Guardians of Finance

This post was written by Philip Lane

This impressive new book includes a lengthy section on the Irish banking crisis.  One of its authors (Jerry Caprio) will speak about the book next Wednesday March 21 1pm-2pm in the IIIS seminar room, TCD. All welcome.

Summary:

The recent financial crisis was an accident, a “perfect storm” fueled by an unforeseeable confluence of events that unfortunately combined to bring down the global financial systems. And policy makers? They did everything they could, given their limited authority. It was all a terrible, unavoidable accident. Or at least this is the story told and retold by a chorus of luminaries that includes Timothy Geithner, Henry Paulson, Robert Rubin, Ben Bernanke, and Alan Greenspan.

In Guardians of Finance, economists James Barth, Gerard Caprio, and Ross Levine argue that the financial meltdown of 2007 to 2009 was no accident; it was negligent homicide. They show that senior regulatory officials around the world knew or should have known that their policies were destabilizing the global financial system, had years to process the evidence that risks were rising, had the authority to change their policies–and yet chose not to act until the crisis had fully emerged.

The current system, the authors write, is simply not designed to make policy choices on behalf of the public. It is virtually impossible for the public and its elected officials to obtain informed and impartial assessment of financial regulation and to hold regulators accountable. Barth, Caprio, and Levine propose a reform to counter this systemic failure: the establishment of a “Sentinel” to provide an informed, expert, and independent assessment of financial regulation. Its sole power would be to demand information and to evaluate it from the perspective of the public–rather than that of the financial industry, the regulators, or politicians.

35 Responses to “Guardians of Finance”

  1. Kevin Donoghue Says:

    I find it hard to see how the ‘Sentinel’ is supposed to deliver as per final paragraph. Of course I should read the book. For now though I’m sticking to my view that only public hostility to and suspicion of financiers will generate the pressure needed to ensure even a modicum of honesty. We’ll be getting somewhere when notions like ‘pillar banks’ vanish from the discourse, replaced by the sort of comments we now see about newspapers: you can’t trust them and in any case they’ve had their day; good riddance.

  2. Paul Hunt Says:

    The concept of a ‘Public Advocate’ - similar to this ‘Sentinel’ - is well-established in the US representing the collective interests of consumers of utility services in investigations and hearings before the state-level Public Utility Commissions to keep utility service provider in line. But this is an alien concept in Anglo-Saxon democracy on this side of the Atlantic - and is totally alien in the variety of systems generally throughout the EU.

    It is something that needs to be banged in to the heads of our increasingly thick EU politicians, but it is probably impossible. It is probably too much to expect voters and consumers to demand it.

    And so the same citizen and consumer-gouging activities continue. And the academics view it as possibly interesting, but get a sniff of the great unwashed and move on rapidly.

  3. The Dork of Cork Says:

    Yes sentinel sounds very Dark.
    So we get a oracle yeah ?

    It was /is just a leverage crisis - taking a extreme amount of wealth from the future which makes certain enterprises look viable when they are not.

    In a govermental system the leverage should be 8 to 1 or hopefully less and in a private system at the very least the M1 money supply should be on the CBs books (no loans to banks) just the money baby.
    What is so complicated about this ?

  4. The Alchemist Says:

    ‘Why Shareholders Don’t Rule’ p. 58. Worthwhile reading.

    However not only was this (partially or largely, could be debated) true before the crisis, but even afterwards. For example, in the case of Ireland the nationalisation of Anglo wiped out retail shareholders. Even now, to this day, the long promised assessor has not been appointed. No other jurisdiction in Europe would treat shareholders in this fashion. It is the obverse of the Wild West capitalism that wrecked the banks, but no less lawless, no less grey.

