A group of economists: (Joshua Gans, Nicholas Gruen, Christoper Joye, Stephen King, Sam Wylie and me) has issued a statement calling from a comprehensive inquiry into the financial system.
It’s over the fold
Untitled
p.p1 {margin: 0.0px 0.0px 0.0px 0.0px; font: 12.0px Helvetica; color: #284fa9; min-height: 14.0px}
p.p2 {margin: 0.0px 0.0px 0.0px 0.0px; text-align: center; font: 12.0px Helvetica; color: #284fa9}
p.p3 {margin: 0.0px 0.0px 0.0px 0.0px; text-align: center; font: 16.0px Times New Roman; color: #284fa9}
p.p4 {margin: 0.0px 0.0px 0.0px 0.0px; font: 16.0px Times New Roman; color: #284fa9}
p.p5 {margin: 0.0px 0.0px 12.0px 0.0px; font: 16.0px Times New Roman; color: #284fa9}
p.p6 {margin: 0.0px 0.0px 12.0px 80.0px; text-indent: -24.0px; font: 12.0px Helvetica; color: #284fa9}
span.s1 {font: 16.0px Times New Roman}
span.s2 {font: 16.0px Lucida Grande}
span.s3 {font: 9.0px Times New Roman}
span.s4 {color: #000000}
Australia Needs a Comprehensive Financial System Inquiry
Joshua Gans, Nicholas Gruen, Christopher Joye,
Stephen King, John Quiggin and Sam Wylie
Ever since the severe market failures in Australia’s securitisation industry were identified in 2008, we have been concerned that these problems were partly attributable to more fundamental flaws in Australia’s ageing regulatory architecture and the inadequately defined role of government in dealing with such crises.
The shortcomings within our governance system have been exacerbated by the relentless changes that have occurred in financial markets since the essential elements of our regulatory infrastructure were put in place decades ago. One example of this is the 1996 Wallis Inquiry’s rejection of the use of deposit guarantees, which have been critical tools for maintaining stability during the current crisis. Following the lessons that have been learned during the global financial crisis, and the 12 years that have elapsed since the last such exercise, we believe that a broad-based inquiry into the integrity of Australia’s financial system is now warranted.
While the $40-50 billion per annum residential mortgage-backed securities (RMBS) market supplied the funding for up to a quarter of all Australian home loans it did so with little-to-no government oversight or support. The growing depth and liquidity of this market enabled the emergence of significant alternatives to the major banks in the form of empowered regional banks and building societies, and smaller non-bank lenders. When this market disappeared due to an entirely external shock—the US sub-prime crisis—many of these institutions were brought to the brink of collapse and forced to withdraw from lending altogether or merge with competitors. At least one smaller Australian bank would likely have failed had it not done so.
The biggest beneficiaries of this chaos have been the four major banks that receive the most favourable regulatory treatment under the existing system, which was not conceived with many of their smaller rivals, and the new markets that they rely on, in mind. Yet the forced ‘reintermediation’ of the major banks into the residential lending arena has had other unintended effects, with the pressure placed on their balance-sheets in turn compelling them to ration credit to the higher risk small business, corporate, and commercial property sectors.
We are still in the midst of understanding the consequences of the global financial crisis and the actions of governments (including Australia’s) in response to it. Importantly, it remains uncertain to what degree Australia’s comparatively successful performance in navigating through this catastrophe has been due to our own regulatory foresight or just good luck. We would do well not to discount the possibility that a ‘good roll of the dice’ left us without more significant system failures such as those seen in the UK. In future crises, we may not be so lucky.
This cataclysm was imposed upon us by the increasingly interconnected and globalised nature of capital markets. These interdependencies also extend to government policy. The catalytic event that was US sub-prime borrowers defaulting on home loans that barely exist in Australia pushed the world into a deep recession and has subjected Australia to a marked slowdown accompanied by significant job losses. As a nation with a large foreign debt that has continually increased its liabilities via enormous current account deficits, Australia’s vulnerability to foreign shocks is in many respects greater than most of our peers.
