Bankers should not be let off the leash

There needs to be a fundamental rethink on the central premise that the price of a good is the best signal of risk.

The financial sector cries out for deregulation, let the market determine the outcome. That is until it is stuffed and ordinary citizens have to wear the burden of the bankers’ hubris.

Australia did not have a sub-prime crisis because there is no way the Australian Prudential Regulation Authority (APRA) would tolerate the same lending practices.

It could be argued that the interest rate rises of the Reserve Bank encouraged the carry trade which could have triggered asset bubbles within our economy.

The solution to guard against greed, excessive risk and lack of prudential behaviour is not increasing the price of money and slugging productive activities to curb speculative activity. It is to establish a regulatory framework that curbs the excesses of the speculators. It is to recognise the proper role of fiscal policies to damper asset bubbles and utilise quantitative monetary policy solutions rather than relying on the blunt tool of the price of money.

Eslake’s solution would have been for the Federal Reserve to raise interest rates virtually guaranteeing a world-wide recession.

The rises necessary to curb the speculators would choke the rest of the US economy and because of the imbalance in the world economy set a chain of events with dire consequences.

Unfortunately not only has the US become the international reserve currency it has also become the international reserve consumer.

When looking at the historic interest rate data the rates in 2003 were not fundamentally different to the rates in 1955. Did we see a financial crisis in 1955 because the financial sector threw prudential caution out the window? Did we see low interest rates in 1955 lead to consumers gorging themselves on easy credit?

No we did not, because the society at the time knew that bankers could not be left off the leash, there was a regulatory environment that provided the civil society of western democracies with suitable safeguards and controls.

Society had not been infected with the disease of the neoclassical economic religion. Maybe society remembered the excesses of the financial sector that led to the Great Depression and that appropriate regulation is essential.

Society must not abdicate control or responsibility to the ghost of the free market.