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BFCSA investigates fraud involving lenders, spruikers and financial planners worldwide.  Full Doc, Low Doc, No Doc loans, Lines of Credit and Buffer loans appear to be normal profit making financial products, however, these loans are set to implode within seven years.  For the past two decades, Ms Brailey, President of BFCSA (Inc), has been a tireless campaigner, championing the cause of older and low income people around the Globe who have fallen victim to banking and finance scams.  She has found that people of all ages are being targeted by Bankers offering faulty lending products. BFCSA warn that anyone who has signed up for one of these financial products, is in grave danger of losing their home.

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Rescue for Imprudent Banks? Back to 1929 Please!

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ECONOMIC AFFAIRS:
Should we rescue imprudent banks?

by Colin Teese

News Weekly, August 30, 2008

Those running financial institutions are seldom chastened by the experience of over-lending and the collapse that inevitably follows, writes Colin Teese.

To parody a cliché, "Nothing succeeds like excess." The finance industry proves it. But for this we can't really blame market failure.

Financial markets don't fail; the normal characteristics of market operation - the possibility of failure as well as of success - have never been allowed to exist. A senior Reserve Bank of Australia (RBA) official once conceded as much to this writer. Banking and finance, she insisted, were too important to allow ordinary market considerations to prevail.

Governments, even in market-dominated economies, have long agreed. For a century, perhaps longer, the finance industry has been permitted the luxury of pursuing the "glorious irresponsibility" of free-ranging deregulation to the point of destruction. And so, every few decades or so, deregulation inevitably leads to a cycle of a boom and bust which infects the real economy.

Financial institutions, confronting the boom-and-bust consequences of bad lending policies, face either bankruptcy or panic-driven runs by depositors.

Almost invariably, what has its source in one economy quickly spreads to other associated economies. Institutions all over the world collapse, and many more are seriously weakened.

Breakdowns

These breakdowns, if allowed to go unchecked, can threaten the stability of the entire global economy, if not of capitalism itself. Responsible governments can't risk allowing this to happen. Accordingly they - or more accurately their taxpayers - take up the role of lender of last resort and rescue the financial institutions (irresponsible and prudent alike) from the consequences of their risk-taking extravagances.

As to the impact of the present global crisis on Australia, those of us with sound memories will recall that, at the beginning of this year, orthodox economic opinion, in media, academia and government, emphatically assured us that we would not be seriously affected by the financial collapse which had begun to affect the United States and Europe.

Our finance sector, they boasted, was more prudently managed, and therefore had eschewed bad lending policies. Accordingly, it would be immunised against the worst of what was happening elsewhere. Without actually saying so, they considered us safe because our industry operated under a tighter regulatory rein than did many others.

We now know they were wrong - not about the degree of regulation here in Australia, but about yet another of the hitherto unrecognised downsides of globalisation.

In a globalised world, with all of its associated financial interconnections, better regulated financial institutions in one economy are not necessarily insulated from the flow-on effect of bad business practices elsewhere. In late July the National Australia Bank has demonstrated that decisively.

Orthodox economists were always enthusiastic supporters of deregulation - and, ironically, in the financial sector, most of all. No doubt, some among them might have found themselves uncomfortable recognising, even indirectly, the value of our regulatory regime in affording us protection from the adverse consequences arising in other economies because of deregulation.

Their attitude, however, may not be all that inconsistent. Although they may pretend otherwise, orthodox economists have always given silent support to the idea that the finance industry is a special exception to free-market theory. In effect, their silence amounts to a tacit endorsement of the notion that the sector should, where necessary, be allowed to capitalise its profits and socialise its losses.

The inconsistency - which the rest of us should keep emphasising - lies in the fact that such economists don't otherwise support this idea. We all know how strenuously and vocally they insist that farmers and manufacturers should be exposed, unsupported, to the full impact of unalloyed market forces.

Thus far, despite these inconsistencies, orthodox economic policies have been imposed on farming and manufacturing industries with devastating consequences. Manufacturing has been reduced to little more than rump status in our economy, and farming is heading in the same direction.

In the table of developed economies, we are near the bottom when it comes to measuring the contribution manufacturing industry makes to national output. As to farming, there are those already saying that, within a decade or so, we will be a net importer of food.

These declines in important parts of our real economy should be regarded as national tragedies, and not simply ignored.

At the very least, we are entitled to ask: if socialising losses can be seen as necessary and desirable for the finance industry, why cannot the same be true for farmers and manufacturers?

Meanwhile, we have been obliged to sit back and watch while our economic managers, not for the first time, here or abroad, have intervened to bail out the finance industry through which an avalanche of irresponsibility has come.

It is, moreover, small comfort to conclude, as well we might, that what we are seeing now is nothing new. It has happened before and, so long as we allow the mistakes of the past to shape future finance industry direction, it will happen again.

