Brash vs Gould

February 3rd, 2009 at 1:00 pm by David Farrar

does an excellent rebuttal in the NZ Herald to a call by for more regulation. Some extracts:

But Gould implies that the crisis was caused by “free” and unregulated markets, especially in the financial sector. This is quite simply nonsense. Banks may be relatively lightly regulated in New Zealand (where there is no banking crisis), but they have been highly regulated in the United States and Europe for many years.

Worth thinking about. And then talking about the US regulations:

In many ways, this intensive supervision by official agencies made matters worse by leading bank customers to assume that banks were effectively “guaranteed” by Government, thereby enabling banks to operate with levels of capital well below those regarded as prudent in earlier decades. Perhaps even more serious, intensive supervision led some bank directors to suspend their own judgment, and believe that they were behaving prudently provided they were observing all the rules.

Often a problem – a minimum standard becomes a target.

Gould seems not to have noticed that the crisis emerged not in the essentially unregulated hedge fund industry, or even among private equity funds, but in the most highly regulated part of the financial sector, namely banking.

Yep.

Gould argues that “Government involvement in the management of the economy is essential”, implying that that has not been the case in recent decades. Again, that could hardly be further from the truth.

Government taxation and spending make up some 40 per cent of total economic activity in most developed countries, and in all developed countries regulations of one kind or another tightly control what businesses can do.

It’s not exactly libertarian heaven with the status quo.

Gould in any case asserts that fiscal policy is more important than . I would not want to get into a debate about which is more important – both are important. At its most basic, is essentially about preserving the purchasing power of money.

Unless that is achieved within some tolerable limits, money can’t fulfil its important roles as a unit of account, a basis for transactions, and a store of value – just ask the Zimbabweans!

When people argue for a bit more inflation they are arguing for a bit less purchasing power.

With the benefit of hindsight, monetary policy was probably too loose in recent years, in some countries at least.

This is the irony – interest rates were probably too low, causing too many people to borrow.

We also know that, in the nineties, the United States Government started putting pressure on American banks to lend to borrowers of quite marginal creditworthiness to prove that they were not discriminating on the basis of race.

It is often the best intended policies that have the worst results.

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25 Responses to “Brash vs Gould”

  1. vibenna (305 comments) says:

    I think a major contributor to the crisis was a moral hazard. Executives (and fund owners) were remunerated on funds under management, with performance bonuses. The easiest thing to do was just jack up the fees (2%-5% per annum) and try to manage as much capital as possible. Risk didn’t matter. Return didn’t matter. It was all other people’s money. All that mattered were the annual performance fees.

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  2. vibenna (305 comments) says:

    … I mean annual management fees (not performance fees). Sorry. Although performance fees are also good, if you have two funds taking opposite positions in the market. One of them’s bound to win! :-)

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  3. Murray (8,835 comments) says:

    And thats the crunch quote: “We also know that, in the nineties, the United States Government started putting pressure on American banks to lend to borrowers of quite marginal creditworthiness to prove that they were not discriminating on the basis of race.”

    Its the ploicies of the likes of Jimmy the Penut and Slick Willie Clinton supported by Obama types who got them into this crap hole.

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  4. LUCY (359 comments) says:

    Spot on Murray.

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  5. Kimble (4,092 comments) says:

    vibenna, you are partly right, there was moral hazard, but funds under management wasnt the main goal. For a start, funds under managment implicates the managed fund industry which wasnt the cause of the crisis. It was the drive to achieve a greater return with lower risk.

    When you lower your risk on one area you can take on more risk in another and increase your expected return. It was still about return. What happened was that risk was very badly estimated.

    Most CEOs were paid bonuses tied to the share price, so what was important was, yes in some part, to increase the pool of money the business manages, but the business itself was investingit own money, so the focus was to post high returns for less risk.

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  6. philu (13,393 comments) says:

    gee..!..when did ‘the don’ become just another peddler of american rightwing blog ‘talking points’..

    ..(even down to blaming the poor for the economic crash..(!)

    oh that’s right..!..i forgot..!

    ..he always has been..

    ..eh..?

    ..and as one of our major bubble/problem-creators..

    ..isn’t it just about time he just shut the fuck up..?

    phil(whoar.co.nz)

    why dosen’t he take a cooking class/lessons..?

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  7. philu (13,393 comments) says:

    love those capital letters in the name there..LUCY/muzza-groupie….

    ..kinda shouting it out..are you..?

    btw..my dog is petitioning me for a name change..

    ..something about ‘guilt by association’..?

    ..phil(whoar.co.nz)

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  8. Danyl Mclauchlan (1,049 comments) says:

    Unless that is achieved within some tolerable limits, money can’t fulfil its important roles as a unit of account, a basis for transactions, and a store of value – just ask the Zimbabweans!

    What a jackass. Brash’s continued mystical faith in monetarism reminds me of those lone Japanese soldiers that turned up in Borneo decades after the end of the war, still fighting the good fight for the emperor. Every time I think about how close this country came to making him Prime Minister chills run down my spine. If Brash had been in charge for the last three years we’d be looking at Iceland with envy.

