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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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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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