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.

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!

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.

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.

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.

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.