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.

Sancho
Both sides of politics are unanimous in their support of the current central banking kleptocracy.

Either the parties to a transaction can decide the price, or the government can. There is no other possibility. But if there is, what is it?

How are regulators going to lower interest rates without stealing from savers? How are regulators going to regulate the price of money without it turning into a fraudulent kleptocracy? How are regulators going to determine the difference between what the price of money is, and what it should be? How is any given government intervention not going to favour one party to each transaction?

Those who allege under-regulation never answer these questions, because they can't. Their interventions can only produce results that are more unsatisfactory, even from their own point of view.

Tell you what, Jefferson K. Jardine. Drop the sock puppet account and argue your case from one username and we can have a discussion.

Running multiple accounts to prop up an argument hardly screams confidence.

Ken McKay egregiously misrepresents both my article and my reasons for writing it. I am an economist; I have never been a 'banker', and while I did work for a bank for almost 14 years I no longer do. My purpose in writing the article to which he refers was not to defend bankers in general, nor to suggest that (some) bankers do not bear some responsibility for the damage inflicted by the global financial crisis.

On the contrary, I explicitly wrote that one of the consequences of interest rates being held too low for too long in most Western countries (other than Australia) in years preceding the GFC was that it prompted the 'supply side of the financial services sector' to come up with 'an ever-growing range of increasingly risky investment products cater to the growing demand for them – products whose risk characteristics neither their creators nor regulators fully comprehended', in order to cater to the demand from investors for rates of return that could no longer be obtained from low-risk investments in an environment of inappropriately low interest rates.

Ken McKay quotes that passage, but seems entirely to have missed the point that it is a criticism of bankers.

Nowwhere did I say in this article, nor have I said anywhere else, that there should not be increased regulation of the financial system in the aftermath of the GFC.

(to be continued)

(continued from previous post ...)

McKay, like many others (including on at least one occasion John Howard), seems to think that banks like high interest rates, and implies that anyone arguing that interest rates are inappropriately low is somehow motivated by a desire to enrich bankers. One of the things I did learn while working for a bank is that banks make their money out of the spread between borrowing and lending rates, and that these spreads tend to widen when rates are going down, not when rates are going up. Moreover the securities which banks hold on their books tend to increase in value when interest rates are going down, and to decline in value when rates are going up.

In short, banks don't like high interest rates any more than anyone else (except depositors). And that's why most countries have independent central banks, so that interest rates can be set free of political interference and pandering to populist prejudices of the sort on display in McKay's last paragraph. Fortunately for Australians, our central bankers have discharged their responsibilities rather better than many of their peers.

Saul I find your circular logic disturbing, you argue that we need monetary policy determined by independant technocrats free of populist political views
Yet argue these so called independant technocrats (US Reserve) kept rates too low so fuelling the irrational economic behaviour of consumer and manufacturers of financial products.
If the technocrats get it wrong according to Saul who corrects their error?
Saul and the champions of letting the "experts" decide are in fact without even knowing it advocating fascism.
We must get back to the people through their elected representatives being in control of both monetary and fiscal policy.
The abdication of responsibility for monetary policy has defacto led to fiscal policy becoming inactive because the political elites can continue to blame the technocrats but are not expected to act to preempt their errors.
We cannot let populist views (wishes of the people) to interfere with the dogma and religious fervour of economists

"We must get back to the people through their elected representatives being in control of both monetary and fiscal policy."

Slasher
Why would the people have more control of interest rates if politicians set them, than if the people themselves set them through their actions in buying or selling, or abstaining from buying or selling?

Government control of the money supply is based on a false pretence of knowledge that no single person, or government authority, knows, nor ever can know.

None of the advocates of government control of the money supply will answer this question: *how* are the politicians, or the bureaucrats, or the central bankers, going to know what the price of money should be?

So... how?

In 1955, interest rates on housing loans were fixed for the full term of the loan.
Why is it little or no mention is ever made about the increase in interest rates on the so called 'toxic' loans in the American housing market? Many of those defaulters saw their loans interests rates go from 1% to 5% in just a few years.
Now they are being offered the golden opportunity to rent the houses they formerly owned; ie pay off the loans on someone else's behalf.
Meanwhile, it has been reported that the median wage level in America has actually dropped.
You want to stabilise the financial sector? Bring back certainty to contract law.

"You want to stabilise the financial sector? Bring back certainty to contract law."

