever it is they want it to do? Nicholas Gruen assumes they can and should bring about a “level playing field” (which he doesn’t define). The two banking regulators, the APRA and the RBA, purpose to bring about "financial system stability". Rhrosty assumes a “brand new people’s bank” (which he doesn’t define) will reduce the corrupt effects of government playing favourites with the banking industry. Saltpetre believes that more government regulation will result in more competition and more small fry, when it is government regulation that is causing the cartel in the first place.

And so on.

What if this foundational assumption of government’s capacity is wrong? That would have explaining power, wouldn’t it?

Okay now. Those who assume it: prove it. Without assuming it in your premises!

What needs to be explained is why a general ban on fraud should not be sufficient regulation for all purposes of public policy; and why the pretensions of government to centrally plan the economy should not be recognised to be false from the outset.

Those who ASSUME the knowledge and capacity and beneficence of government never seem to reflect on the corrupting effect that past generations of such assumers have had on banking! It is not banks who are responsible for the bailouts with taxpayers' money. In case you haven't noticed, it's the governments!
Posted by Jardine K. Jardine, Monday, 11 February 2013 8:17:59 AM
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Neatly put, Jardine K. Jardine. But I suspect we are in pearls-before-swine territory here.

>>What if this foundational assumption of government’s capacity is wrong?<<

There seems to be this belief in an almost magical capacity of governments to control every aspect of the financial system, both nationally and internationally. Which phenomenal power is also at the root of every conspiracy theory, designed to fleece the general public in favour of the Elite Banksters. As well as providing the motivation for all the free advice to government on how to "solve" the problems.

Unfortunately, it also leads to silliness such as this, from Geoff of Perth.

>>In either 2008 or 2009 at least two of our four majors were effectively bankrupt and used a unorthodox 'special' lending avenue opened by the US Federal Reserve to borrow funds, secretly mind you, it was not reported to APRA or the Oz Federal Reserve, to borrow billions of dollars to remain 'liquid'.<<

Complete hokum.

Banks here did take advantage of some highly attractive low-interest loans in the early days of GFC-firefighting. Who wouldn't? If I were a shareholder, I'd be asking questions if they hadn't seized the opportunity. But the loans were not "unorthodox", except in the sense that they were a part of the Fed's own damage control. They were not "special". They were, above all, not "secret". As such, there was no need to "report them to APRA".

Or indeed "the Oz Federal Reserve", whoever they may be.

But hey, who am I to spoil such a great story?
Posted by Pericles, Monday, 11 February 2013 4:27:25 PM
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K Jardine and Pericles again misses the point.Our Govts are controlled by this Oligarchical system in which the International Banking system creates from nothing all the money to equal our productivity + inflation.They own us.

They have interests in all the major media outlets,oil cartels,big pharma,Monsanto,military and chemical industries.President Dwight Eisenhower called it the Military Industrial Complex.I call it the Banking Military Industrial Complex. BMIC.

It is time for both of you to get you heads out of that Ostrich posture.
Posted by Arjay, Monday, 11 February 2013 6:47:48 PM
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Arjay

It's you adopting the ostrich posture.

The fact that governments, in their attempts to control credit and banking, are controlled by oligarchic plutocrats, is hardly an argument for government's presumptive competence or goodness at controlling credit and banking, is it?

You are only proving my point: there is no justification for the assumption that government has the knowledge, the capacity, or the selflessness to have powers to regulate credit or banking other than to police the law against fraud.

All
I submit that a good preliminary exercise for any sensible discussion of banking policy would be to ask, what would government need to know, in order for it to be true that government has the competence to manage the supply of money and credit? Those who assume it's true, go ahead and answer it.
Posted by Jardine K. Jardine, Monday, 11 February 2013 7:59:48 PM
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OK, Jardine and Pericles, (and I don't mind the odd 'pearl', as long as I don't have to wear 'em),

A theory, in general terms:

1st point of 'control': A certain amount of money in national circulation (debt/credit doesn't come out of thin air): Gov't creates it, or it comes from foreign investment, the net of import/export, and the net of currency trading; and it goes on the merry-go-round. Value varies with floating dollar, but, in macro terms, Govt has a role in stabilisation - limiting foreign borrowings (Govt and private), issuing Treasury Bonds/Securities either to 'cool' the economy (reduce money in circulation) and/or to gain funds for Govt expenditure programs (fiscal management), or alternatively, Govt 'buying' debt (Bank Bonds, and maybe MBS) to increase liquidity and so 'stimulate' the economy.

