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The Forum > Article Comments > Our paradigm of banking regulation is shot > Comments

Our paradigm of banking regulation is shot : Comments

By Andy Schmulow, published 2/9/2009

In the wake of the GFC there needs to be a radical overhaul of banking regulation, bypassing the state in favour of the market.

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Andy, as is widely acknowledged the GFC was brought on mostly by the failure of the Americans to regulate their own market. The better regulated Australian market held up quite well in the crisis, with no major institutions here going under. Markets boom and bust, its what they do, but at least strong regulation of the financial sector will make the busts far less uncomfortable than they would otherwise be.
To make any case for reducing regulations you would have to draw a very strong link between regulation and the bust which the article fails to do.
Posted by Curmudgeon, Wednesday, 2 September 2009 11:41:12 AM
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The idea that insurance and its premium can be used to control risk in lending is interesting, but it relies on the idea that someone can effectively calculate the likelihood of future outcomes. The GFC, specifically the role of the ratings agencies, showed (yet again) that we arenít very good at this.

Adding more regulation, while it might be some peoples preferred option, it is not the only possible path. A less regulated, more volatile system may lead to more innovation and a more regular culling of unviable institutions, lessening the impact when they do fail. As to regulators being able to foresee future outcomes and design regulation so that it allows innovation while preventing unwanted instability, see point one
Posted by Grumbler, Wednesday, 2 September 2009 12:38:49 PM
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What strange logic.

"Shareholders and consumers have learned the hard way that bankrupt banks take the rest of the economy down with them."

Which was, of course, why governments adopted the highly unpopular strategy of borrowing from future taxation, to prevent as many as possible from going down the tubes.

But apparently, governments stepping in like this is, somehow, a bad thing.

"...what was the response to this series of stuff-ups? An ever greater determination to rely on the state to regulate bank"

Watch out baby, the bathwater is on the move...

>>we should... admit we have a problem. Our paradigm of banking regulation is shot.<<

That is akin to suggesting that because our jails are full of criminals, our justice system has failed.

"insurers will insure against earthquakes. So why not insure a bank against insolvency?"

I can think of a few reasons, straight off the top of my head.

One, of course, that immediately springs to mind, is that insurance companies were shown to be not entirely in control of their risks in the existing regime.

http://www.nytimes.com/2008/09/17/business/17insure.html

AIG has so far needed more than $100 billion to keep them afloat. That's a lot of billions.

And these are the people the author suggests should evaluate the risks of Banking, and act as regulator?

"This just goes to show you shouldnít hire an economist to design your house."

But when it comes to Banking in Australia, we should take advice from a South African Arts/Law graduate?

Quaint.

As I said, strange logic indeed.
Posted by Pericles, Wednesday, 2 September 2009 1:43:37 PM
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Bugger that.
Too big to fail = Too big to exist.
Break them up and destroy their ability to effect the whole world with their greed and usury!
Posted by mikk, Wednesday, 2 September 2009 3:38:28 PM
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"For every hundred hacking at the branches, there is only one striking the root."

Why no mention of the Federal Reserve? Presumably a monopoly power, and a chronic policy, of inflating the money supply has no effect on money, credit or banking.

The steering mechanism of any market is the price mechanism.

The price of money is controlled by government: that's what the central banks are for.

The price of shoes is not regulated by government, and no wild booms or busts there. The price of white-goods is not regulated by government. No wild booms or busts there. The price of food is not regulated by government. No wild booms or busts there either.

But the price of money is regulated by government, and surprise surprise, we have the curious coincidence: the mechanism for harmonising supply with demand is controlled by national socialist central planning committees, and we have massive wild upswings and depressing downswings, legal privileges for political favourites, and enormous economic waste, dislocation and hardship.

According to the orthodoxy, this has nothing to do with monetary policy, which is presumptively beneficial or neutral.

The idea that a money supply *less* regulated by government would be *more* volatile is mistaken. In the absence of the government monopoly and its endless interest in inflation to fund imperial wars, and politicians' welfare-state handouts, the result would most probably be:
1. a slow growth in the money supply
2. slow but steady compounding economic growth
3. a rise in the general living standard of all, including in environmental quality
4. gradually falling prices: ie money gaining in value
5. an end to the cycle of greedy booms and depressing busts
6. greater individual liberty, and more effective control by society over government's anti-social and criminal tendencies.
Posted by Peter Hume, Wednesday, 2 September 2009 4:51:49 PM
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If we shouldn't have economist building houses please stop lawyers lecturing on topics they know nothing about. Most of the hybrid securities that undermined the world financial systems were insured. However the lack of proper anti trust legislation to stop monopolies meant that there was no impediment to one insurer being the insurer of all the banks and the hybrid securities. Hence the insurer simply could not pay out on the policy.

The dependance of the price mechanism to fully signal all costs and risks to the market is the root cause of the problem. As an earlier post stated Australia has survived relatively unscathed because of a better regulatory regime. By relying on the price signal we ignore concepts of imperfect information, irrational behaviour on behalf of investors. When price to earnings ratios are significantly higher than historic trends why do investors continue to buy stock? Simply because they think other mugs will keep on buying and hence they can time the market to beat the correction. Hence the price is distorted from long term value and is not an accurate assessment of true risk.

We need a fundamental rethink of monetary policy, unless we reject the neoclassical chicago monetarist religion we will only repeat the mistakes of the past.
Posted by slasher, Wednesday, 2 September 2009 6:17:15 PM
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