Close the financial casino - let's get back to basics

An examination is needed of what contribution each system and instrument makes, whether it is necessary or used excessively.

Trillions of dollars are involved with complex instruments that separate risk from the lenders and that leave buyers and sellers not actually knowing what they are trading. There is strong evidence of massive abuses and misunderstanding, internationally and locally.

While our four big banks appear to be sound and are being backed by our governments, one can only conclude that many errors were made in their management. With prudent management, ANZ would not have incurred the Opes Prime disaster nor would NAB have experienced its trading fiasco.

The essential function of a banking and financial system is to act as a service industry supporting the real economy, which is manufacturing, resources and services to the population at large. Maintenance of a strong, ethical, trustworthy banking system is essential. Organising and directing use of capital is a valuable function of our banking system.

However, in recent decades many of the Wall Street financial institutions, including banks, have gone beyond thinking of themselves as a service but rather as "masters of the universe" entitled to cream off huge fees and taking ever-increasing percentages of total profits. They hired highly educated, brilliant personnel, paid them excessively and turned off their moral compasses.

Heavily involved in the debacle are the rating agencies, company valuers, real estate valuers and auction houses. In many cases their payment came from those they were valuing and were used in the financial areas to cover the backsides of executives advancing funds. Valuations were ramped shamelessly. See the art market.

The reaction of the US Congress is a backlash against the perpetrators of the abuses. Main Street is bailing out Wall Street. Many economists are strongly objecting to the plan passed by Congress, believing the costs excessive to Main Street and not tackling the fundamental undercapitalisation of the banking sector. One such critic is Nouriel Roubini (see his website).

We frequently read in the media that all is well with our Australian systems. But is it? We are told we are part of the world system and must accept the instruments conjured up in London and New York. But do we? It appears that the Chinese Government, which did not bow to the demands of the international financiers, is better placed precisely because it did not use these instruments.

Profligate use of credit by individuals, businesses and some governments has been encouraged by low interest rates but also by unconscionable marketing such as credit cards. Credit well used is a boon but excessively used is a bomb. We have not taught sound money management at any level. The hands-on experience of those who lived through the 1930s Great Depression has largely been lost.

The US has been living beyond its means for some years. The past eight years under George Bush has been a particular disaster. He cut taxes, incurred huge expenses in the military, ran large trade deficits, did nothing to cut oil imports, in addition to ruining his country's relationships and reputation.

Australia also has been living beyond its means. It is difficult to see how we can continue running with our trade deficits and not pay the piper. Should the resource boom end, as is likely, we need to develop other sectors. This will require sound financial systems.

Climate change trading systems will add another dimension of risk. In effect , carbon emissions trading will introduce another trading currency that will use the same trading instruments, including all the derivatives, which are part of the financial problem. Billions of dollars will be involved.

A unit of oil can be measured, but how do you measure emissions to give a base for the currency?

It is time to go back to basics and re-examine the roles of government, banks, other financial groups, as well as the plethora of derivatives used today in our financial systems. We have been operating in a financial casino and the results are now evident.

Frank Mahlab, MBA,

Melbourne

Parallel universe

SINCLAIR Davidson ("As world finances unravel PM loses the plot", 20/10) is writing from a parallel universe when he asserts that excessive executive remuneration did not contribute to the current crisis.

The trigger for the credit crunch was the failure of Lehman Brothers.

In its last annual report it showed $20billion net assets in other filings and statements it revealed that since 2006 Lehman's executives had ripped $US15 billion out of the company to pay bonuses on top of generous salaries. The bank's failure is sufficient proof that these bonuses were not earned in any meaningful sense.

If this professor of finance really believes you can rip 43% of the capital out of a bank over three years and not harm its survival prospects he should do his institution a favour and swap jobs with the caretaker.

John M. Legge

Surrey Hills

Well done, Rudd

SO ALLAN Fels and Fred Brenchley (18/10) are not happy with the banks consolidating. Perhaps that explains why Graeme Samuels is chairman of the Australian Competition and Consumer Commission. I'd rather have solvent banks, thanks very much. Has anybody appraised the said gentlemen of the banking crisis? Thank God for Kevin Rudd.

Eric Wells

Geelong