  5. Ceterisparibus Says:

    This article may be pertinent….
    http://www.rollingstone.com/politics/news/bank-of-america-too-crooked-to-fail-20120314

  6. paul quigley Says:

    Sounds like an interesting session. Amar Bhide’s recent book is also a really solid piece of work in this area.

    http://www.oup.com/us/catalog/general/subject/Finance/FinancialInstitutions/?view=usa&ci=9780199756070

  7. Mike Hall Says:

    A Sentinel?

    Great idea providing we can have Prof Randall Wray & Wiiliam K Black in charge. Maybe a couple of other options, but not many. Don’t worry tho’, they will (rightly) get rid of about 95% of the financialised-no-productive-purpose casino very quickly, so tho’ small in number, the workload would rapidly diminish.

    I’m not vindictive tho’. The unemployed banksters may avail of the minimum wage (ECB financed) Job Guarantee program if they wish.

  8. Michael Hennigan - Finfacts Says:

    Why were Irish regulators willing to sit around two-and-a half years waiting for a reply to a letter they sent to Anglo Irish bank expressing concerns about its meteoric growth in size?

    Why indeed!

    There was a tradition of sending pleading letters and from the late 1990s, the governor of the Central Bank had sent a series of 5 letters to banks imploring them to put the brakes on credit. Almost every month he met his counterpart at the Banco de España, at ECB governing council meetings and he could have asked (he may well have) about the extra provisioning rules that had been imposed on the big Spanish banks.

    The answer to the authors question is that for people at the CB who had never made a consequential decision in their professional lives, sailing against the prevailing winds fanned by political leaders, would have taken sterner stuff.

    The main board of political appointees including the country’s top trade unionist and an economist who was the slave of a defunct demographer, were also part of the prevailing ‘we invented the free lunch’ consensus.

    The authors say “the Guardians of Finance did not work effectively to protect citizens in many countries.”

    In the US, the prevailing orthodoxy was also a big factor combined with the corrupt money inducement system.

    A former SEC chief serves as an adviser to Goldman Sachs at the age of 81 and has also worked for the Carlyle group.

    So with the huge differentials in salaries between the regulators and the regulated, for both cavalry and infantry, it’s bound to be a factor for those with the prospect of making a lot more money in their careers.

    As for the ‘Sentinel,’ this would in effect be another regulator.

    In the US, Republican members of the House Financial Services Committee voted on March 6 to reject an amendment to fund fully the President Ó’Bama’s request for the SEC’s budget. Republican members spoke out against the amendment, claiming that recent financial scandals demonstrate that the SEC has done an inadequate job and thus doesn’t deserve the funding requested by the Obama administration.

    Simply, they are refusing to support funding of additional staff for the regulator.

    The SEC’s budget has no impact on the government’s bottom-line, because it is funded by fees on public firms and Wall Street.

    Would it be a shock if some of the savings for Wall Street firms were used for campaign contributions?

    Select chapters

    http://bit.ly/FOBDvn

    Happy Paddy’s Day don’t make eejits of yourselves!

    It must have come early in Paris - - “Rocket” has a bit more propulsion than Bertie Ahern’s gem in 2006: “The boom is getting boomier,” but as idiotic.

  9. Joseph Ryan Says:

    @MH
    Agus beannachtai na feile Padraig leatsa, a Michil.

    Thought for the day
    “Ever bless and defend the sweet land of our birth,
    Where the shamrock still blooms as when thou wert on earth,
    And our hearts shall yet burn, wherever we roam,
    For God and St. Patrick, and our native home.”

    That should keep you going for a while!!

  10. The Alchemist Says:

    @MH

    The answer to the authors question is that for people at the CB who had never made a consequential decision in their professional lives, sailing against the prevailing winds fanned by political leaders, would have taken sterner stuff.

    Indeed Michael, sadly and deplorably true.

    When one considers that no government has seen fit to face down and damp down the enormous legal costs of the various tribunals, it makes a mockery of expectations that Noonan & Co, will ‘do the business’ when it comes to a mere 30 or 40 odd billion in promissory notes.

    Sailing against the prevailing wind is not something provided for in official Ireland.