It is, therefore, critical that policymakers take this opportunity to thoroughly review the existing system and evaluate whether changes need to be made to it. Although the dependence of financial institutions on national governments has been reinforced by the crisis, global capital market integration is not going away. We have little comprehension of the consequences of the raft of new policies that are being implemented by other nation states. What effect will the whole or partial nationalisation of banking systems around the world have on Australian institutions and, more specifically, our ability to source foreign credit? Will the UK Government’s recent decision to guarantee securitised home loans along the lines of the Canadian model place Australian lenders at a competitive disadvantage in a global capital raising context? What are the long-term ramifications for Australia of the new regulatory regime being instituted by the Obama Administration?
These linkages cannot be ignored and should be examined under the auspices of a first-principles system review process similar to that undertaken by Campbell in 1981 and Wallis in 1996 with the benefit of new insights.
If there is any doubt as to why Australia needs to urgently revisit the foundations of its financial architecture, and evaluate what renovations might be required in light of the current crisis, consider that the following questions remain unanswered:
· Will the Australian government seek to establish a regulated clearinghouse for the hundreds of billions of dollars worth of over-the-counter derivatives contracts that are otherwise beyond the remit of policymakers;
· Should banks be subject to a ‘systemic capital charge’ to account for the risks associated with the correlation between bank balance sheets given that current capital charges reflect the idiosyncratic risks to the institution itself, and may not be collectively large enough to compensate for system-wide catastrophes;
· Will the deposit and/or wholesale funding guarantees be phased out and, if so, what new policy guidelines will explain how they might be redeployed when capital markets seize up again in a manner that minimises disruptions to other sectors (such as the knock-on effects seen in non-guaranteed areas like the commercial paper debt markets, the mortgage trust industry, and the CMBS and RMBS markets). If they are not phased out, how will the terms and price of these subsidies be determined and what regulatory constraints will be applied to prevent the emergence of moral hazard risks. More broadly, what parts of the credit markets will or will not be guaranteed in the future;
· Should APRA impose ‘automatic stablisers’ that require banks to accumulate capital in good times to serve as insurance against the bad;
· Has this crisis reminded us that Australia’s major banks fulfill a unique community role akin to public-private utilities that warrant special controls to guard against system stability risks? Here it is odd that we’ve been repeatedly told that our banks were lucky not to have had substantial overseas exposures and yet they now appear to be rushing offshore to obtain exactly these;
· What new regulations will govern executive compensation at banks and securities firms to mitigate the ‘call-option’ like payoffs that have tainted these arrangements in the past and how might these be tied to prudential supervision (eg, higher risk-weightings for firms that have short-termist structures and/or claw-backs on remuneration for executive negligence and adventurism);
· Can real competition emerge while consumers face significant costs in switching between financial institutions? Does a government-regulated securitisation market provide an opportunity to consolidate mortgage account standards and more effectively enable switching;
· Where government guarantees are deemed necessary is it preferable for them to be offered against complex institutions like banks, or against tangible portfolios of assets the characteristics of which can be relatively easily assessed by independent experts;
· China Strike Force ipod Should citizens who feel unsure and unqualified to shop wisely in our financial markets be able to access basic savings, payments, and wealth management products that have been vouchsafed by governments as being safe and professionally managed (eg, why can’t Australians invest with the Future Fund)? In this regard, is there a role for a publicly-owned entity, akin to KiwiBank in New Zealand, to offer essential services in Australia’s finance sector that leverage off unique government infrastructure (eg, Australia Post, the tax system, and the government bond market);
· How will policymakers remedy the regulatory asymmetry between institutions like the larger banks that rely on short-term retail deposits as their primary source of funding (in combination with wholesale debt) and many of their competitors that depend on the longer-term and (ironically) ‘matched’ funding furnished by the RMBS market? Whereas banks benefit from a range of government subsidies (implicit and explicit deposit guarantees, term funding guarantees, RBA liquidity support, etc), which glue together the enormous asset-liability mismatch created by funding 30 year loans with at-call deposits, Australia’s regulatory architecture does nothing to maintain the liquidity and integrity of its securitisation market. This contrasts with the Canadian system, which has remained open and functional throughout the crisis (and displayed lower default rates than Australia);