Surely the time has come for elected governments to step in with decisive measures which might chart a different path for the future.

Given its privileged status, but with no other worthwhile justification, the finance industry understandably takes an entirely different view. One could paraphrase it as follows:

"Well, yes, some of us have been behaving like naughty boys and lent money to those who never should have been allowed to borrow. Still, others lent too much even to those who could afford it.

"As a consequence, a number of institutions have collapsed, and a great many more are threatened. This is to be deplored. But it is the way competition in this industry operates. It has happened before. And now, as then, government funds will be necessary to help put the industry back on its feet.

"Embarrassing? Yes, but necessary. Again, as before, new regulations will be put in place. Distasteful but, in the circumstances, unavoidable. We can't very well resist them.

"But, as circumstances improve and we get back on our feet, we can begin nibbling away at them publicly. Finally, governments will relax the worst aspects of them and we will be able to get back to managing our own affairs. It always happens."

The institutions cannot be blamed for thinking like that because that has been the practice after every previous catastrophe. Those running financial institutions are not chastened by the experience. Neither do they readily accept more than a proxy responsibility for what has happened.

What others might regard as acts of irresponsibility - no less in this crisis than in any other - are supposedly nothing more than inevitable and necessary reactions to the competitive pressures always present in the industry, and without which it could not operate effectively.

If periodic breakdown of the system arises from these pressures, so be it. Governments and customers of the finance industry have to live with it. But do they? Most certainly not!

Why, then, do we treat financial institutions as "special"? The reasons are not difficult to follow, even though they do not make good sense.

First, the finance industry, and most notably its banking element, is politically and respectably influential, and therefore powerful. When the industry warns politicians to keep their hands off, they take notice. Economists, too, have mostly been similarly intimidated.

Moral hazard

Technically, economics tells us that financial institutions should not be "bailed out" any more than other businesses. To do so creates what economists have called "moral hazard". If financial institutions know - as has long been the case - that a lender of last resort, with the deepest possible pockets, is always waiting in the wings, then that creates "moral hazard".

What possible reason might they have for always pursuing prudent lending policies? Indeed, with the ultimate risk lying in the hands of others, it makes good business sense to take advantage of that and accept larger risks in pursuit of the greatest possible gains. And this is what happens.

But this need not be so. There could be better ways.

Housing loans, share purchases and lending for consumer spending lie at the heart of the current problem.

Unlimited cheap credit available for these purposes has encouraged borrowers to accrue debt levels they can't service. Initially, it looks good on the domestic growth figures, but ultimately it bloats house and share prices, fuels inflation and undermines the real economy.

Of course, we can't ignore the problem of providing housing for low-income earners. People have to be housed. What we must re-learn is that market forces help in serving this need - either for rental or purchase. Those able to buy houses need a facility offering long-term, low, fixed interest loans for house purchase at the bottom end of the market - but only for low-cost housing.

For those who can't buy, governments need to provide rental housing at affordable prices.

All of the developed economies once did these things. We need to do so again and stop pretending that market forces and deregulated interests rates can deliver satisfactory outcomes.

As we are now finding out, the alternative is to allow an uncontrolled finance sector to induce regular and seriously disrupting booms and busts such as the developed world is now trying to deal with.

It is what necessity compelled us all to do after the 1929 debacle that ushered in the Great Depression, and it worked until governments were persuaded to dismantle appropriate regulation.

If governments once again face their responsibilities, recovery will be quicker, making all of us better off.

If governments this time hold their nerve, we might even succeed in weaning financial institutions, once and for all, away from the moral hazard of believing governments will automatically cover for their irresponsible behaviour.

- Colin Teese is a former deputy secretary of the Department of Trade.


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Comments

  • doyla66
    doyla66 Sunday, 02 September 2012

    Great find, JJ.
    I wonder if anyone listened to Colin Teese at the time?
    What we have seen is a banking bubble supported and nurtured by our government.
    What we need is a government with the backbone to resist the intimidation and courting (read: manipulation) by financial sector overlords. This applies to both major parties, in spades.
    If our elected representatives can't handle the heat they should get out of the House.
    How can we have an unregulated system and claim that our prudential regulation is the key to Australia's success? That's illogical.
    Everyone knows taxpayers propped up the spoilt boys of banking and finance, for goodness sake!
    Lo/No/full Doc fraud loan borrowers propped them up as well, even if they didn't realise it at the time!
    These "special" financial guys expect privileged treatment and no consequences from their choices and actions - classic elites!
    I wish I could get away with what they're allowed to do - no chance, I'm in the "wrong" tribe.
    If the government puts in place extra props to help the banks "cope" with Loan Frauds I hope there are full scale demonstrations in the streets of every capital and Canberra condemning both.
    Both government and the financial sector badly need a reality check - whether they like it or not.
    Deflate the debt bloat, deal with the actual consequences and let's get Australia down to size, minus the delusional rhetoric.

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