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!

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?

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.

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.

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.

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