· Should the RBA ‘lean against’ incipient asset-price booms fuelled by increases in system-wide leverage;
· Should Australia’s global foreign debt position be the subject of any general policy oversight and, if so, what measures should be pursued to ensure that these exposures are prudent;
· What position should Australia take in relation to the restructuring of the global financial architecture? This will begin in earnest once it is clear that the worst of the crisis has passed. We need to be prepared for the negotiations that lead to new organisations, treaties and the global regulation of finance. For example, European states appear to favour a global super-regulatory body. The US has not embraced this approach. Where should Australia stand? And what will Australia’s views be on other key issues, such as the uniform global reform and regulation of rating agencies and hedge funds; and finally
· What does Australia want to achieve from trade negotiations relating to the opening of foreign financial systems to overseas firms? Australia should be able to expand its supply of global financial services because of its location, political stability, resilient financial infrastructure, skilled workforce and competitive institutions. What steps will be taken to optimise Australia’s ability to both import and export financial services?
These are but a small subset of the many profound policy questions facing Australia and its financial system. Our relatively strong economic position offers an opportunity to review, investigate, consolidate and reform (if necessary). We need to take active steps to avoid the temptation of complacency and accept the lure of challenge. Only a full-scale independent commission on the financial system—roots and branch—can put us on a path to continued stability and insulation against the unpredictable. Following in the footsteps of Campbell in 1981 and Wallis in 1996, such a review’s time has now come.
John Quiggin 
Review into “Financial System” or should this be review into “Economic System”.
Why look at tea leaves when you cup is falling apart?
JQ – I just cant agree with the final indented paragraph – the optimisation of conditions to allow Australian expansion in the import and export of financial services is part of the problem…not part of the solution. It is precisely the opening of foreign financial systems everywhere that resulted in the pandemic financial “CEO” Flu (a mutant variant of swine flu).
Well done John. “”Financial deregulation”, the privatisation of the Commonwealth Bank and the destruction of the Commonwealth Development Bank were some of the silliest actions of the Hawke Government. It reflected the triumph of theoretical economic speculation with its excessive faith in the self-regulatory markets over the practical wisdom gained from experience gained in the Great Depression (see my book – The Cult of the Market).
This is an example of the deeper investigation I think academic economists should spend some time working on.
Political Economy Conf
The point being that our financial problems are mere symptoms of deeper economic imbalances, and this is where academic effort can most usefully be directed.
Absolute nonsense. The free economy has mechanisms to correct itself. Okay, sometimes things overshoot on the upside and downside but you will not change human nature. Government should stop anarchy and protect the weak, but leave the economy largely alone. A full regulatory view is an academic exercise and a complete waste of money. Nothing like a GFC to bring out the “experts”. Consultancy plays out to be a great counter cyclical career! The biggest beneficiaries of the GFC have generally been the biggest companies in any sector, banking or otherwise so why such a surprise the Big 4 flourish.
Please apply to your brilliant minds to solving world hunger, disease or global warming instead.
Too late. Way, way too late.
The die was cast on August 15, 1971 (when the world went off gold and allowed the embezzler-bankers and blind bureaucrats to take over the world).
And only NOW are “economists” screaming! Talk about horses bolting!
“It’s too late baby, NOW, it’s too late…
Though we really ddddiiiidddd try to make it… (with the ridiculous bailouts and heroin “stimulus” packages that provide short term relief but long term DEBT)…
Something has died (the economy)…insiiide…
And I can’t hiiide (it’s obvious to even to the Treasury) and I just can’t faaaake it… (not orgasms – economic growth you idiot)”
We are totally screwed and there’s no way out. Malinvestments infect the whole world, from sub-prime residential housing in the US to ridiculous over-built polluting coal-fired factories in central China producing useless trinkets. It takes a lot of talent to screw up the economy as badly as this. The current generation of economists has a lot of explaining to do.