Bravo Grim!

Since the entire purpose and function of central banking is to undermine certainty in contract law, by favouring one party to each transaction over the other, and since this fraud in turn is the grandaddy of the systemic fraud further downstream in the financial system, we should start by calling for the abolition of central banks.

This is something on which socialists and libertarians should be in agreement.

It would be the single biggest stroke that could be made against the inflation being used to steal from the poor and working class to fund handouts to the rich and privileged; big government getting in bed with big business, crony capitalism, the military-industrial complex, the funding of aggressive imperial wars, big pharm, and the rampant consumerism of consuming the future for the present. At the same time it would be the single biggest stroke possible to increase liberty, and reduce the ongoing tendency of the population to become dependent on government which is unsustainable in any event.

The argument that the raising and lowering of interest rates impacts on demand for money may have had some validity when there were capital exchange controls, however in a globalised economy raising the domestic price for money will not necessary deter demand for money.
Those speculators can simply access loans offshore. If the domestic price of money is raised in a deregulated currency exchange environment we see the carry trade push the local currency up, in Australia's case the Japanese were the predominant market. This leads to overseas loans becoming cheaper even with a higher interest rate. Hence jacking up domestic interest rates will not curb speculative activity. It will hamper productive investors who will be cautious about hedging risks associated with offshore loans, but the gamblers will still continue to gamble.
That is why we cannot continue to rely on the price of money to underscore monetary policy. But I doubt Saul will seek repentance for his devotion to economic dogma and will continue to write articles calling for higher interest rates to curb the excesses of the financial system rather than putting the trust in democratic institutions to develop appropriate regulatory regimes to control their recklessness (because that is populist meddling)

Ok, economics is not my field, due to my own assertions along the lines of "you cant eat money", "money cant buy me love" etc. Laugh all you like but what means more, that your family loves you and you can feed your children or the value of your home? Money does not stop us being human does it?
Why has this human made thing called "the economy" somehow become more important in "democracy" than people? People are so busy making money these days that they dont know how to grow (nature used to provide, greed even ruined that) their own food nor even how to keep each other happy without Foxtel.
ECONOMICS IS MEANT TO SERVE THE PEOPLE, NOT THE REVERSE.
The modern economy is meant to work like ecology, "the survival of the fittest", so if the big banks cant cope why is it that us ants have to bring the dinosaur food instead of eating him?

Well said, Milgu.
I love the imagery.

Ah another submission on “business bashing”, from the mouthpiece (or perhaps the cod-piece) of the union movement.

Jardine K Jardine’s summation is very accurate to what really happens.

Kenny McKay is, as all union agendas do, promoting an emotional wedge which see private enterprise as bad and a union dominated economy, through pulling the strings of their parliamentary puppets as in the best interests of the common good.

(and whilst I have met lots of private entrepreneurs, I have never, ever met “the common good” )

With current mortgages, I choose who I borrow from and the lenders choose who they lend to. Lenders finance the loan under conditions I accept and I carry the capital risk.


I was in UK in 1977 when the socialist swill had regulations on lending which meant, because I was not a first time buyer, I was not allowed to arrange for a new mortgage from normal housing funds.

That was the result of a socialist government meddling in that which it denies because it cannot control it - aka the forces of supply and demand.

All that Kenny baby wants is some mythical central system which makes sure everyone is treated the same, risk is eliminated and fairness prevails.

Well it is going to happen when the meek inherit the earth and the fairies reveal themselves at the bottom of the garden.

Until then, private enterprise knows better than government and unions combined –

it always has and always will…

milgu “why is it that us ants….”

I don’t see myself as an ant but as an individual. Maybe you should work on your self esteem.

col, the system supports the speculators over the builders. farmers and manufacturers are paying higher interest rates because of the speculators (sponges of society) who then socialise their losses.
farmers who put food on our table and manufacturers who provide jobs to our communities should not pay the piper for the sponges in our society. i am sure you can self-identify with the sponges who are really oxygen thieves

Slasher “col, the system supports the speculators over the builders. farmers and manufacturers are paying higher interest rates because of the speculators (sponges of society) who then socialise their losses.”

In any market situation, some folk seek to avoid risk and concentrate on doing what they do best like building, farming, manufacturing etc.

They seek to minimize the monetary risk associated with future prices (either buy or sell) and insure by taking up or placing contractual agreements at secure future prices.