Point 2, Govt spending: Fiscal management via infrastructure and general 'maintenance' programs (road, rail, education, welfare ..) and injection of Grants or subsidies - for R&D or industry stimulus, and jobs; and control of Govt budget debt/surplus and 'savings' (Future Fund).

Point 3, Bank Oversight: Stipulating Monetary Reserve Levels - to prevent the banks over-lending, to provide adequate protection for bank creditors (deposits, Bonds). Note: Banks carry their own risk regarding the security/integrity of their loan book.

Point 4, Bank Licensing: Issuing Licenses subject to conditions to ensure operational integrity - as far as is practicable - as, for example, applies with mining or exploration licenses - and regarding reporting and transparency - as, for example, applies to all publicly listed companies; ie, no private equity 'blindfolds', particularly regarding foreign capital transactions.

Point 5, Limiting Risk: Limiting and oversight of Mortgage Backed Securities (MBS), Collateralised Debt Facilities, and Derivatives Trading (and any other 'widgets extraordinaire') - particularly on the equities market.

Spoon Feeding? Yes, but look at the US for what open slather causes.
Posted by Saltpetre, Tuesday, 12 February 2013 1:24:19 AM
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It's good to see someone taking it seriously, Saltpetre.

>>Govt has a role in stabilisation - limiting foreign borrowings (Govt and private), issuing Treasury Bonds/Securities either to 'cool' the economy (reduce money in circulation) and/or to gain funds for Govt expenditure programs (fiscal management), or alternatively, Govt 'buying' debt (Bank Bonds, and maybe MBS) to increase liquidity and so 'stimulate' the economy.<<

This is the theory, yes. But none of this has helped to stabilize the Greek/Irish/Spanish etc. economies in recent years.

You have to wonder whether - prior to the present difficulties - their governments stabilized or destabilized their economies with their attempts to manage their money supply. Reacting to crisis is one thing. Avoiding it is another, and it is clear that the governments in these countries hadn't the faintest clue how their fiscal policies would play out.

Even hindsight doesn't help a great deal, to be honest.

>>Govt spending: Fiscal management via infrastructure and general 'maintenance' programs<<

This has an impact on the economy, no question. But is it a valid management tool? If so, when should it be employed (ignoring the political angle for a moment) and to what end? It seems, in your description, to rely heavily on the ability to tax the population at will - which is not a valid assumption in all scenarios. Ask Greece.

>>Bank Oversight: Stipulating Monetary Reserve Levels<<

Banks are inextricably joined to the international system, and must react to its various upheavals. They would therefore be more concerned about Basel III than any pronouncement from the Reserve Bank.

>>Bank Licensing: Issuing Licenses subject to conditions to ensure operational integrity<<

This is fairly loose. You also have to have a license to operate as a used-car dealer.

>> Limiting Risk: Limiting and oversight of etc...<<

This implies that the government would actually know the best way to limit risk.

Which effectively rings us back full circle
Posted by Pericles, Tuesday, 12 February 2013 8:38:10 AM
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Saltpetre
That is not so much a theory, as five categories of assertions/assumptions that government has the competence to manage money and banking.

However you still haven’t explained what reason there is to think that government has the competence to do what you believe it should do in the first place. You’ve just assumed it.

And you haven’t said what government would need to know, in order for it to have the competence to manage the supply of money and credit.

So ... what would they need to know?

For example
Point 1. Government creates money.

No doubt it does. But the question is, how does government know whether it’s creating too much, too little, or just the right amount?

What account have you taken of the possibility that, if its creating the wrong amount, this is generating economic instability and social injustice for which you assume the solution is more interventions?

And why wouldn’t a general ban on fraud be sufficient for all purposes of regulation of money and banking?