But instead of being charged with recklessness or negligence, they want to ride to the rescue (again?) and save us from…from…the disaster that these SAME economists were RECOMMENDING in 1997 with the Wallis Report!
HaHaHa! This is too, too funny! Please, I can’t take this much laughter in one day!
JQ, the initiative has been reported, in parts, in the smh of today.
The smh article includes the following statement:
“It says a new inquiry would examine whether the banks should pay a “systemic capital charge” to account for risks in their business and whether they should have to accumulate capital in good times.”
I have a couple of questions:
1) What is ‘capital’ in this context?
2) How can one ‘accumulate capital’ on a system level?
These questions may appear to be ‘naive’ or even ‘pretend naive’ to those who know I am an econoist. But these question are sincere (I believe there is a problem with the concept of money and there is a problem with the separation of finance from monetary economics and from the so-calld ‘real economy’).
Ernestine, more detail around this specific proposal is provided in the following BIS paper…http://www.bis.org/publ/arpdf/ar2009e7.pdf
Thank you, Chris Joye, for the quick response. I understand that the proposal in question is framed within the context of the BIS nomenclature. This is helpful.
Dan
Australian capitalism is NOT a “free economy”.
The macroeconomic imbalances have been emerging since the 1950’s as structural trends within most OECD capitalist economies (I posted references some time ago).
This is pretty much agreed. What may be open for debate is the extent this can be attributed to capitalism (ie capitalism as it is) or to some deformation that can be corrected (ie capitalism as it is not).
John Quiggin et al are seeking for the deformation within the “financial system” and leaving the deeper issues (being addressed by Stilwell – as referenced in earlier post) totally ignored.
A truly free economy would be self correcting but it would not be a fair economy.
Ernestine – “whether they should have to accumulate capital in good times.”
I take this to mean they wont be able to lend out as much as they currently they can. I hope it is this. Higher reserves unavailable for lending. Accummulating capital “in good times” leaves way too much to the discretion of the banks. They will just gamble it away again and say “oh well…we needed to, times arent that good.”
Like beating a donkey with a feather.
Like beating a donkey with a feather? That’s a wierd analogy.
How about “Like allowing corrupt embezzlers to set up multiple Ponzi schemes in good times and giving them fake paper money for their clients in the bad times?”
There will be no reform of the AUS financial system – no matter how desirable that appears in principle – unless there is an almighty crash in the AUS economic system. And that will not happen unless and until there is a housing crash brought on by either high unemployment or high interest rates.
So far neither of these two crosses appear likely to be borne. Mainly thanks to the PRC whose insatiable demand for our minerals and glut like supply of our capital has been the economic salvation of AUS in the post-war era.
The Rudd govt is the most conservative govt in the past generation, perhaps in living memory. It is a great believer in cosmetic reforms and business-as-usual. It will move to change policy, but only after there has been a demonstrable change in polity.
That is what happened to our parents generation who were scarred by the Great Depression and were disinclined to trust bankers. Almost 50% of them were prepared to nationalise bankers in 1949, in the early stages of a post-war boom!
The polity will only change when masses of people have been kicked out of their jobs and homes. Ardent champions of financial reform are therefore faced with the dilemma of Russian revolutionaries in the late 19th C – “worse is better”.
Only this time you guys want to save capitalism, not bury it. In political reality, if you want to reform finance capitalism you should give the finance capitalists enough rope. They will hang themselves.
I wonder if Australians can make a deposit in, or take a loan from, Kiwibank. We are supposed to have seamless economic relations with New Zealand. If there is a big demand here for dealing with a plain vanilla government bank, then there is a big opportunity here for the Kiwis to grow their business.
Chris Warren – you refer to macroeconomic imbalances since the 1950s and whether capitalism or some form of deformation of capitalism is responsible and can be corrected…?