  11. Tullmcadoo Says:

    MH,
    Far from being idiotic, Minister NoonAn’s statement us factually correct. Given its open nature, Ireland is a geared play on the world economy so if it booms, Ireland booms. Of couse, it is widely accepted that such a boom cannot happen.

  12. The Alchemist Says:

    @tull

    Rocketman’s statement sounded on a par with other egregious examples of Bubble hubris.

    Ahern floating the prospect of advising Germany on how to get out up out its slump in 03. Only to be followed two years later by talk of Ireland joining the G20 if not the G8. Not to mention perennial assertions that a ‘world class’ knowledge economy is just around the corner.

    Growth this year projected to be 0.7%, with what margin of error.

    A small bit of modesty about Ireland’s ambitions would not go astray. Who can blame Rehn and the rest for brushing off demands for debt reduction?

  13. Michael Hennigan - Finfacts Says:

    @ Tullmcadoo

    The pre-2008 credit world isn’t returning.

    Despite the surge in exports by 50% in current money terms in the period 2000-2009, the numbers employed in foreign-owned enterprises was back to the 1998 level.

  14. David O'Donnell Says:

    @Michael Hennigan

    Half time England 9 Ireland 6

    Antrim Hurlers win All-Ireland Football a Draw

    Hockey into Olympic Final qualifier

    A Madra Rua spotted in West Cork

    Blind Biddy leads the St Patrick’s Day parade in Teheran

    Gombeenizm and Shawneenizm alive and well locally

    Enjoy!

    @ all matrixsQuidesque fans in The Knowledge Economy

    http://www.businessinsider.com/greg-smith-story-animated-2012-3?nr_email_referer=1&utm_source=Triggermail&utm_medium=email&utm_term=Clusterstock%20Select&utm_campaign=Clusterstock%20Select%202012-03-16

  15. Tullmcadoo Says:

    Alchemist,
    There was a conditionality in Minister Noonan’s statement. It is highly probably that if global trade accelerates in foot of a recovery in global GDP then growth in the most open economy will accelerate.
    MH,
    Things are indeed different from the last cycle, we have regained some modicum of competitiveness, FDI flows are favourable, the Ag cycle us favourable. If u insist on driving by looking in the rearview mirror you are going to crash.

  16. David O'Donnell Says:

    Everyone joins in Berlin parade

    http://www.irishtimes.com/newspaper/breaking/2012/0317/breaking30.html

    Loved those Green Angela’s Corsets - hope they’re not catching.

    @all

    Bandon enters the Guinness Book of Records for the most Leprecauns in one place at one time .. Glenties come second! With all those pots of Gold the Financial Crisis is Over … for the .. er .. day!

    @Guardians of Finance

    Blind Biddy says Hi!

  17. John Corcoran Says:

    Happy St Patricks Day to all those who emigrated and to all who stayed

    The era of the Irish politican culminated in Kennedy. He was born to the work and was at every stage of his life a “pro“. He rose on the willing backs of three generations of district leaders and county chairmen who, like Barabbas himself, may in the end have been saved for that one moment of recognition that something special had appeared among them. That moment was in 1960 when the Irish party chieftians of the great Eastern and Midwestern cities, for reasons they would probably even now not fully explain,came together to nominate the grandson of Honey Fitz.

    It was the last hurrah. He, the youngest and newest, served in the final moment of ascendancy. On the day he died, the President of the United States, the Speaker of the House of Representatives, the Majority Leader of the United States Senate, the Chairman of the National Committee were all Irish, all Catholic, all Democrats. It will not come again.

    Daniel Patrick Moynihan 1964.

  18. David O'Donnell Says:

    Minor point:

    Irish are Catholic, Protestant, Dissenter, Islamist, Buddist, Confusian, Shintu, Hindu, Dissenter, Humanist, or whatever you wish, and are free, to believe in, once you don’t pust it on anyone else, as long as you are loyal Irish …

  19. zhou_enlai Says:

    It makes sense to have people who are not responsible for decisions analysing and criticising such decisions. The central bankers and regulators are compromised.

