The Dim-Post

April 29, 2010

But will they step to the wu?

Filed under: finance — danylmc @ 7:20 pm

Stephen Franks is sceptical about the new financial markets super-regulator announced this week:

But most of the stuff on the FMA is the political equivalent of corporate changes of letterhead and livery, until proved otherwise. Sometimes it signifies a genuine transformation. More often it is instead of genuine change. We won’t know till we see the detail.

I think the presence or absence of ‘Plane’ Jane Diplock, arguably our worst performing civil servant of the decade will be an indicator of the efficacy of the new organisation. Also, I told myself that next time I posted something in the finance category I’d link to this:

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38 Comments »

  1. Raw I’m gonna give it ya, with no trivia. Raw like cocaine straight from Bolivia. My hip-hop will rock and shock the nation, like the Emancipation Proclamation.

    Comment by Conor Roberts — April 29, 2010 @ 8:44 pm

  2. Regulation is they key Danyl. You just regulate the perfect world.

    If I would write a connecting the dots post I would quote both your “cannabis free for all” versus “we need more regulation for financial markets”.

    But anyway, as National is as socialist as we have seen in a decade, we will get more regulation and things will become worse. And why? Regulation is the veil behind which finance companies hide the dirt to convince the public that they’re sound. Why can’t we just let the market work and let them fail and those that trusted in them? But can’t do that, that would be capitalism, the worst system of any.

    Comment by Berend de Boer — April 30, 2010 @ 7:43 am

  3. Berend – the finance companies were totally unregulated, so in that sense the free market did ‘work’, if by ‘work’ you mean destroy the life savings of thousands of people.

    Comment by danylmc — April 30, 2010 @ 8:17 am

  4. You could say that unregulated finance companies are like an 18 wheeler with a drunk driver driving: there’s no surviving.

    Comment by Exclamation Mark — April 30, 2010 @ 8:30 am

  5. Berend, is your argument we should never trust finance companies no matter what and that removing regulation just lets ordinary people see them for the robber barons they are and are therefore well enough informed to stick their money under the mattress?

    Comment by Neil — April 30, 2010 @ 9:08 am

  6. I have no interest in this but why do you think Diplock is the worst civil servant in NZ? Compared to Mark Prebble and Wintringham, the guy who ran MfE for Labour or Dr Bewildered at DoL?

    IS it because she didn’t enforce the law or because you don’t like the outcomes of the market and think she should have ‘done something’ whether the law allowed her to or not?

    Comment by insider — April 30, 2010 @ 9:50 am

  7. Neil, the argument is that if you trust people to blow out their brains with drugs, but not to make an informed decision on what company to trust with their money is just silliness.

    Finance companies are robber barons? Just leave that to the market to decide. Unfortunately we live in the age of too-big-to-fail and regulation-will-fix-it.

    Comment by Berend de Boer — April 30, 2010 @ 9:57 am

  8. So let’s take the case of the finance companies. They’ve wiped out the life savings of thousands of people. So sure, people won’t invest with them in the future – so in that respect the market ‘has worked’, but they’ve stolen enough money to live in luxury for the rest of their lives, while many of their victims have lost everything. How has the market ‘worked’ in that respect?

    Comment by danylmc — April 30, 2010 @ 10:15 am

  9. “Neil, the argument is that if you trust people to blow out their brains with drugs, but not to make an informed decision on what company to trust with their money is just silliness.”

    But isn’t the problem that people WEREN’T able to “make an informed decision on what company to trust with their money”, in that the information given to the market often was incomplete/misleading? A better analogy is that we should have a FMA to ensure that companies abide by strict reporting and disclosure requirements, just as we should have rules to stop people selling me BZP while telling me it is ecstasy. That can’t be a bad thing, can it?

    Comment by Andrew Geddis — April 30, 2010 @ 10:15 am

  10. I have no interest in this but why do you think Diplock is the worst civil servant in NZ? Compared to Mark Prebble and Wintringham, the guy who ran MfE for Labour or Dr Bewildered at DoL?

    Diplock presided over a multi-billion dollar regulatory failure; she spent most of her time running the Securities Commission travelling the world telling them what an amazing regulatory system New Zealand had.

    Comment by danylmc — April 30, 2010 @ 10:17 am

  11. I suppose having regulations would have given people a false sense of security. Instead of presenting themselves honestly as bookies they pretended to be finance companies and the various regulatory agencies provided a smokescreen.

    But if they are that self-serving with regulation then I don’t see why they would act any better without regulation. Better to make them come out as either bookies or finance companies then people can make an informed choice.

    I’m not against greed but if people want to gamble I’d prefer they to do it with their own money and if they use other peoples’ then that should be made clear.