The deformation of which you speak is monopoly power.
We speak in glowing terms about competition STILL, which is quaint, we convince ourselves it is still alive, but in reality we sat back, de-regulated markets extremely, and let real competition starve through creeping unfettered unhindered acquisitions, mergers, takeovers and accretions of monopoly power.
We should have let those banks fail…they were too big, too unsustainable (and are still) and needed to fail for competition. Like a drop of water smashed on the ground to even smaller droplets.
Instead we protected the monopolies, not competition or the economy.
“Worse is better”. Yup. Unfortunately, it is true. It will wake the populace up to the fraud and the need for gold and silver. Which we happen to have under the ground, so why wouldn’t we want a return to the gold standard for Heavan’s sake!
It’s (partly) in the Melbourne Age as well: People’s bank to break the Big Four, “…also signed by… John Quiggin, a professor at Queensland University…”.
“WE NEED AN INTERVENTION INTO NEAR-BY FINANCIAL COMMUNITIES”
PM announces bold new policy to clamp down on financial rorts
The Prime Minister, Mr Rudd, today declared a state of emergency exists in the downtown financial districts of Melbourne and Sydney. He said that drastic action was called for to rectify severe dysfunction in these communities which was posing a hazard to the good governance and economic prosperity of the nation.
“For too long average Australians have stood by and let people in these communities run amok, preying on vulnerable members of society whilst pocketing enormous amounts of un-earned income,” he said.
“The time has come for the Federal government to put a stop to this racket and re-store order and decency to the management of the nations financial affairs.”
“For this reason I have declared that a State of Emergency now prevails for all offices premised in the Big End of Town in our major capital cities. The Army and senior public officials have been given the power to seize financial records to determine the audit trail of unaccounted for funds.”
“An income and wealth management scheme is now being prepared to ensure that all funds streaming into large financial houses will hitherto only be spent on projects of demonstrable economic utility. This does not include ankle deep shag piles, gleaming harbour cruising yachts or booking out the Ivy Pool for the end of year bonus bust-up”.
Members of the Opposition cautiously welcomed the scheme, although the Leader of the Opposition expressed reservations about its extent. Mr Turnbull was especially concerned about the regulation of merchant bansk:
“I hope the PM understands that merchant banks must not be deprived of their source of income. They provide a valuable service and are a useful stepping stone for a career in politics,” he said.
Representatives of the financial industry rejected the new policy as . A spokesman for the Australian Securities & Derivatives Industry Association complained that the new policy was a violation of their UN Charter guaranteed human rights:
“We shall be taking our case to the UN as this Intervention explicitly tramples on our right to make obscene amounts of money investing in worthless projects,” he said.
The Bar Association made a statement in support of the financial industry. A spokesman said that without the finance industry lawyers would not be able to frantically churn up the property market or charge like wounded bulls in divorce property settlements.
No formal statements were issued by the Silent Majority. However a large throng of people bearing lighted torches, wielding pitchforks and baying for blood was observed to be marching towards Collins Street at the onset of dusk.
Alice
I do not see monopoly as the key issue. If an industry has 1,000 enterprises and they all charge capitalist prices, economic imbalance (eg per capita debt increase) still results.
If an industry has just one monopolist, but only charges a natural price, then no economic imbalance occurs.
The problem with monopoly is not necessarily economic crisis but more to do with the fact that there are usually more efficient industry structures.
Commercial monopolies are bad because they are inefficient. They do not introduce any additional economic imbalance but may speed up crisis tendencies which exist for other reasons.
To test this understanding consider the problem of natural monopolies.
How do natural monopolies create economic crisis? They don’t. Natural monopolies only create imbalances when they are used to create private benefits. In thi8s case the real problem is in the system creating private benefits, monopoly or otherwise.
Chris your comments make no sense in the context of a monopoly currency and a monopoly central bank. You do not see the concentrating effects of monopoly fiat so can’t understand Alice’s point.