    We do not have sufficient expertise or resources to set up such a body or to attract sufficiently expert people on an ongoing basis. Therefore any such institution nwould need to be an EU level institution.

  20. grumpy Says:

    “Barth, Caprio, and Levine propose a reform to counter this systemic failure: the establishment of a “Sentinel” to provide an informed, expert, and independent assessment of financial regulation. Its sole power would be to demand information and to evaluate it from the perspective of the public–rather than that of the financial industry, the regulators, or politicians.”

    This looks like worthy but naive stuff to me. The function is really needed at the very time that it would (in the non-academic world) have the rug pulled out from under it by popular (ie public) support for looser financial regulation and political band-wagonning on that popular support.

    Those of us who attempted to get members of the Irish public to think about the well known joke-like nature of financial regulation and what the consequences might be can testify to the fact that the Irish public were generally on-side with charade-style regulation and chancery.

    The public got what the public wanted (at the time).

  21. Joseph Ryan Says:

    @Grumpy

    McWilliams and indeed Garreth FitzGerald and some others warned that Ireland was going off the rails for a long time. Most sensible people knew the housing market was grossly overinflated.

    However I do not remember seeing a direct warning of bank failure as a result.

    If the Regulator and others thought this was a possibility they should not have pulled back on an explicit public warning.

    Michael Somers seems to think it is a badge of honour that he had suspicions about Anglo. But was it really good enough for him to leave it at that. He had the resources and expertise at his disposal to do a much more thorough analysis. He also had the stature to warn government in the most explicit terms. Perhaps he did?
    But the bottom line was, nobody warned publicly about bank failure, particularly the bankers.

  22. grumpy Says:

    @Joseph

    How could you specifically warn of bank failure at the same time banks’ audited results indicated you merely had suspicions a tail risk might actually happen - that the potential was there, the press, public, and all the political machines would label you a ‘crank’, ‘jealous looser’, ‘cribber and moaner’, or the choice of one of the posters here “malcontents”.

    This is generally the crowds’ reaction to people who continuously point out inconvenient facts. It might be easy to appoint a ’sentinel’ for bank regulation in Ireland currently but it only really matters when it would be hard to do or sustain.

    As for specific warnings of bank failure from Somers etc, prior to August 2007 I didn’t and I cannot imagine anyone talking about bank failure as anything other than something that COULD ACTUALLY happen if the housing market plunged, given how complacent the banks and borrowers had been. By early 2008, it was looking quite likely (nothing stronger than that) that Anglo could fail and conversations among the more switched-on about more appropriate deposit institutions started to take place. Even at that point it was all a question of judgement (that could have been wrong) not hard facts you could use to send in the cops. Somers might have had the resources to know more, but he would have still likely have been relying on his sense of judgement - and probably made himself look a bit malcontenty in the process.

  23. grumpy Says:

    By the way, I can highly recommend this piece by one on the country’s actual, y’know like real “Sentinels”. (the type that don’t have to wait for legislation to be passed or a big, fat remuneration package to be signed after they’ve made friends with the minister:

    http://namawinelake.wordpress.com/2012/03/16/a-st-patricks-day-tale-lock-in-in-committee-room-4/#comments

  24. John Corcoran Says:

    @Joseph Ryan
    +1
    In 1999,2000.2001,2002,2003,2004,2005,2006,2007,2008,the independent economist David McWilliams told Michael Somers et all there was a massive property bubble which would burst and leave hunderds of thousands of householders in negative equity. What did the million euro p.a man ,Michael Somers ,the highest paid employee in the public service do?.

    Mr Somers was on Marian Finucane rte radio this morning dispensing his genius to the great unwashed.

