JAKE'S VIEW
Jake's View
by

Norman Chan Tak-lam and other Central bankers blind to the obvious

PUBLISHED : Sunday, 19 April, 2015, 6:51am
UPDATED : Monday, 16 November, 2015, 4:46pm

"I do not subscribe to the view that banks' primary role is to generate maximum shareholder value, leaving the regulator to worry about the safety of deposits."

Norman Chan Tak-lam, HK Monetary Authority
Insight page, April 16

You have to wonder sometimes how the neural pathways of a mind like Norman's are laid out. What he denies is exactly what he does believe.

He does in fact believe that the safety of deposits is the concern of the regulator.

He has guaranteed the deposits of all banks in Hong Kong. This in turn encourages the banks to work the system for as much money as they can make from it.

Can he really not add one plus one?

I concede that there is no reason to pin this blindness on Norman alone. He is just a dedicated follower of fashion. Across the world central banks are no longer run by bankers but by bureaucrats and academics with no working experience of financial markets.

They all get it wrong in the same blind way.

The worst case of it by far was in the United States in the 2008 financial crisis when it turned out that the big investment banks, which were meant to understand all the fine details of complicated derivative instruments, found themselves loaded to the brim with the worst of the junk they themselves peddled. Luckily for them, one of their number, Hank Paulson, a former boss of Goldman Sachs, was treasury secretary and he orchestrated a big scare that the entire system would go bust unless the taxpayers made good all the bad debts.

There was never any such danger but an unusually gullible president swallowed Paulson's bluster with the result that US federal debt has since doubled to US$18 trillion in the service of reckless gamblers.

There had been a chance that the folly of the likes of Goldman Sachs and Morgan Stanley (my own erstwhile employer) would have rendered them history, at most made to seem alive a few more years to milk the last drops of their previous good names. Just think of it - Barclays Morgan Stanley, First Illinois Sachs.

But, no, slavering devotion to personal gain was rewarded with a rescue by public money and one of the best possible object lessons of history foregone.

The corporate gamblers could have been hung out to dry - "Just look at what unthinking greed can do to you". Instead they were encouraged to do it again.

Meanwhile, the authorities in the US also eliminated the barriers between deposit taking and investment banks, barriers specifically raised to protect the depositing public from the wolves of the New York dealing rooms. They're rebuilding the atom bomb in the US, and this time they intend to drop it on themselves.

So, no, Norman is not the worst of them, not even such a danger to the public good as his counterparts in Frankfurt and Tokyo, but he thinks exactly the same way they do, and they all have it wrong.

When you tell people that it does not matter where they deposit their money because you have guaranteed it, then you make them careless of where they put it and encourage them to go straight to the bankers who promise the highest return.

You then also encourage these bankers to make wild bets. If they win they keep everything above the deposit rates they pay. If they lose they can toss their losses into the public purse. Heads I win, tails you lose.

This inevitably gives banks an incentive to hire clever, unscrupulous people at high rates of pay while scorning the prudent, community-minded people for whom they previously looked.

It only gets worse when central bankers then artificially suppress interest rates, thus encouraging the misuse of debt finance. Government has nationalised the liabilities of commercial banks while making a casino of the assets side of their balance sheets.

And then Norman talks of how the industry must "seek to regain the ethical and moral high ground it once enjoyed".

How can it do that, Norman, when the likes of you and your fellow central bankers across the world have shot it off that moral high ground and won't let it go back there?