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  9. Hagues (711 comments) says:

    philu “..and as one of our major bubble/problem-creators..”

    I thought our biggest problem was the deadweight loss to the economy of taxing the productive sector to throw the money away on the unproductive sector

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  10. Patrick Starr (3,675 comments) says:

    “..and as one of our …..problem-creators..
    ..isn’t it just about time he just shut the fuck up..?”

    seriously Phool – – coming from a parasite like you- think about what you wrote…….. and then take a good long look at yourself

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  11. Murray (8,835 comments) says:

    The seas don’t rise, the temperature hasn’t changed and phool is still a fuckwit.

    The Don is virtually a topic in some universities because of his knowledge, achiements as Reservwe Bank Gov and fiscal skill. Meanwhile in tribute to phool PBS broadcast “this is brain on drugs” messages.

    You decide who is the better equiped to comment folks.

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  12. Ratbiter (1,265 comments) says:

    Hagues – don’t go there!

    That “unproductive sector” are people too. Historically, we have seen that if they aren’t looked after to some minimal degree, then they either:

    (1) Die in the gutters/fields in large numbers.
    (2) Rob/murder/thieve from members of your “productive sector” in large numbers.

    Are either of these acceptable tradeoffs for a tax cut?

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  13. Hagues (711 comments) says:

    Or Ratbaiter they might be a bit more careful with profelactics if they knew the taxpayer wasn’t going to fork out to bring up their kids, or they might be looked after by their own extended families, or the unemployed might get off the couch and look for a job, or Philu might decide that finding someone to look after his kid in the school holidays isn’t quite as bad as starving… etc etc.

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  14. PhilBest (5,112 comments) says:

    Danyl McLaughlan, you are a twat. If Brash had ended up leading the government in 2005, here are some likely things that would have happened.

    1) The supply of land for housing freed up; pressure taken off the housing bubble
    2) Tax cuts, economic stimulus, turnaround in the decline in productivity
    3) Regulatory impediments to business and productivity and economic growth, axed
    4) The Investment money from Japan flooding into NZ, going into productive activity rather than pumped up house prices
    5) Wasteful government spending cut
    6) Wiser Monetary management than what we did have

    How all this stuff is a cause for lament, or could be imagined to have made our situation worse rather than better, is beyond me.

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  15. Hagues (711 comments) says:

    Oh and ratbaiter I would also argue that the cost of looking after those in genuine need to an acceptable minimum level and the actual amount spent on the unproductive sector differs to a degree measured in the billions.

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  16. PhilBest (5,112 comments) says:

    Vibenna and Kimble, one of the biggest moral hazards was the complete and utter pointlessness of saving money, and the complete and utter pointlessness of saving money to put down a deposit on a house. You were only ever going to end up with a bigger mortgage than if you just bought the house now on no deposit, because the price went up faster than you could save money. Also, there was the moral hazard of housing as an investment; no-one bothered to invest money in productive or potentially productive businesses; the real income from house value appreciation beat the returns available from everything else.

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  17. gd (2,286 comments) says:

    Sigh When are the dimbulbs gonna to realise you cant legislate or regulate for good moral or ethical behaviour. What you do is set up a principles based legal framework and then set serious penalities for those who transgress. let the Courts hear the evidence on each case and decide Everyone will have slightly different circumstances One size wont fit all

    Laws cant cover every eventuality Think Sarbanes Oxley A telephone book size piece of legislation that costs even small sized companies huge sums in compliance and its a great big fat failure.

    What we need is fewer laws less regulation smart laws and smart regulation that allow the good operators to get on and do the business and that cut the bad guys off at the pass

    Sharia law penalities really appeal to me. I mean Fulder, Fred the Shred , Thaine etc minus hands would send a really good message to the others who might think about doing bad stuff

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  18. PhilBest (5,112 comments) says:

    That is right, GD, you can’t legislate or regulate for good moral or ethical behaviour. But it helps if everyone is at least properly educated, and is expected to take responsibility for themselves, and if the government does not create conditions in which irresponsibility is rewarded. This is one of the worst aspects of what is happening now, with bailouts and the like. I really believe that the guilty people know that they deserve to be wiped out and don’t deserve a bailout courtesy of the taxpayer, and they are relying on scare tactics based on economic falsehoods, to get to gouge the honourable hardworking taxpayer and business owner.

    One of the myths that frustrates me the most, is that somehow people could have been “protected” by more, or better, regulations. Rubbish. Everyone, investors and regulators, had their eyes open to the underlying basis for everything they were doing: an assumption that house prices could continue to rise much faster than incomes, forever. They got it freakin’ wrong, didn’t they, and what’s more, they still are. No amount of regulations will do anything but kill the economy as long as the fundamental problem at the root, is denied.

    And Don Brash is one of the few people who actually have a grasp of this. It is a tragedy that he didn’t get to run NZ in 2005.