  25. grumpy Says:

    Another cracking read:

    http://namawinelake.wordpress.com/2012/03/18/irish-government-strategy-for-dealing-with-anglos-promissory-notes-thanatosis/#comments

  26. grumpy Says:

    Colm McCarthy slags off the ECB today in the indo for “forcing” the Irish government to act against its own will. Could I make the point again that although Colm might have been shown a copy of the letter the ECB refused to publish, I and so far as I know no other commentator has. If it really is as clear cut in demonstrating no actual element of choice for the Irish government to act this stupidly - but simple “force” - then I have to say it is incredibly dim for the contents of this letter not to be leaked at least partially by the Irish side. If what Colm says is a fair reflection of what occurred then the ECB can hardly sustain, in in international financial media context, much of a complaint about facts getting an airing - don’t forget it has to remain credible in an international context.

    If you have a few phrases from that letter Colm, would you mind posting them or emailing them on please?

    Here are some bits and bobs from todays article:

    “The ECB, for reasons which it has never explained, then forced the Irish Government, against its declared wishes, to continue paying 100 per cent of face value on maturing senior bonds in these zombie banks.

    The ECB threat was to restrict liquidity provision to the Irish banking system unless the unguaranteed bondholders were paid in full.

    No other eurozone member has incurred bank-related debt under ECB duress. There are no provisions in the Maastricht Treaty, in the Stability and Growth Pact or in any other pact or international treaty which grant this power to the ECB, nor was any eurozone member state ever asked to accede to such an arrangement.

    This whole sorry saga has raised once more the enduring policy dilemma of ensuring that central banks are both independent and accountable.

    The European Commission at least communicates without resort to anonymity and is to be commended for accepting this form of accountability.

    It is time for the Commission to show independence as well — in particular, independence from the unaccountable central bank.”

    http://www.independent.ie/opinion/analysis/this-burden-of-bank-debt-is-simply-not-sustainable-3053806.html

  27. Gavin Kostick Says:

    @ grumpy

    I noted that too, and was reminded that when Vincent Brown challenged the chap from the ECB, the chap from the ECB fell back on the ‘national decision’ line - implying that when all things were considered the government decided to do it for its own best interests (pay off unsecured bondholders), not that the ECB dictated it.

    On another issue, what, if anything do you (or the Dork if he’s reading), make of this?

    http://brixtonpound.org/what/

    Also for the Dork and Brian Woods Snr, another thing they’re doing.

    http://brixtonpound.org/

  28. The Dork of Cork Says:

    @John
    A display of mindless conservatism - its was just a bunch of guys & girls clutching their collective blankee.
    Its not up to be guv ……… discrete channels , connections , hush hush………professional secrecy…….

    @Gav
    Well it might help but it is not taxable which makes the money loop incomplete.
    Still it might help.
    “In May 1931 losses were still at 140 million schillings, and capital at 125 million plus disclosed reserves of 40 million for a total of 165 million. Under Austrian law, if a bank lost half its capital it had to “turn in its balance sheet,” or close down. In an effort to rescue the Creditanstalt, the government, the National Bank, and the House of Rothschild, the last with help of the Amsterdam branch, furnished 100 million, 30 million, and 22.5 million schillings, respectively. But the announcement of the support operation on May 11, 1931, started a run, partly foreign, partly Austrian…

    By June 5 the credit [for the entire country] was exhausted and the Austrian National Bank requested another. Still under pressure, the bank raised its discount rate to 6 percent on June 8 and 7.5 percent on June 16. The new credit was arranged by the BIS, by June 14 this time, but subject to the condition that the Austrian government should obtain a two-to-three year loan abroad for 150 million schillings. At this point the French interposed the condition that the Austrian government should abandon the customs union with Germany. The Austrian government refused, and it fell…”