The Wives are in Connecticut! And in the interim, as only those who speak financial speak,without any references to Business Accountants and what they speak..thus Frank Sinatra’s “God didn’t make little Green Apples and it dont rain in..” Verily a flow of uneasy has occured amongst the Facebook goose steppers and other Rock Musicians,we have the Green Shoots being questioned to their value by Prime Minister Moody Modesty! Whereas ,I read they are as dead as a crop without its head of wheat!The Cosmic Question about looking back in Time,presents both a case for and against the Quiggin’s view.But like sunspot activity the very figures may not show up as even electronic equivalents of printed or as yet printed replicas of whatever worth they once seemed to of inspired!? Don’t recycle your monitors ,the buggars want the Gold!?
ABOM
Sorry but it is not a case of “can’t understand”.
A monopoly central bank, provided it did not increase per capita debt, and was a non-profit making enterprise would not create any more deformation than if there were 1,000 central banks.
A monopoly central currency, provided it did not allow business to increase per capita debt, would not create any more deformation than if there were 1,000 other currencies.
I generally smile when journalists and activists excoriate monopoly, and have to laugh when they claim that only they “understand”.
Alice @ 11, I don’t think (or hope) it is as simple as that.
Alice @ 15, IMO, one of the major contributing factors to the current financial crisis is the ideology of ‘economic rationalism’ which is reflected in the Campbell inquiry report. Admittedly, these ideas were not confined to Australia. The ‘economic rationalist’ idea that ‘competition’, ‘level playing field’, and ‘productivity based income increases’ works in the world of contracts (banking and finance) as it works in many but not all (eg natural monopolies) in the physical part of the economy is misconceived – IMHO.
Chris,
You’re so smart you must have seen this GFC coming a mile away!
Funny how all the “gold is money” internet companies have all been targeted by govts around the whole. Funny how legal tender laws force me to buy and sell in one currency. Funny how that currency is issued by the RBA. If the market was free and there was natural monopoly in money, none of this would be necessary.
But then you know so much more than anyone else on this topic….
whole world. One had the director killed (allegedly by the other director). One has been bankrupted and is facing jail. There are no gold is money internet providers in Australia – although they are starting up in USA, because they still have some memory of real money and its intrinsic benefits compared to govt enforced monopoly fiat.
ABOM – your analogy is better than mine. In fact “the embezzlers” is not an analogy. Id say its a factual observation of financial markets methodology.
John
A more circumspect view on RBMS may be appropriate – they caused the mess.
See my comments.
David
ABOM
Blind Freddy could see it coming. I noticed it in 1987 when I saw the charts in “Economic Forecasting and policy” (Llewellyn, Potter, Samuelson) p40f. Australia is depicted at p41.
Even you would have seen it coming if you had browsed this text. It is very clear.
Also during the 1987 crash the Statistics people in the Parl library produced data which showed the same trends for Australia (but did not use “net lending of government”).
22 libraries have this book so there is no excuse for not knowing.
Chris,
I wasnt discussing the case of natural monopoly nor was I discussing monopoly power in the simplest micro definition of one firm supplies an industry. I dont think you got my point. Monopoly power accrues in oligopolies as well. So many of our buying terrains are dominated now by oligopolies. This process has continued unchecked since the dominance of economic rationalist ideology as Ernestine mentions above, and has resulted in reckless, ill thought out de-regulation processes, that in short have reduced competition and contributed to growing inequality and rising underemployment amongst other negative trends. How many more long term indicators of economic welfare in statistical agencies have to scream at us before worrying economic problems and underlying misconceived ideologies are addressed?
Chris,
Let me get this straight. You’re saying you saw the 2007 GFC coming in 1987? Err…have you ever heard the comment “Timing is Everything.”
If you want brownie points for knowing about the GFC in 1987, von Mises should get more for knowing about the GFC in the early 20th century:
“Certainly, the banks would be able to postpone the collapse; but nevertheless, as has been shown, the moment must eventually come when no further extension of the circulation of fiduciary media is possible. Then the catastrophe occurs, and its consequences are the worse and the reaction against the bull tendency of the market the stronger, the longer the period during which the rate of interest on loans has been below the natural rate of interest and the greater the extent to which roundabout processes of production that are not justified by the state of the capital market have been adopted.”
