Last week, Paul Krugman wrote the following on the growing protest, Occupy Wall Street:
There’s something happening here. What it is ain’t exactly clear, but we may, at long last, be seeing the rise of a popular movement that, unlike the Tea Party, is angry at the right people.
When the Occupy Wall Street protests began three weeks ago, most news organisations were derisive if they deigned to mention the events at all. For example, nine days into the protests, National Public Radio had provided no coverage whatsoever.
It is, therefore, a testament to the passion of those involved that the protests not only continued but grew – eventually becoming too big to ignore. With unions and a growing number of Democrats now expressing at least qualified support for the protesters, Occupy Wall Street is starting to look like an important event that might even be seen as a turning point.
“Occupy Wall Street is starting to look like an important event that might even be seen as a turning point.”
What can we say about the protests? First things first – the protesters’ indictment of Wall Street as a destructive force, economically and politically, is completely right.
A weary cynicism, a belief that justice will never get served, has taken over much of our political debate. In the process, it has been easy to forget just how outrageous the story of our economic woes really is. So, in case you’ve forgotten, it was a play in three acts.
In the first act, bankers took advantage of deregulation to run wild, inflating huge bubbles through reckless lending. In the second act, the bubbles burst – but bankers were bailed out by taxpayers, with remarkably few strings attached, even as ordinary workers continued to suffer the consequences of the bankers’ sins. And, in the third act, bankers showed their gratitude by turning on the people who had saved them, throwing their support behind politicians who promised to keep their taxes low and dismantle the mild regulations erected in the aftermath of the crisis.
Many Australians will feel a degree of support for the protesters. From a distance, our American cousins have quite obviously been put to the sword by Wall Street. And the failure of the Bush and Obama administrations to bring justice to the American people in the wake of the Wall Street debacle that culminated in the GFC must be quite a burden for the nation.
Such a sense of sympathy will probably be born, too, out of a feeling of righteousness. After all, as Australians we know that better outcomes are possible. We had our Wall Street moment in the collapse of HIH, didn’t we? It was prosecuted. The perpetrators were convicted and punished. The lessons were learned by regulators and our system corrected. Thus we prospered in the GFC.
It’s true. Sort of.
In its annual report on the Australian economy last week, the IMF revisited the topic of financial stability:
32. Banks were resilient to the global crisis, mainly because of sound regulation and supervision. Prudential rules, often tighter than the minimum international standards, such as higher loss-given-default assumptions, together with a pro-active approach to supervision, helped maintain a healthy and stable financial sector. Moreover, the Council of Financial Regulators played a key role in coordinating the response to the global crisis. Staff welcomed the government’s confirmation that the Financial Claims Scheme will be a permanent feature of the financial system. The scheme currently guarantees deposits with banks and other deposit-taking institutions of up to $A 1 million. The cap is being reduced to $A 250,000 in February 2012, but will still cover around 99 percent of deposit accounts in full…Banks have remained sound.
Fair enough. I agree, especially with the effectiveness of the crisis response. But the IMF didn’t stop there. It also provided the following kicker:
43. While financial institutions (mainly banks) have reduced their external borrowing, disruptions in global capital markets could still put pressure on their funding. Financial institutions external borrowing has fallen from a peak of 70 percent of GDP in 2008, to less than 60 percent of GDPin mid-2011 (Tables 6 and 7). Short-term debt (mostly issued by banks) has also declined, but remains sizable at 42 percent of GDP (on a residual maturity basis). Funding from European banks was just over US$300 billion at end 2010, about ¼ of gross external debt. If offshore funding markets were disrupted, the cost of bank funding would likely rise.
In other words, Australian banks remain vulnerable in the event of another rise in the price of global funding. Kudos to the IMF for pointing out the obvious, that the Australian banks remain unsound. Of course, as we know, it doesn’t matter because if the banks do find themselves unable to roll over their debts, the Australian government can step in and guarantee the debt. The ratings agencies now openly declare that the implied guarantee lifts bank ratings by two notches.
So, no worries, and certainly nothing like the US failure, because we haven’t had any bust. But is that the point? Is that really what underpins the Occupy Wall Street protests? I don’t think so.
Certainly, having your life ruined by some greedy banker is the spur to action. But it’s not the cause. The cause is the outrage at a plutocracy that changes the rules to suit itself.
And here we do find parallels with the US. The diplomatic function of the IMF may prevent it from calling a spade a spade – that management of liabilities by banks and supervision of such by regulators has been a failure in Australia. But, make no mistake, it was a failure. After all, one can’t ignore the responsibility to manage a full half of bank balance sheets, can one? If you can’t pay your debts because nobody will lend you more money at an affordable price, well, you’re a bankrupt aren’t you?
Yet, for three years, the politico-housing complex (our own plutocracy) has indefatigably changed the rules to defend itself. The banks that chose to borrow too much money in wholesale markets are seen as victims of unforeseeable outcomes like international bank freezes, government guarantees and other’s complex derivatives. But they borrowed the money using their own brand of currency and interest rate derivatives. Too much of it. And in private business, that’s all that matters.
Regulators tell us what a great job they did and how nobody saw any of it coming. But, isn’t that the point of regulation? To ensure that the exuberance of banks never overwhelms unforeseen outcomes?
I don’t dispute that the GFC bailout of Australian banks via government guarantees was the right thing to do. But the charge that was rendered on the banks was utterly inadequate and was, implicitly, a bailout, given no private institution would provide it.
It should have been framed differently to preserve the integrity of the public/private divide. The government might have taken an equity stake, given they were adopting the risk. If that was seen as too difficult at the time, the government should afterwards have called a fair dinkum ‘Son of Wallis’ inquiry in which the failed rules governing the public/private divide could have been publicly re-examined and redefined. Such as inquiry could also put a framework around the government’s seemingly open-ended commitment to purchasing private mortgage backed-securities.
As things now stand, we have a system that utterly confuses bank incentives, moral hazards and the integrity of the national Budget, and, while I do not believe that Australian regulators are as compromised as their US brethren, and that they are doing a god job of clearing the system of its imbalances over time, I’d feel infinitely more comfortable if the rules were redefined in absolutes. So long as a bank CEO can call the Prime Minister and reactivate the government guarantee then the differences between the US plutocracy and our own are one of degree, not kind. The IMF implicitly sees this too:
45. Despite the factors mitigating the risks, staff recommended that the authorities encourage banks to reduce further their exposure to short-term external debt. APRA could consider the merits of introducing measures along the lines of the Net Stable Funding Ratio requirement ahead of the 2018 schedule being discussed by the Basel Committee.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.