So you’re not really joining issue, all you’re doing is repeating the assumption that I say is unjustified, and that you haven’t justified.

For example, government interventions in money and banking obviously do promote fiat money and fractional reserve banking, inflation of the money supply, cozy banking cartels making huge profits from a government-granted licence to print money based on thin air, and systematic handouts to political favourites, bubbles, and waste.

If my theory is correct, we would see what we are in fact seeing.

But if your theory is correct, and government has the presumptive wisdom and capacity and selflessness to optimise money and banking, then why is there any non-optimal allocation of resources at all? Not enough monopoly power, presumably?

So I think either way, the interventionists lose the argument.

(BTW, Google shows the following USA regulators:
Securities & Exchange Commission
Commodity Futures Trading Commission
Federal Reserve System
Federal Deposit Insurance Corporation
Financial Industry Regulatory Authority
Office of the Comptroller of the Currency
National Credit Union Administration
Office of Thrift Supervision.

Highly regulated isn’t it?)
Posted by Jardine K. Jardine, Tuesday, 12 February 2013 8:42:12 AM
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Pericles and Jardine,

I was fully expecting 'bollocks' in response, but instead you have thrown me a curve ball - with very much to ponder and review. I shall have to work on an adequate response.

One thing though, my idea of responsible fiscal management is for government to stay within budget, and not to embark on punitive taxation measures (or essential services cutbacks) to facilitate 'largesse'. (A steady as she goes approach, obviating unexpected consequences or knee-jerk reactions to 'black holes' - crisis management to be avoided as far as humanly possible, thank you.) And, like any responsible 'corporation' I would expect borrowings and debt accumulation to be fully justified by reasonable and judicious assurance of future more than compensatory returns (jobs, productivity, innovation).

Greece/Ireland/Spain - 'easy' credit, outlandish speculation, taxation concessions and rorting - total fool's paradise.

Government's capability? That is a curly one. Ken Henry seemed to keep a handle on things, so someone must be crunching the numbers in Treasury and the RBA. The right mix of free enterprise and government intervention? A work in progress, I presume. Control of liquidity (given the global scenario)? I guess only some fine tuning by the RBA may be possible, as part of CPI and reserve rates evaluation.

Fraud, as an effective 'oversight' mechanism? Someone firstly has to prove a case (requiring relevant investigative capacity to be operating), it is likely the horse has already bolted (the damage done), and the penalties are generally puny. (Still awaiting effective action in the U.S.)

Banks/Financiers on their own recognizance? GFC anyone?

U.S. - all those agencies, and probably 'emasculated' by legislated loop holes and concessions (and probably not talking to each other) (a bit like the failures regarding awareness of impending 9/11?) - consciously or unconsciously engineered for failure? Smoke and mirrors, or busily giving appearance of doing 'something'? Certainly makes you wonder how the U.S. is able to stay No 1? Maybe not for much longer.

For now, much to evaluate, so little time, will have to catch you later.
Posted by Saltpetre, Tuesday, 12 February 2013 11:40:32 PM
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Don't get me wrong on this, Saltpetre, there is much wrong with the banking system.

One revelation (to me, at least) recently exposed the fact that for many years, the activities of banks did not feature at all in the process of economic modelling. They were regarded as neutral agencies. Now that they have become profit centres of enormous magnitude, their impact can be seen as substantial - in Mr Gruen's words, they "warp the playing field". (Not the most felicitous metaphor, but we can let that pass.)

Key to understanding the issues here is the public's belief that the continued viability of banks is, in fact, one of the primary roles of government. Hence, the "too big to fail" part rests fundamentally on the public's perception. Imagine for a moment the political implications of allowing one of the big four to close its doors.

But the answer is not that it should be the role of government to run our banking system. Their record of mismanagement of every enterprise they have been involved in speaks for itself. We the public may be getting a pretty poor deal with the existing set-up, sure. But that is not a sufficient justification to trade one level of manageable discomfort for a future of total chaos and disappointment.
Posted by Pericles, Wednesday, 13 February 2013 10:52:39 AM
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