Video | Agriculture | Confidence | Economy | Energy | Employment | Finance | Media | Property | RBNZ | Science | SOEs | Tax | Technology | Telecoms | Tourism | Transport | Search

 


Bank bailouts erode public support for markets, King says

Bank bailouts deeply worrying threat to support for markets, says former BoE head King

By Pattrick Smellie

Feb. 11 (BusinessDesk) – Public support for market economies has been placed at risk by governments bailing out the global banking system when other businesses have been persuaded to accept commercial failure, says former governor of the Bank of England Sir Mervyn King.

Speaking to a packed auditorium at Victoria University last night, King said he worried there was “something deeply damaging” in the debate over economic policy that the banking system should be both the standard-bearer for market disciplines and the exception to the rule.

“I worry that the support for a market economy, which may not come naturally to many people, is at risk if we say that a market economy works for some sectors of the economy, but it doesn’t work for banking.

“We’ve got to make sure it works for banking as well, and then we will demonstrate to people that a market economy is a good idea.”

King argued that market economics was still the best method of generating “higher productivity that will eradicate poverty and raise living standards.”

“It would be tragic if people threw that away because people felt they’d somehow been cheated because one sector was treated differently from the way they were,” he said.

That was particularly because of the role the financial industry had played in supporting market-based economic reforms.

“We’ve tried to encourage people, particularly ordinary people in the labour market, to accept that the labour market must be allowed to grow with the market and there are many people who have felt, whereas 30 or 40 years ago if their business was in trouble, their instinctive response is to say ‘well the government should be bailing me out’, now they accept that the government shouldn’t bail them out. They should just sort out the business or accept that it’s a failing business or do something else.

“The shock to the system in 2008 (when the global financial crisis hit global markets) was: who were the people who were telling most fervently that we had to accept the discipline of a market economy? It was the people who worked in the financial sector.

“And when they get into trouble, well, what happens? They get bailed out.

We accept all these changes and reforms which have made us more insecure in our businesses and the labour market and we’ve done so because we’ve come to believe and see that a period of steady growth and low inflation was good for the economy.

“So if this market discipline was good for us, why isn’t it good for them?

“The big challenge of the reform of the banking system is very simple: to make the banking system like every other industry. Namely, one where if you do badly, you fail, and if you do well, you bank on. It shouldn’t be regarded as special.”

Achieving this would take globally coherent reforms to the banking system, which might take time to implement, but should not be overly complicated, said King, who urged a KISS approach: “Keep It Simple, Stupid.”

The key to a sustainable banking sector was to require banks to carry substantially more capital on their balance sheets instead of being able to leverage exponentially off an increasingly small asset base.

King traced the roots of the global financial crisis to the fall of the Berlin Wall and the collapse of communism, which had led to a period of “hubris” in western economies, which allowed the financial sector to develop unsustainably for a prolonged period before the 2008 crash.

Current signs of global recovery should be regarded with caution, as it was far from clear that similar crises could not recur without further major reform to the banking system.

(BusinessDesk)

© Scoop Media

 
 
 
 
 
Business Headlines | Sci-Tech Headlines

 

Drones: First Certificate Issued Under New UAV Rules

Transport Minister Simon Bridges and Associate Transport Minister Craig Foss say the first certified flight of an unmanned helicopter under new aviation rules is a great example of how they can enable commercial use. More>>

ALSO:

GE Swedes And Cow Deaths: Plant Analysis Backs Up Earlier Advice

The industry body is recommending that farmers do not feed Herbicide Tolerant (HT) swedes to cows in spring when the animals are in late pregnancy or early lactation. DairyNZ is also advising caution if farmers are considering other leafy varieties. More>>

ALSO:

Statistics: Dairy And Travel Still Our Largest Export Earners

New Zealand earned $2.3 billion more from exports than we spent on imports during the year ended June 2015... total exports of goods and services were $67.5 billion, while total imports were $65.1 billion. More>>

ALSO:

Approval: Air New Zealand And Air China Launch New Alliance Route

Air New Zealand and Air China have today launched joint sales for a new daily direct service between Auckland and Beijing after receiving approval from New Zealand Minister of Transport Hon Simon Bridges to form a strategic alliance. More>>

ALSO:

Money Trading: FX Trader Jin Yuan Finance Warned Over Lack Of Monitoring

Jin Yuan Finance, an Auckland-based foreign exchange trader, has been warned over its lack of anti-money laundering processes in place in the first public notification by the Department of Internal Affairs. More>>

ALSO:

Auckland Surge, Possible Peak: House Values Accelerate At Fastest Annual Pace In 8 Years

New Zealand residential property values rose at their fastest annual pace in eight years in August, pushed higher by overflowing demand in Auckland, which is showing signs speculators think it has reached its peak, according to Quotable Value. More>>

ALSO:

Cash Money: Reserve Bank Launches New $5 And $10 Banknotes

The $5 and $10 final banknotes were revealed at an event at the Bank in Wellington, and will start to be released from mid-October 2015. More>>

ALSO:

Truck Sales Booted: Commerce Commission Files Charges Against Mobile Trader

The Commerce Commission has filed charges against a mobile trader, or truck shop operator, claiming he obtained money from customers by deception and never intended to supply them with the goods they paid for. More>>

ALSO:

Get More From Scoop

 
 
 
 
 
 
 
 
 
Business
Search Scoop  
 
 
Powered by Vodafone
NZ independent news