The fox guarding the chicken coop and setting the rules and everyone hailed deregulation of financial institutions. We seem to have to learn these lessons over and over.
arthur -----Original Message----- From: Stephen Straker [mailto:straker@;interchange.ubc.ca] Sent: Thursday, October 31, 2002 1:12 AM To: [EMAIL PROTECTED] Subject: Re: Moral hazard (was Re: Or poorer Keith: > ... I would still maintain that it was this strategy of governments > and the subsequent impoverishment of millions of prudent people who'd saved > for years that gave the go-ahead to financial malefactors of all types in > the following decades. There'd always been crooks, but they fairly > mushroomed in recent decades. > ... > ... the only specific fact I'm concerned > with here is that many western governments, between the mid-50s and the > early-80s, proceeded to allow their currencies to devalue by anything > between 15 and 30 times more than anything that had happened for 300 years > at least. If any issuing bank had done this, it would have been called a > criminal act. > > I have given the reason -- which Krugman didn't (apart from original sin) > -- for the wave of financial mendacity which then infected and then quickly > overtook a high proportion of other financial institutions on which > ordinary people depended from the mid-80s onwards -- retail banks, > investment banks, stockbrokers, auditors, building societies (house > mortgages), pension funds, insurance companies, etc. If governments can't > keep faith, why should other institutions? My business-man friend replied to my request for amplification of his point that the banks were singularly important in the changes which Krugman discusses. Here's what he writes: >>>>>>>> I was arguing that with the repeal of the Glass-Stegall Act, generally speaking, banks were no longer prohibited from equity transactions with companies to whom they loaned money. Before this, banks could only "earn" money from a business through loan interest payments and deposit-type banking services. This meant that it was critical for bankers to assure themselves that loans were only given to financially strong companies whose businesses were generating enough cash to cover interest and principle payments, and whose management could be morally relied on to honor the loan commitments. The bankers were motivated, knowledgeable, tough-minded businessmen, policing the risk in corporate business plans and quantifying this risk by the amount of money they would loan and the rate they would charge. Once permitted to conduct equity business with the same corporations, banks realized that they could make a whole lot more money from a given firm by providing equity-type services for the companies such as managing stock issues and trading in the stock. All of a sudden, it was more important to the banker (worth a whole lot more money) that a client company's stock rose significantly than it was that the company was able to repay loan interest and principle. Consequently, the bank was no longer quite as motivated to carefully study the business fundamentals and the future cash flow of a company before loaning it money and/or recommending the purchase of its stock to others. Now, the fees generated from investment banking activities (stock and other equity dealings) as well as the gains to be realized through stock speculation for the bank's own account were GROSSLY more profitable than loan interest. I actually believe that banks got to the point where, consciously or unconsciously, they felt that the loss of loan principle was OK in some circumstances. Hope that's clearer. <<<<<<<<<<<<<< Does this help? (Sounds similar to the change of rules allowing accounting firms also to be management consultants.) If I find the RM Solow reference, I'll let you know. best wishes, Stephen S <[EMAIL PROTECTED]> Vancouver, B.C. [Outgoing mail scanned by Norton AntiVirus]