    Comment by Neil — April 30, 2010 @ 10:47 am

  12. Actually she didn’t preside over it. The failure was a political one. WHo writes the law? Who decided there should be multiple regulators? And these failures were global ones so it may be that our system was the best but not up to it like every other system in the world. Is she to blame for a gloabal systemic failure?

    We see the word ‘regulator’ and think they have all sorts of powers to do what they want. They often don’t or they are encouraged by the law to avoid regulation where they can. ANd they can’t stop people breaking the law. They can only deal with it afterwards. WHat they can’t do and shouldn;t be expected to do is take risk out of the market. ANd I think that is sadly what some people want.

    THe way I understand it say with finance companies, is that the SC did not have power to regulate them. It only had power to ensure their disclosures were legal. That can only be done after the fact. It didin’t have any oversight of capital adequacy or risk profiles or whether their property valuations were realistic.

    So I’m not sure pillorying Diplock is the right answer, just as I wouldn’t blame Howard Broad because some other sleazebag decided to break laws he is responsible for enforcing, even though it might satisfy the need to blame someone.

    Comment by insider — April 30, 2010 @ 11:04 am

  13. So let’s take the case of the finance companies. They’ve wiped out the life savings of thousands of people.

    On the flip side, those finance companies provided critical mezzanine finance for property development, that almost certainly wouldn’t have taken place in their absence. All other things being equal, housing affordability in the main centres is better than would otherwise have been the case.

    Comment by Phil — April 30, 2010 @ 1:25 pm

  14. But isn’t the problem that people WEREN’T able to “make an informed decision on what company to trust with their money”, in that the information given to the market often was incomplete/misleading?

    I don’t think that’s entirely accurate, Andrew. The information available to the public in a prospectus is broadly similar to what you might find in a Registered Bank GDS (general disclosure statement) and is subject to signing-off by Auditors and the Trustee for accuracy and completeness.

    Where we do have two serious issues are Financial Advisor impartiality (ie; they’re not impartial) and public financial literacy (ie; they’re illiterate).

    Comment by Phil — April 30, 2010 @ 1:33 pm

  15. Andrew @ 9 “the information given to the market often was incomplete/misleading? A better analogy is that we should have a FMA to ensure that companies abide by strict reporting and disclosure requirements,”
    Err, there WERE reporting requirements. There was FIRST RANKING SECURED. There were warm fuzzy folk called “trustees”. Yet folk got dicked. So if we start regulating them EVEN MORE, why not just require that they register as a bank

    Neill @ 5, the alternative to a finance company isn’t a mattress, it’s a bank. And although super schemes and shares aren’t perfect, they have been proven to be better than finance companies.

    Gordon Brown (my hero) oversaw the implementation of a single super-regulator. It is called the Financial Services Regulator (FSA). You should call some of your British chums and ask them how that’s working out for them.
    I suspect that the “elite” who “rule” us are seduced by the word “super”. Just as a superman suit has a little tag warning the wearer that they are not imbued with the power of flight, our politicians need to be warned (publically and in writing, so that they think twice before ignoring it) that a super-regulator is just a regulator… with new packaging.

    Insider @ 12 “these failures were global ones so it may be that our system was the best but not up to it like every other system in the world. Is she to blame for a gloabal systemic failure?”
    Our finance company failures aren’t on the scale of the BANK failures of the UK and the US. Finco failures didn’t threaten to bring down our economy.
    Maybe our balance IS quite good: strong differentiation between banks and fincos.

    What Phil said @ 14!

    Comment by Clunking Fist — April 30, 2010 @ 2:15 pm

  16. Danyl: So let’s take the case of the drug dealers. They’ve wiped out the brain cells of thousands of people. So sure, young adults won’t buy from them in the future – so in that respect the market ‘has worked’, but they’ve stolen enough of the future of NZ to live in luxury for the rest of their lives, while many of their victims have lost everything. How has the market ‘worked’ in that respect?

    I hope I’ve made yourself clear Danyl.

    Comment by Berend de Boer — April 30, 2010 @ 2:31 pm

  17. Three words can sum up why Mums and Dads lost all their money:

    Secure Debenture Stock.

    No-one knows what the fuck that means.

    Comment by Pat — April 30, 2010 @ 2:55 pm

  18. Pat, ever heard of Google? Try it.

    Comment by Berend de Boer — April 30, 2010 @ 3:29 pm

  19. Phil/Clunking Fist,

    There’s not just one source of incomplete/misleading information at issue here. Some finance companies pretty clearly failed to inform the market (i.e. individual investors, many of whom have limited financial knowledge) about what they were doing and their financial position (think Blue Chip/Hanover Finance). Some cases involved financial advisors apparently misstating the relative risks of various financial products. And some case, yes, involved dumb moves by people certain that property could never lose its value (i.e. a kind of wilful blindness to the available information).

