Don Brash with a few home truths

There is an excellent Op-Ed in today's NZ Herald by former Reserve Bank Governor Don Brash, in response to the recent article by Dr Bryan Gould, former British Labour Party member and ex VC of Waikato University.

Gould's thesis is to blame the global economic turmoil on the market system and in particular its lack of regulation. ..."Gould implies that the crisis was caused by "free" and unregulated markets, especially in the financial sector.

Brash is withering in his attack -

"This [blaming the "unregulated financial sector" for the global woe] 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."

Government agencies specify minimum capital levels that banks must maintain, enforce a wide range of rules and restrictions, including limits on concentration of credit risk, limits on net foreign exchange positions and much more. They have monitored those rules by regular on-site inspections.

"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.

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.

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.

This is well worth the read.