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  19. PhilBest (5,112 comments) says:

    NZ MIGHT have looked something like THIS, today, had we had good economic management:

    “Poland, Czechs to escape recession -EU forecast”

    Mon, Jan 19 2009

    By Marcin Grajewski

    BRUSSELS, Jan 19 (Reuters) – “Poland, the Czech Republic, Bulgaria and Romania will escape recession among the European Union’s new member states from central and eastern Europe, the European Commission said on Monday…..”

    http://www.fxstreet.com/news/forex-news/article.aspx?StoryId=674de849-5653-465d-9d02-5f52d81fa00e

    “Financial crisis, the Czech Republic and the euro”
    By Martin Jahn /
    Hospodářské noviny /
    30 October 2008

    “…….Today, it is clear that what started as a US credit crisis will develop into a world-wide recession that will last at least one or two years. An economic depression was averted only thanks to a relatively speedy and well-coordinated response of central banks and governments. The (Czech) “Crown” ? Nothing special…For a long time it seemed as though the financial crisis had nothing to do with us. Czech banks had not bought big volumes of toxic shares and conservatively focused mainly on the development of the local market. An economy driven by the export industry maintained a healthy, rapid growth rate.

    But the Czech Republic cannot avoid the impact of the crisis. Local exporters are already noticing a significant decrease in demand, particularly from western Europe. The majority of banks and important companies in the manufacturing industry, moreover, have foreign owners, and they are feeling the impact of the financial crisis more strongly than firms on the local market.

    Fortunately, the crisis hit the Czech Republic in the upward arc of its economic cycle. This means that we should not see any significant decrease in production or any massive layoffs, but rather a decrease in economic growth, which, in my opinion, will not exceed 3% next year.

    It would be a mistake to think that the impact of the crisis will be less drastic simply because our country has not introduced the euro yet. There are a number of countries that also still have their own currency but have been hit hard all the same. Hungary, Ukraine and Iceland are some of the examples. By contrast Austria and the Netherlands remain nearly unscathed. Germany also appears to be quite resilient…….”

    http://praguemonitor.com/2008/11/07/financial-crisis-czech-republic-and-euro

    That last sentence or two is interesting:

    “…..Austria and the Netherlands remain nearly unscathed. Germany also appears to be quite resilient…….”; along with the position of the Czech Republic itself as covered in the article. We should be taking a good hard look at the reasons WHY some countries have not got themselves into such a mess, shouldn’t we?

    I do know that Vaclav Klaus in the Czech Republic is about the most economically literate leader of any nation; Don Brash running NZ would have put NZ on a similarly sound footing.

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  20. Kimble (4,092 comments) says:

    “Brash’s continued mystical faith in monetarism reminds me of those lone Japanese soldiers that turned up in Borneo decades after the end of the war, still fighting the good fight for the emperor.”

    It would only be mysticism to one who didnt understand it. You cant blame others for your own ignorance all your life, dim.

    You cant even see the absurdity of claiming that the staunchest opponent of inflation New Zealand has ever had would, when he had political power, support and promote policies which would lead to disturbingly high inflation, which his own school of thought would predict!!

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  21. Nick Archer (137 comments) says:

    The conventional wisdom that is being put out there by economists in the wider media is that it was a combination of eschewed regulations (on Clinton’s watch) of the banking industry thus allowing a Housing Bubble to be created that burst (as bubbles eventually do).

    Also contributing factors were monetary policy (Greenspan’s reputation is not as high as it used to be) and good old fashioned greed in the banking industry (with so much toxic debt created and Investment Banking as we knew it in recent years is now over…) with the main driver being the sub prime mortgage market (as alluded to by Brash).

    Also there are other factors and theories touted also e.g. Fed policy following the dot com bust that followed on with a new bubble (housing) and the complexity of the banking products on offer (which has lead to the highly complex and hard to measure toxic debts). The banks have pretty much lost in 12 months the amount of money they had made in the previous years 25 years…

    And Government intervention/regulation (bailouts etc) risk putting fuel on the fire and making the situation worse, because no one really knows where the bottom of the hole is…

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  22. jacob van hartog (309 comments) says:

    Seems like the unregulated areas like credit default swaps and so on went crazy, the lightly regulated areas like the wall st investment brokers/banks went mad and the heavily regulated areas like Freddie Mac, most banks went bonkers.

    But then again the Federal Reserve was run , in hindsight , by an idiot who just opened the sluices for the money supply after 9/11 and then kept it going

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  23. berend (1,599 comments) says:

    PhilBest, I’m in the Netherlands at the moment, and I can confirm you notice very little here. But to say it won’t affect the Netherlands? I can’t believe that. They are pumping billions into their banks as well, have put up high guarantees, the housing bubble is alive and well. So I’m reserving judgement on that.

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  24. OECD rank 22 kiwi (2,786 comments) says:

    Don Brash knows what he is talking about.

    He would have made a great PM of New Zealand. The current recession hitting New Zealand might not have happened if Don Brash had been PM of New Zealand since 2005.

    Still, the voters get what they deserve and a long, punishing recession that will cripple New Zealand for years to come seems to be an appropriate and fair outcome.

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  25. Kimble (4,092 comments) says:

    I think we would still be headed for a recession, there is nothing to stop that, but I think Brash’s policies would have put us in a better position to ride it out than what Labour left us with.

    Recall, it was only very recently that Labour produced a poison-pill budget and in doing so sacrificed New Zealands economic future for short term political gain.

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