And Landis should get extra brownie points for getting the timing approximately right and the explanation SPOT ON:
http://www.goldensextant.com/SavingtheSystem.html
Alice @29, I may not have made myself clear. I was saying that ‘competition’ (eg allowing more banks into the domestic market) was an ill conceived idea, which goes back to the Campbell report. Further, oligopolies have dynamics which are very different from a natural monopoly.
ABOM
A crisis, I actually thought it would have occurred earlier. The huge growth in services exports (mainly education) gave our economy a fillip.
I did not expect it to be a whole-globe event.
Certainly – if the multi-trillon bail-outs save the system this time – then, if the same trends remain – we can all see a future deeper GFC guaranteed.
I haven’t read von Mises, but if that extract was representative, then he was to that extent right.
If Landis reckoned in 2004 that a GFC was coming then he was a bit late. Per capita debt levels were already showing the unsustainable exponential trends.
Even Steve Keen was earlier (2001) See his ch 11 in Debunking Economics.
Ted Wheelwright was even earlier.
Everyone knew – every 10 years there is always a recession, and even Quiggin/Langmore knew that unemployment was ratchetting up.
You haven’t read von Mises?????
Oh dear…
I dont think I made myself clear either Ernestine.
I have never agreed with more “competition” in the way of allowing more banks into the domestic market (and then multiply that by similar de-regulations on a global scale). These policies have in fact reduced competition by concentrating it in a large global banking oligopoly (who I see as prime contributors to the recent GFC) and on the domestic scene, in the hands of the majors.
This foolishness is not competition at all. It is standing back, and allowing uncontrolled financial activity. That has resulted in not competition, but extreme concentrations of unproductive or partly unproductive wealth. Notwithstanding, it is the excess of monopoly power that contributes to the instability and monopoly power does not accrue when a market is genuinely competitive.
I am trying to suggest here that whilst the “language of competition” was used to argue for banking de-regulation, it was a false argument and produced quite a perverse outcome.
What we have ended up with in the financial sector bears no relationship at all to a competitive market (and no amount of further freedoms or barrier reductions will render it thus, unless they are also free to exit… and bank bailouts prevented this).
And it was Keynes who suggested trade everthing else but keep the banks controlled and at home…
Alice
I am having trouble following exactly what your argument at #15 is.
Anyway I want to point out that it is not monopoly (as a factor, degree, single entity – whatever) that causes macroeconomic imbalances.
It is more likely that macroeconomic imbalances cause monopolisation in a frantic attempt to maintain false capitalist profits.
In any case, in Australia, practically every industry is characterised by some degree of monopoly or oligopoly which worsens over time. This is a symptom.
Australia suffers from liquidity issues. The Huge supply of Sovereign bonds flooding the markets will make it hard for corporations to raise financing from corporate bonds as the institutions will invest in the sovereign bonds. We are seeing greater corporate use of equity markets to raise capital. In effect tapping into the retail market (Mum and Dad investors). Those investors Mum and Dads ado not have the same access to the more secure investments of sovereign bonds. There is a need for the sovereign bonds to be available to retail investors to ensure the bond issues are taken up, but also these investors can balance the higher risk investments with the more solid investment. Allowing the retail market access to sovereign bonds also allows better price signals to be sent to this impact sector of the investor market.
Oh Rudd, you do make me laugh.
Rudd is quoted (Jack at 12.14) as saying “The time has come for the Federal government to put a stop to this racket and re-store order and decency to the management of the nations financial affairs.”
I recall the Federal Government coming to a grinding halt for a nigh on a week to discuss a fake email and a ute in the midst of a GFC. How about the government leave the restoration of “order and decency” to the private sector.
