Former Future Fund chairman and CBA CEO David Murray has given everyone a post-GFC caning this afternoon:
“Governments in Europe an the US have not faced up to structural reform and fiscal discipline as they should have and that’s raised the questions of what is the role of the central bank. If central banks think these [quantitative easing] tools are available in the future and do not have regard to the distortions that they create in the economy, then we go in and out of this process again and again,” said Mr Murray.
This is all fine and good but it’s but all a bit simplistic. Quantitative easing may buy government bonds but it does so to drive down interest rates to enable banks to make a very easy profit and rebuild their balance sheets because they went hog-wild in the cycle leading up to the GFC; in the US on sub-prime mortgages, and in Europe on sub-prime countries. That doesn’t absolve government of its role in the crisis – not least in the poor design of the euro or the sub-prime incentives in the US or in running deficits – but the banks were an almighty part of it too.
Murray doesn’t make much more sense when he turns to how governments have now moved to stabilise those same crazy banks:
“After the crisis, the political system moved quickly to blame the banking system not their own deficits and Basel the committee swung straight into action.
“If the banking system is the gearbox of the economy, the Basel 3 stripped out overdrive and top gear at the wrong moment,” he said.
“The one standard that they should implement in my view is through the cycle of dynamic loan loss provisioning, where a bank can build its provisions in the good times in the cycle without any other consequences for their capital ratios and when the cycle comes off expend those provisions.
“This would have a positive effect on the cycle and would bring [the banks] back to market beta that they should have which is close to one,”
Forcing up loan loss provisions is exactly the same as asking the banks to retain more capital which is what Basel III is aiming to do. I suppose it might be argued that society should have waited until the good times returned to implement higher capital rules, in whatever form, but it’s not very realistic is it? Doubly so since the only time government has the power to corral banking interests is when they’re on their knees. Don’t waste a good crisis and all that…
Obviously there are only a few quotes here from what I’m sure a much longer address and apologies if this is all taken out of context and I’m missing something.