    But isn’t the overarching problem that because there are different information sources, and because different regulatory bodies have responsibility for different bits of the market, things can quite easily go belly up without anyone being able to do much to stop it? And when that happens, it is all very well to say “that’s just the market at work – those that were dumb lose out, while those that were bad we’ll now punish” … you retain an ideological purity at the cost of, well, the life savings of thousands of New Zealanders. Why is that a good thing?

    Comment by Andrew Geddis — April 30, 2010 @ 4:29 pm

  20. “you retain an ideological purity at the cost of, well, the life savings of thousands of New Zealanders.”

    Do you think this makes it better. It makes it worse.

    On 19 March 2009 the Reserve Bank approved the following rating agencies for the purposes of Part 5D of the Act:
    • Fitch Ratings;
    • Moody’s Investors Service; and
    • Standard & Poor’s Ratings Services.
    An NBDT must hold a credit rating from one of these rating agencies.

    http://www.rbnz.govt.nz/finstab/nbdt/creditratings/index.html

    “No, the e-mail messages you should be focusing on are the ones from employees at the credit rating agencies, which bestowed AAA ratings on hundreds of billions of dollars’ worth of dubious assets, nearly all of which have since turned out to be toxic waste. And no, that’s not hyperbole: of AAA-rated subprime-mortgage-backed securities issued in 2006, 93 percent — 93 percent! — have now been downgraded to junk status.”

    http://www.nytimes.com/2010/04/26/opinion/26krugman.html

    Government regulation either for stoners or investors doesn’t work.

    Self imposed industry regulation would work but government regulation creates cosy little ring fenced clubs just like the rating agencies above.

    This is madness. This is Sparta.

    Comment by Simon — April 30, 2010 @ 4:45 pm

  21. Simon: government regulation creates cosy little ring fenced clubs just like the rating agencies above.

    Fully agree. That’s the big problem with regulation. The most heavily regulated markets, the financial markets, are also the ones that most consistently fail.

    Buyer beware would be my motto.

    We’re not talking about playground equipment for kids here (where one can argue that buyer beware is simply too little too late). At one point in your life you are going to be an adult, and with that position comes the risk of failure for a decision you made. If you think you can’t take decision, why not give the government 100% of your money?

    And how many people would pump money into obscure funds unless they were somehow “government approved” or “government regulated”? A whole lot less, and the problem immediately solves itself.

    Comment by Berend de Boer — April 30, 2010 @ 4:51 pm

  22. Well, you could socialise many of the costs of life, creating moral hazard and disincentives “well that’s just socialism at work – those that work smart-hard we tax heavily, those do not bother to try too hard, we carry” etc. … you retain an ideological purity at the cost of, well, the savings of thousands of New Zealanders. Why is that a good thing?

    And what IS the solution to drugs/finance companies? Helen’s mob didn’t know. Perhaps the answer is better economic education/street smarts.
    The Americans (contrary to you leftie’s opinions) went down the high-regulation* route for savings/loans/mortgages, creating moral hazard big time. Look where it got them.

    *non-recourse, ninja, Fanny Mae, Freddie Mac, Community reinvestment act, etc.

    Comment by Clunking Fist — April 30, 2010 @ 4:54 pm

  23. Boy – you guys sure have the old ideological ju jitsu down pat, don’t you? The most spectacular failure of free market capitalism in 65 years takes place, and hey presto … it’s the fault of government regulation! I must introduce you to some commies who will tell you the collapse of the Soviet Union was proof that, had it followed a “really socialist” path, it would have been a roaring success. You’re peas in a pod.

    Point by point – Simon … self regulation would work, but government regulation never can. Let’s set aside the obvious evidential disproof of that claim from other areas of life (fisheries, for example – think we’d have many snapper left without the QMS in place? If you’d prefer to see a completely “industry self regulated” fishery, feel free to go catch cod on Canada’s Atlantic coast). What exactly is stopping the industry from regulating itself? I mean – so the reserve bank says “get a rating agency rating” … what industry measures does this rule out?

    Berend … there was no “government approval” of finance companies, so I’m not sure what you are on about. Frankly, if I had to choose between your wittering and analysis like the following, I know where my money is going: http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10576713

    Clunking Fist … that government regulation caused the US house price meltdown is a tired old myth, believed only by those who desperately need it to be true so as to escape complete cognitive dissonance. See, for example, http://www.nytimes.com/2010/04/12/opinion/12krugman.html

    And obviously “Helen’s mob” didn’t know the solution to finance companies – not sure why you even bring them up in relation to greater regulation of financial activities, as the regulatory problems arose under Labour’s watch, while it is National that is increasing that regulatory oversight. You might need to rethink your knee-jerk ideological judgments if you want to remain current in your comments.

