Red News Readers,
Who needs the terrorists to bring America down when we have Wall Street?
We can no longer bank on the free market
September 26, 2008
There were boys of my acquaintance who, having scraped four Bs in the leaving certificate, were presented by their fathers with a red MG and a seat on the Sydney Stock Exchange, as it then was.
That's going back a while now, but some of them are still there. Some even graduated from broking to a higher calling, "merchant banking".
I've been worried about markets ever since.
Yet we've had reassurance from Messrs Rudd and Swan that this country's system of regulation is second to none, certainly superior to that in the US. The message from the top is that Australia is immune from the uncertainties gripping our powerful friend.
Immediately, I'm concerned.
Consider what is subject to no regulation or regulation-lite: hedge funds, a large proportion of short selling, investment banks, great slabs of the finance business, along with numerous zany financial instruments.
The stock exchange as a regulator of the market is inherently conflicted. The competition regulator has had much of its reach progressively crimped by the High Court, and the Australian Securities and Investment Commission is hardly the best-resourced policeman on the block. It's quite good at shooting down the small-fry transgressors, but the big and the ugly are rarely roped in.
There's also the prudential regulator that keeps an eye on commercial trading banks and insurance companies. It must have dropped off while HIH was heading for the rocks.
Where we do differ from America is that Australia has a more centralised and better-organised regulatory regime. Apart from that, our regulatory aims and strengths are rather similar.
What can't be regulated in any market are things such as sentiment, confidence, fear, herd instincts and greed. They are outside the scope of the most artful draftsperson. So far, no one has come up with a law that forbids people forming a queue outside a bank.
Quite apart from which the regulators on occasions are uncertain about how to regulate. The move this week to restrict short selling is a case in point.
Originally all short sales were to be off, then ASIC relented and said that covered short sales of dual listed stocks would be OK. Since then the Australian Stock Exchange and ASIC have fallen out of step on the whole topic.
In the US the details of the Treasury's "plan" to avert a disaster in capital and credit markets is extraordinarily vague. The details of how the $US700 billion ($837 billion) is to be financed are far from clear. It looks like a case of new debt for old debt. How the trash assets that are to be traded for cash or government paper will be valued is also unknown, let along which institutions qualify for the handout.
Also, assuming all this ultimately comes to a happy end, will capital markets be permitted to return unhindered to the business of manufacturing dubious assets and fee-driven greed?
The biggest unknown of all is, will it work?
Certainly, the downside of all this, the prospect of a trillion-dollar US deficit and the printing of money, and how the interest bill is going to be paid is not in the discussion mix - let along whether taxpayers need to get something more out of this than a hypothetical unclogging of the financial arteries.
It's all a matter of just trusting the US Treasury Secretary, Hank Paulson, (ex Goldman Sachs) to get things going and restore confidence.
The appearance of George Bush on prime time television looking like a stunned mullet and pronouncing "our economy is in serious danger" would have sent a chill around the world. Of course, he was trying to bludgeon Democrats into supporting Paulson's blank cheque, without debate.
We have all been suckled on the dictum that markets will arrive at the correct outcomes.
Markets do the regulating. What we see is that raw-boned marketeering is really nothing more than an excuse to avoid social responsibility. Everything that can't be resolved by a free market outcome is by definition insoluble, and best forgotten.
To save the market, the taxpayer is now being asked to fund the nationalisation of the "commanding heights of the economy" - banks, mortgage lenders and insurance companies.
Old-fashioned socialists must be dusting off their manifestos.
If we had such a well-regulated system, we'd know the answers to a lot of the unknowns. Yet we don't know, for instance, whether the Reserve Bank and the Treasury here would step in and buy up junk debt from irresponsible financial institutions. And what would happen if they didn't?
Where sentiment turns now is the big unknown. Not even the US Treasury can regulate that. All that we can bank on is "hope".