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 in 1997..

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 interests.

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 Exchange.

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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