My Facebook friend, Hemant Shah, was thoughtful enough to share a video of an interview with Steve Keen, an Australian economist, that featured on the Hard Talk show of BBC. He asked for sharing it with other bankers as also economists. He also sought our views in the matter as if we could make out more of it than Hemant himself, who is a very keen intellectual.
Instead of giving you a link of the video alone, I am giving a link here that has both the video as well as a transcript of the interview.
The subject matter of the interview lies in the domain of central banking rather than commercial banking, and yet I feel inclined to share a few thoughts.
Banking, capital adequacy norms notwithstanding, is the most highly leveraged business in the world. It essentially uses funds from public at large. And this is reason enough to subject it to the most stringent regulation. And hence any argument for deregulating this sector can not be sustained. Engaging in or financing speculative activities to swing various markets in the hope of milking them is very likely to be the first result of deregulation. And this is precisely what has happened. Presence of a few players with huge funds at their disposal in any market, spot or future, financial or commodity or real state, is sure to distort the working of the market to the detriment of large number of normal players first and finally the rogues themselves. It is indeed surprising that, amongst others, pension funds, of all the institutions, were allowed to invest in the newfangled and little understood derivative instruments engineered by clever and brilliant bankers who were motivated entirely by their own bonuses and had little concern for the possible fallout of their actions. Perhaps the deregulation prevented the regulator from stepping in in time.
Though Prof. Raghuram Rajan has another different explanation too in his book, The Fault Lines. He says there was a political motive too behind the subprime crisis. The political motive coincided with the greed of the banking sector and the resonance led to the resonating crisis.
Obviously a crash of the banking system necessarily means a huge blow to large number of depositors and the economy as a whole. And hence the governments are obliged to step in. What Steve says is that the intervention should not be in a form that condones the sins of the bankers and penalizes the common man. Though, his ideas are close to impossible to put in practice.
I tend to agree with the view expressed in the interview that use of capital for the sole purpose of growing it through speculation must be discouraged. Capital must be allocated only for economically productive activities and to a small extent to facilitate consumption. I also have a gut feeling that the toxins left in the global financial system by the sins of the banking system are going to take some more time to get purged.
Instead of giving you a link of the video alone, I am giving a link here that has both the video as well as a transcript of the interview.
The subject matter of the interview lies in the domain of central banking rather than commercial banking, and yet I feel inclined to share a few thoughts.
Banking, capital adequacy norms notwithstanding, is the most highly leveraged business in the world. It essentially uses funds from public at large. And this is reason enough to subject it to the most stringent regulation. And hence any argument for deregulating this sector can not be sustained. Engaging in or financing speculative activities to swing various markets in the hope of milking them is very likely to be the first result of deregulation. And this is precisely what has happened. Presence of a few players with huge funds at their disposal in any market, spot or future, financial or commodity or real state, is sure to distort the working of the market to the detriment of large number of normal players first and finally the rogues themselves. It is indeed surprising that, amongst others, pension funds, of all the institutions, were allowed to invest in the newfangled and little understood derivative instruments engineered by clever and brilliant bankers who were motivated entirely by their own bonuses and had little concern for the possible fallout of their actions. Perhaps the deregulation prevented the regulator from stepping in in time.
Though Prof. Raghuram Rajan has another different explanation too in his book, The Fault Lines. He says there was a political motive too behind the subprime crisis. The political motive coincided with the greed of the banking sector and the resonance led to the resonating crisis.
Obviously a crash of the banking system necessarily means a huge blow to large number of depositors and the economy as a whole. And hence the governments are obliged to step in. What Steve says is that the intervention should not be in a form that condones the sins of the bankers and penalizes the common man. Though, his ideas are close to impossible to put in practice.
I tend to agree with the view expressed in the interview that use of capital for the sole purpose of growing it through speculation must be discouraged. Capital must be allocated only for economically productive activities and to a small extent to facilitate consumption. I also have a gut feeling that the toxins left in the global financial system by the sins of the banking system are going to take some more time to get purged.
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