    Comment by Andrew Geddis — April 30, 2010 @ 6:56 pm

  24. Andrew, sorry, I was of course completely mistaken that the government guaranteed deposits in finance companies and that it had to pay out on them. My, how could I have been so stupid?

    And Andrew, please tell me what part of the finance market is “free”? Central planning of the interest rate for starters. What happened to the big government banks Fannie Mae and Freddie Mac? Who forced banks to give loans to those who would otherwise not qualify? But best of all: who, in the end, guaranteed this whole crony capitalism? The taxpayer, through the government. If this was a free market, these banks were free too fail. Clearly they are not free by any definition.

    And now, please Andrew, explain how you are going to regulate Greece.

    Comment by Berend de Boer — April 30, 2010 @ 7:05 pm

  25. “Andrew, sorry, I was of course completely mistaken that the government guaranteed deposits in finance companies and that it had to pay out on them. My, how could I have been so stupid?”

    Yes. You pretty much were mistaken in this.

    I mean, I know you are trying to be sarcastic and all, but the government did NOT guarantee deposits in financial companies prior to the end of 2008. Since then, three have failed and their depositors have been reimbursed to the tune of around $60 million … out of a total of 48 finance companies with a total of $6 billion in investor funds that have failed since May 2006.

    So, as you say, you are “so stupid.” Your own words, note.

    Comment by Andrew Geddis — April 30, 2010 @ 7:42 pm

  26. Andrew, for the same reason Freddie Mae and Fannie Mac were not government banks until they were. That’s the whole point.

    (BTW, your numbers are bit off I think, but that doesn’t matter for this argument).

    Comment by Berend de Boer — May 1, 2010 @ 7:18 am

  27. “or the same reason Freddie Mae and Fannie Mac were not government banks until they were. That’s the whole point.

    First, it is Freddie MAC and Fannie MAE. Second, this makes NO sense whatsoever in the context of earlier discussion.

    “(BTW, your numbers are bit off I think, but that doesn’t matter for this argument).”

    Well then, find evidence to correct them. Because PRIOR to the government guarantee, 45 finance companies collapsed to a tune of some $6 billion. Since then, 3 have collapsed, to a tune of $60 million. So if you want to fashion this into an argument that “government guarantees caused reckless investment and thus the problem”, you’d better start tap dancing real fast.

    Comment by Andrew Geddis — May 1, 2010 @ 9:07 am

  28. “Clunking Fist … that government regulation caused the US house price meltdown is a tired old myth”
    The gummint didn;t cause it on its own. It’s often described thus: the gummint created the loose fiscal and monetary condition speeding locomotive taht the public and bankers were happy to climb on to. I’m sure a section of the banking industry really believed there WAS “no more boom and bust”.
    But you said it again “The most spectacular failure of free market capitalism in 65 years takes place”
    Mate, if you REALLY believe it was a “free market” rather than a mis-regulated one feed by abundant cheap (govt created) money, then I’ll stop arguing with you. While regulators were busy describing down to the last detail to whom and on what conditions, a bank lends money on housing, they completely ignored history, the budget deficit, as well as what “denialist” economists and some business leaders were trying to tell them.

    That’s for the link to the NYT (!): “Why didn’t the same thing happen in Texas?” Err, because they can’t create property bubbles because (drum roll) Texas doesn’t regulate property quite like anywhwere else in the world. I.e. there’s more of a free-merket rather than the usual artificially constrained market feed by loose money.

    Comment by Clunking Fist — May 1, 2010 @ 11:21 am

  29. “government guarantees caused reckless investment and thus the problem”

    As soon as the Gov’t guarantee was announced, investors piled into 2-year debenture stock with finance companies. It was a perfectly rational approach for an individual investor, because there was suddenly NO DIFFERENCE WHATSOEVER between a finance company debenture and a two year term deposit with a Registered Bank.

    Consequently, the liquidity issues which really drove the initial crisis were not solved at all, but merely postponed.

    Government guarantee didn’t cause the problem, but it sure as hell hasn’t done a thing to fix the problem.

    Comment by Phil — May 1, 2010 @ 1:41 pm

  30. “Mate, if you REALLY believe it was a “free market” rather than a mis-regulated one feed by abundant cheap (govt created) money, then I’ll stop arguing with you.”

