Money is too important to be left to
central bankers. The US Fed's failure to control money growth is the
root of current financial instabilit.Hongkong's SFC feeds at the same
trough as the investment bankers it is supposed to police. SCMP
by Philip Bowring
Just as war is too important to be left entirely to generals, so money
is too important to left up to bankers, even central bankers. I am reminded
of this not by the news that Chase Manhattan (or whatever they now call
it) banker and executive councillor Antony Leung Kam-chung is being
tipped to become Financial Secretary when Donald Tsang is promoted to
Chief Secretary. Nor even by the defence in this newspaper by Andrew
Sheng, central banker turned head of the "softly softly catchee nobody"
Securities and Futures Commission of the new securities legislation.
The Leung news and Sheng article emerged a few days after a leading
member of the US Federal Reserve Board, or central bank, delivered a
speech which left even me, ever sceptical of bankers' wisdom, open mouthed
in amazement. The President of the Federal Reserve Bank of Dallas, Robert
McTeer, proclaimed "If we all join hands together and buy a new SUV
(Sports Utility Vehicle) all will be well" He concluded a speech to
business leaders with a rallying call to boost the economy and avert
recession: "go out and buy something".
In other words, the solution to current US ills is for both consumers
and businesses to keep spending more than they earn, create even more
excess capacity and get even further into debt! Put off the day of reckoning
so that someone else will be in the hot seat when the creditors finally
send in the bailiffs. (Meanwhile also burn up more dollars and warm
the globe with those overweight, gas guzzling contraptions)
The McTeer formula for continued debt-driven growth is in fact merely
a crude version of the policy which Mr Greenspan ( for long in conjunction
with ex-Goldman Sachs Treasury Secretary Rubin) has been pursuing for
several years but especially since 1998. When in doubt, create more
credit. Let market forces and a strong dollar ravish manufacturing,
but be sure to bail out your Wall Street banking pals when they screw
up with hedge funds
The biggest booms and busts are almost always credit phenomena. They
are possible not primarily because business or the public get carried
away with some craze be it Jakarta taxis, the internet or Tokyo real
estate but because bankers provide the credit to make it possible. Bankers
are an especially dangerous breed today because the money they lend
is not theirs. They are often rewarded by the amount they lend, not
by the long term profitability of their lending. And the easiest way
to cover up bad loans is simply to lend more - the current Greeenspan
formula for trying to avert recession..
International banks often have stricter internal controls than the
local ones but also less local knowledge and those responsible for lending
binges have usually moved on to another continent before the crisis
hits. Asia's crises were primarily banking crises - Japan is still in
one. The US may not have a banking crisis because the banks' role in
credit markets has been declining. But given the rate of growth of the
non-bank financial intermediation and the securitization of all manner
of receivables the dangers of a major crunch are real. Only a cap on
debt now can avert a major disaster later.
The Fed looks a dubious model to follow. Greenspan's reputation five
years from now may no longer include the word "maestro". Hongkong is
at least fortunate in one regard with its peg and currency board --
it cannot have an independent monetary policy so there is a limit to
the damage that the Financial Secretary and Monetary Authority can do.
We just get manic lending by some commercial bankers, as to real estate
The US does have an example that Hongkong would do well to follow:
the retiring head of the Securities and Exchange Commission, Arthur
Levitt. Though he came from the securities industry, few SEC heads have
worked harder or been more unpopular with the vested interests who regularly
rip off the small investors with dishonest "research", kickbacks, front
running, hidden spreads and numerous other unethical devices which explain
the outrageous dimensions of many a Wall Street bonus. He forced Nasdaq
to clean up its act, and make massive restitution for ripping off investors.
He has been in running battles over transparency and auditing standards
and forced companies to stop providing information to favoured brokers
at the expense of the investing public.
He has recently been fighting the conflicts of interest which have
become the norm in the auditing/consultancy oligarchy which is supposed
to protect outside investors but so often serves management interests.
Mr Levitt couldn't prevent the abuses which led to the tech bubble,
spurred as it was by the investment bank/broker research drivel and
powered by unrestrained credit growth. But he fought hard for investor
Contrast this situation with Hongkong. In the debate over new legislation,
the authorities have largely caved in to the interests of the major
investment banks, those most likely to manipulate the system to their
own advantage and for the exploitation of the investing public. These
are the very same outfits that a year ago were publishing the most amazing
rubbish about tech and telecom stocks, ignoring all standards of analysis
that they, as supposed professionals, were expected to uphold. They
made huge profits from what were essentially lies about corporate prospects
while investors who listened to what they believed to be honest advice
lost huge sums.
Instead of listening to such institutions ask for laws to be framed
in their favour, if the SFC had any guts it would have investigated
how so many of their senior mangers and research personnel acquired
beneficial interests in pre-floatation placements of subsequently ramped
garbage stocks. Of course it will not. That would be too close to home.
The GEM saw an especially obvious series of scandalous exploitations
of small investors by large companies and the investment houses. But
main board investors often fare little better. Minorities continue to
be abused on a regular basis without a squeak from the SFC or the Stock
Market manipulation and insider trading are frequently suspected but
though the stock exchange looks into a large number of cases of suspicious
price movements, action is seldom taken. I have experienced how at investment
banks well paid compliance staffs go through the bureaucratic motions
of complying with legal requirements, for instance to keep a wall between
investment banking and broking, while the spirit of the law is routinely
and brazenly flouted in front of them. Deals are also done to benefit
the firm by providing misleading information to clients but whistle
blowers are not welcomed by compliance apparatchiks
The same breed of bureaucrats appear to staff the SFC and stock exchange.
One might wonder how much Mr Sheng, till recently a central banker,
really understands about the investment banking business which he polices.
But more likely he knows too much to dare to try to follow Mr Levitt.
Hongkong has its way of protecting vested interests. Also, Mr Sheng
is a Malaysian. As for worrying about whether new laws are tight enough,
what's the point when existing ones are so feebly implemented?
The brutal fact is that investment banking, like other forms of banking
is too important to be entrusted solely to bankers. So where does this
leave is with Mr Leung if he is chosen? His climb up the hierarchy of
US banks in Hongkong says more about his political than his banking
skills. Nor does working for US banks locally provide inoculation against
Hongkong's parochial and ethnocentric tendencies. It may do the opposite.
In Exco, Leung has been a very positive force on education, producing
new ideas for a profession which is too important to be left to educators.
Could he do the same for government finances and the financial sector?
Maybe. But politically motivated banking is invariably bad banking.
If we are to have someone from outside the civil service, my own choice
would be a numerate and hard-nosed policeman. or an irascible businessman
from the commercial or industrial sector (in the late John Bremridge
mould) who would put the bankers in their place and some financial sector
crooks in jail. ends
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