After the terrible economic crisis we are still recovering from; we would be fools to ever allow bankers and brokers a free reign again. Remember what Thomas Jefferson said all those years ago, it was an accurate prediction as well as a warning.
“If the American people ever allow private banks to control the issue of their money, first by inflation and then by deflation, the banks and corporations that will grow up around them (around the banks), will deprive the people of their property until their children will wake up homeless on the continent their fathers conquered.” -
Thomas Jefferson

Ken McKay’s argument is that the greed of bankers, rather than low interest rates caused the assets bubble.

However this begs the question, why did bankers become extra-ordinarily greedy all in a cluster? There was far *more* government regulation of the finance industry in 2003 than in 1955, so lack of the presumed wisdom of government regulators cannot be the explanation.

According to Ken’s theory, the price of money has nothing to do with the demand for money. We just get a given increase in the money supply here, but the resulting inflation of prices over there has nothing to do with the marginal utility of money. Economic phenomena are unconnected. The assets bubble is a phenomenon of immorality, rather than of economics.

Ken assumes that, while market actors were unable to know the “real risk” in a given transaction, on the other hand, government regulators were.

But how? What was the difference between the market price, and the “real risk” price in any given case, Ken? Show the method by which you calculate it.

If people whose assets were directly exposed to loss were unable to know what the real risk price was, how were bureaucrats, who pay no price for getting it wrong, in any better position?

If it’s true that government has this magic power, then why not abolish private property altogether? Government could directly allocate capital to its optimum uses without even using money as a medium of exchange.

The quintessential function of central banks is to manipulate the price of money. If this has no effect downstream on the price, supply, and demand for money, then why do they do it?

But if it has such an effect, you are blaming the financial sector for a problem originating in government manipulation of the money supply.

“Why should the farmer have to pay higher interests to put food on yours [sic] and my table because the greed of the finance sector?”

Absent central banks, interest rates would reflect the time preference of lenders and borrowers; and banks would be unable to privatise profits and socialise losses.

Helen54
What Jefferson wrote was absolutely right. But that is an argument against central banks, not in favour of them. It is government that is enabling the banks to print without regard to the risk of loss; protecting them from failure by bankruptcy in exchange for a share of the loot.

In Australia both sides of government have been responsible for continued record levels of immigration - our population growth exceeds that of Asian countries - which has put extreme pressure on infrastructure, including housing.

Together with this, both sides of government have moved out of supplying government housing, demanding that private investors provide welfare housing.

The private investment housing 'bubble' as some would have it (it is a convenient whipping boy for some) doesn't exist because prices have been driven up by government interference in population, over-stressing land development and building, while at the same time having little concern for environmental sustainability.

Here is a clue: forget the interest rates and just chop immigration numbers by 50%. That is still a high level of immigration for any modern country. Government could even invest some $$ in the training and re-training of the existing workforce. That would be a change for the better too.

Saul was correct in that interest rates have been, and are now too low and are an important part of the cause of the problem. True, the fiat money supply created by securitised loans made on bubble price assets due to lack of effective regulation was the major symptom, but the artificially low rates are important inputs too. Without the low rates the bubble could not have expanded as far or as long as it did.
Interest rates are a market tool to keep the savings and loans of the country in balance. When more money is being lent then saved, the bill must be and will be paid. When there are not enough savings to cover the desired lending the rates should go up, this is basic free market stuff. If the price is not allowed to rise, but supply is instead increased through intervention such as foreign lending or money printing then a bubble and crash is inevitable, the only issue is who will pay. At the moment it is not the banks...the government saw to that. By trading bank stability for market reality it has created a temporary respite only. Ultimately it will be the consumer who pays through Superannuation fees and charges, inflation and higher taxes. This is OK, but not when execs are still on $Millions and shareholders are getting paid dividends. Private profits and public losses is not only unfair, it is stupid. The adult daycare industry that is our financial industry is a tax on the real economy that could be doing real work, creating real wealth. Exporting real industry to asia while plumping up our "financial services" to create jobs is definitely one of the more inane ideas to come from our system of government!
Australia has not dodged the financial crisis, we have delayed it. You cannot solve over lending with more lending, and price manipulation with more manipulation.
Damn right the bankers shouldn't be left off the leash! The entire financial industry needs a major regulatory shakeout and an investigation into political influence.

Jardine K. Jardine is wasting a lot of energy on a false dichotomy.

We don't have to choose between Communistic centralised finance and the de facto kleptocracy that conservative governments are so enamoured of. We can, instead, choose a regulated banking/finance system that allows free trading without permitting fraudulent money bubbles to develop.