Chris Warren #10
Sorry Chris, this is incorrect. An economy is a complex system (in the formal sense), so cannot be self-correcting. This is another example rife in economics where the assumption leads the “science”.
If you read your Steve Keen a little closer (as an example), you would know that instability is an inherent part of such systems. Under some conditions, a complex system will “self correct” or adapt, under others it won’t. Being “truly free” is not one of those conditions.
On the other hand, what JQ and colleagues are calling for will help.
Sorry, mis-spoke – the second para is correct – the first para should have “so cannot be self-correcting” omitted from the second sentence. Of course it can, but an economy is also inherently unstable due to non-linearity, and normative conditions such as “free-ness”, do not affect such outcomes.
Chris – you said “In any case, in Australia, practically every industry is characterised by some degree of monopoly or oligopoly which worsens over time. This is a symptom.”
On this we are in complete agreement but its the cure we concern ourselves with. I believe economic rationalism, neo liberal agendas and excess removal of regulation (where regulations are clearly required, to the extent that any lay person would suggest intuitively were obviously needed) has contributed to the disease.
isnt the self correcting economy one of johns refuted doctrines,
the magical reversion to a ‘normal’ state,
a truly free economy would result in a cartel in all strategic asset groups joined together dictating political terms and directions to puppet governments in a state of perpetual war against an amorphous enemy …
are we there yet?
Pardon my ignorance but how do the credit unions fit into the present scheme of things and what could be their role in the future?
Roger
What do you mean read Keen a little closer? It is not possible to read Keen any closer than I have.
What is the problem with my sentence? You should not add on all of your stuff under some pretext of some need of a ‘closer reading’.
I certainly do not agree with Keen’s methodology, analysis, or general conclusions or approach. He just proffers a mundane insight – capitalism is internally instable – and then gets everything from then on quite wrong. However, as I said, Keen did publish a relevant prediction for a debt-driven crisis.
How does “a closer reading” of the cited chapter change this?
I personally think Keen, economically is a waste of time. Like most other commentators he wallows in symptoms and his Chapter 13 is nothing but crass stupidity.
Keen is a Minskyite capitalist, willing to argue against some debt increase (speculation and Ponzi), but not all debt increase (eg hedge and Andresen ‘voting bonds’). Minsky claims that “if hedge financing dominates, then the economy may well be an equilibrium seeking and containing system”. This is just silly.
instable?
The i and the u keys are very close together. I am not inventing new words.
The NZ news website is carrying a story (attributed to AAP) at: http://www.stuff.co.nz/business/2576755/Kiwibank-used-in-Aussie-inquiry-plea
Curiously, it lists all the signatories except for JQ.
[…] is as devastating as it has been to any empire’s currency that embarked on this well troddenFor a new financial system inquiryjohnquiggin.com says: A group of economists: (Joshua Gans, Nicholas Gruen, Christoper Joye, Stephen […]
A review of the financial system has to be seen in the context of a crisis of profitability, the type Marx identified as a consequence of the way production under capitalism is organised and the social relations that ensure that. The US sub-prime loans crisis highlighted the disjuncture between the unproductive finance sector of the economy and the productive sector. The flight away from the productive sector (because of stagnant and low profit rates) to the finance sector (with seemingly higher profit rates) was unsustainable since workers in the productive economy produce the value that sustains the finance sector.
@smiths
Smiths – almost there!
The Australian today editorialises against the six economists, saying that “they may know a great deal about economic theory, but not much about current events or history”. I’m sure our host can defend himself against the Oz’s leader writer, but of the other five, two of them run financial services companies, another until recently was an ACCC commissioner and had more than a passing interest in competition as it actually exists in the financial services market, the fourth is a management consultant who presumably makes his living dealing with markets as they exist in practice not theory, and the fifth, while being a distinguished economic theorist, also consults widely in competition matters.
The Oz has not merely played the men rather than the ball, they have swung at the men and missed. It is a poor look.
just heard the bootled water rep explaining that the council had messed up the free market, but everyone knows the market always rights itself
common wisdon