    Well, if you can show me a true “free market” (i.e. one that exists absent any form of government regulation) then you’d have a point to make. But what we’re now getting to is what sort of regulation best works to stop meltdowns of the sort we’ve just seen. And remember, the person most responsible for the “abundant cheap (govt created) money” you decry was Alan Greenspan, who refused to step in to deflate the bubble because of his belief in the efficient market hypothesis – that regulators can never know better than the market what price an asset should have. Hence his refusal to increase the cost of money to prick the bubble. So, the “mis-regulation” you think responsible for the problem is attributable to the kind of “the market can never be wrong” thinking you espouse …

    How’s that for some ideological ju jitsu?

    Comment by Andrew Geddis — May 1, 2010 @ 2:04 pm

  31. “Government guarantee didn’t cause the problem, but it sure as hell hasn’t done a thing to fix the problem.”

    Really – it’s done NOTHING? The guarantee did work to stop a “run on the bank” situation. And given that all market economics works on confidence/sentiment (Keynes’ “animal spirits”), isn’t there some value in an action that helped restore this to the financial markets?

    Comment by Andrew Geddis — May 1, 2010 @ 2:09 pm

  32. The person MOST responsible for all the cheap money was Bill Clinton, HE is the one that kicked it all off with his stupid ‘home loans for people who patently can’t afford to repay them but underwritten by the Govt.’ strategy of prudent financial management. The rest is as they say, history.

    Comment by x-pat — May 1, 2010 @ 2:10 pm

  33. x-pat,

    You need to brush up on your Glenn Beck conspiracies … it all goes back to Theodore Roosevelt and Woodrow Wilson, don’t you know.

    Comment by Andrew Geddis — May 1, 2010 @ 2:48 pm

  34. Yeah, you really showed me Andrew.

    Comment by x-pat — May 1, 2010 @ 4:59 pm

  35. excellent video! Love your work as always

    Comment by LucyJH — May 1, 2010 @ 5:58 pm

  36. “The most spectacular failure of free market capitalism in 65 years takes place”

    Federal Reserve money printing and then keeping interest rates low created the credit crunch. Not capitalism.

    Check out Sarah Palin she gets it except for the money printing. Wise up and get some learning from Sarah.

    “Lack of government wasn’t the problem. Government policies were the problem. The marketplace didn’t fail. It became exactly as common sense would expect it to. The government ordered the loosening of lending standards. The Federal Reserve kept interest rates low. The government forced lending institutions to give loans to people who, as I say, couldn’t afford them. Speculators spotted new investment vehicles, jumped on board and rating agencies underestimated risks.”

    http://blogs.wsj.com/washwire/2009/09/23/excerpts-of-sarah-palins-speech-to-investors-in-hong-kong/tab/article/

    Not saying self regulation would work perfectly but it would be part of the mix but also shouldn’t stop anyone setting up shop. In so far as the finance companies go it would have helped establish return on risk.

    Comment by Simon — May 2, 2010 @ 7:47 am

  37. “Federal Reserve money printing and then keeping interest rates low created the credit crunch. Not capitalism.”

    Right. When you’ve a workable model of modern market capitalism that has a completely unregulated money supply, come back and talk to me … otherwise you’re just touting an empty alternative, just like those die-hard communists who say the collapse of the USSR/current state of Nth Korea doesn’t disprove Marxism because they weren’t “real” socialist societies.

    Further, as I noted above, the “keeping interest rates low” decision came from Alan Greenspan, on the basis that regulators can never know better than the market the real value of assets … in other words, it was a refusal to take regulatory action, not regulation that was the problem. Check out this quote from him in 1963 from an article published as part of Ayn Rand’s book Capitalism: The Unknown Ideal, declaring that protection of the consumer against “dishonest and unscrupulous business was the cardinal ingredient of welfare statism.” “Regulation which is based on force and fear undermines the moral base of business dealings,” he wrote. “Protection of the consumer by regulation … is illusory.”

    Of course, having to confront the real world outcomes of such idealised reasoning tends to have a chastening effect: http://www.nytimes.com/2008/10/24/business/economy/24panel.html?_r=1

    Comment by Andrew Geddis — May 2, 2010 @ 10:18 am

  38. AG, I’m not advocating no regulation. That’s anarchy. I’m just trying to eat the “free-market capitalism failed” elephant one bite at a time.(Or am I playing the “free-market capitalism failed” wack-a-mole game? I forget.)
    You see, if you don’t understand what went wrong, there’s a chance one (i.e., we, our gummints, bankers, the home-buying public, an awful lot of economists) will make the same mistake again.

    Comment by Clunking Fist — May 2, 2010 @ 10:35 pm


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