The folk who then act on the other side of what amounts to those “hedging contracts” are who you call “speculators”.

I suggest, before you criticize or seek to curtail the counter-cyclical influence of so called “speculators” and their influence on markets and market prices, you go back and clearly define and qualify what you mean.

Because, thus far, your assertion to the sponging influence is just a bunch of unproven emotional knee-jerking.

To “i am sure you can self-identify with the sponges who are really oxygen thieves”

I do not “self-identify” at all.

So, if you want t have a swing at me try and make it a good or original one, because that one was fresh back when Moses was a boy.

But to “sponges” and “oxygen thieves”- examples

The multiple array of parasites who see public welfare benefits as a career option,

Those young women (just slags really) who get banged up for the baby bonus,

The dross who demand public housing because they are too stupid or idle to organize a mortgage.

The “Gimme-Gimme’ wailers who lack sufficient intellectual comprehension to cast an effective vote and so go for the politician who promises the most, yet they are too stupid to understand, it will cost 3 times the benefit gained because of the administration by a bunch of otherwise pointless and parasitic civil servants.

would you like me to go on?

Do away with those “oxygen thieves and sponges” and the Australian economy would kick along like it existed within an "social" as well as "economic" Utopia.

Welcome to Col Rouge World, Slasher. Here are some survival tips:

- It's 1957 forever. Houses are affordable, women are be glad to have a man, no matter how violent or abusive, or they are sluts, regardless of their situation or story. Brown people are subhuman and only fit for exploitation. Most importantly, market capitalism is ascendant, stable, honest, and investment bankers are the finest, most moral and talented people in Western society.

- People are only motivated by money. Claims to any other drive are fraudulent. If you wake up at 5am on a weekend to serve soup to homeless elderly people, you are part of the feeding old homeless people industry, and thus no better than Big Tobacco.

- For simplicity, everyone in the country can be categorised as a Parasite or an Angel.

Parasites include people on low wages, foreigners, anyone without a share portfolio, artists, charity workers, and anyone who represents a new or challenging concept.

Angels are people such as hedge fund managers, corporate executives, and, most eminent, the brave employers who fight evil unions to get improved workplace conditions and employment opportunities for Australians. If it wasn't for employers and business associations, the unions would still be sending children into coal mines for a subsistence wage, seven days a week, and taking every opportunity to export Aussie jobs to the third world.

So, the next time you try to make an argument based on facts and observation of the real world, remember that this is the unshakable set of assumptions you're up against.

Sancho, you just brightened up my evening with that wonderful synopsis.

I'm sure Col will see the funny side - won't you Col?

Sancho “So, the next time you try to make an argument based on facts and observation of the real world, remember that this is the unshakable set of assumptions you're up against.”

I can only assume Sancho prefers to criticize others for holding a view than actually present a view himself… afraid it might be pilloried.

Typical of the socialist coward, tear down reason and offer up nothing.

As for Sanchos parody of life…

well what could we expect when it is a projection from someone so bereft of moral character, than the worst excesses of human deprivation and yet even that deprivation is better than the mass terror and mass starvation which the Robespierres and Lenins inflicted on their communities in the name of “the committee for public safety” and “Liberty, Fraternity and Equality” (Robespierre) or the universal poverty which is the product of Communism (Lenin).

It was, afterall Lenin who observed “the goal of socialism is communism”

I am left to believe Sanchos feels we should all be as materially and intellectually "impoverished" as him.

That might be what he believes but I don't...

To "Regulation" of business activity

People who bet on outsiders or follow stupid promises of high returns have only themselves to blame.

"Ham-stringing" the prudent with layers of pointless regulation never reduced the risk-blindness of the stupid, indolent and reckless.

We are all better served being cautious for our own sake, rather than pretend some distant bureaucrat will really give a rats when all that politicians are interested in is "power" - especially socialist politicians and their civil servant lackies.
As for Sanchos comment “People are only motivated by money.”

Yes well the socialist dross probably are but those of us who can think and aspire to more than “survival, food and shelter” know the true richness of individuality and self-realisation.

Unfortunately, such aspirations are way beyond Sanchos comprehension, so even mentioning them to him is a complete waste.

"Parasites", "slags", "socialist dross".

Forgive me for tearing down reason and offering up nothing. I was dazzled by your display of mature explanation and articulation.