    But its best to have a real goverment that represents the interests of the people rather then the banks.
    “Greece is a 4,000 year old grown-up sovereign nation that can issue euros(? me thinks Drachmas) on its own. It does not have to borrow from any central bank including the Bank of Greece. It doesn’t need anyone’s permission: the issuance of currency is the duty of the state when circumstances require it to do so. Without going further into debt, a sovereign can simply use currency it creates out of thin air to extinguish BOTH the currency AND the debt at the same time which is what happens when debts are repaid.”
    Steve From Virgina
    Treasury issued paper anyone ?
    Colm McCarthy is right to a large extent - the ECB expects a sovergin to bail out their counterfeit bank credit using the tax raising powers of indivdual states !!
    Its a complete inversion of everything.
    You either destroy large sections of bank credit deposits (bank bonds) or you produce a massive amount of Euros to pay off this debt.
    Karl has stated the Irish CB can print Euros …… why can’t we Print the entire amount of bank bonds we Guaranteed ?
    However If the Irish CBers are one of them then its the sacred duty of the Irish State to produce treasury issued punts and cut those banking bastards off from our tax raising powers.

    The French were always right not to treat this state seriously - we were always a province / some entities little Bitch.

  29. John Corcoran Says:

    @Dork

    War is Peace—Freedom is Slavery—Ignorance is Strength—Everybody loves Emigration—-Enda is God.

  30. The Dork of Cork Says:

    @John
    There should be talk of breaking the back / creating a run on the Euro by sovergin states simply by outlawing payment of taxes in Euros……….declare the present banking system obsolete and all that as under a energy constrained world they cannot provide much bank credit anyway.

    From the 1 of April………. no from the 1 of May all Irish taxes must be paid in Punts……….. the banks can keep their precious Euros withen their Grubby institutions if they want but people will need to convert them into Punts if they want to pay their taxes.
    If we start the ball rolling we can break this Sisyphus like Ball & chain.

  31. PR Guy Says:

    Someone please assure me that this won’t happen.

    http://www.independent.ie/national-news/daly-hints-nama-would-sell-assets-back-to-defaulters-3053892.html

  32. John Corcoran Says:

    It’s been confirmed by Michael Noonan—the Irish economy is about to take off like a rocket. Fasten your seat belts–

  33. DOCM Says:

    @ All

    With a view to making at least a minimum effort to stay on topic, your attention is drawn to the article by Donal Donovan in the SBP. (If a link is available tomorrow, it might suitably be posted).

    It provides an appropriate counterbalance to the article by Colm McCarthy which is long on assertions and short on facts.

    On the original subject matter of this thread, I would agree with the views expressed by Grumpy. The authors are naive in terms of the solution that they propose but there is undoubted value in what they have written (if the extracts that I have been able to read are any guide).

  34. The Dork of Cork Says:

    @DOCM
    Perhaps it is good to be sceptical of all writers - but this fact is undeniable - countries who cannot or perhaps will not print are being asked to bail out bank credit via tax raising powers.
    Don’t you find something a bit wrong with that inversion of CB state relations ?
    The ECB has become a quasi - fiscal power with all the political baggage that comes with that huge step up in power.
    Countries can destroy that new ability quite easily if they have the will.
    The ECB has no treasuary - it can be broken but not without perhaps a huge rise in oil prices withen lonely countries that are brave.

  35. Michael Hennigan - Finfacts Says:

    @ Tullmcadoo

    Things are indeed different from the last cycle, we have regained some modicum of competitiveness, FDI flows are favourable, the Ag cycle us favourable. If u insist on driving by looking in the rearview mirror you are going to crash.

    What an inspiring cliché! However, what is striking at policy level is how little attention is given to the evolving challenges.

    It’s hardly news for politicians to declare new dawns and in particular before any real structural reform has been made.

    There is NO credible evidence so far that there has been a significant change in the economy.

    The world is not reverting to the easy credit of the pre-2007 period and no western country has fiscal space.

    At present, nobody is expecting booms in the Eurozone, UK and the US — Ireland’s main export destinations. The Eurozone accounts for 40% of exports.

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