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27 April 2011
The United States is ignoring the lessons of successful countries like Australia and Canada as it tries to grapple with the debt fallout from the Global Financial Crisis, Professor of Finance at Boston College, and Deakin Adjunct Professor Ed Kane said last week at Deakin University.
Urging Australian taxpayers to take the time to understand their financial system and make sure they understood the reasons why they had escaped the worst effects of the GFC, Professor Kane said taxpayers needed to ensure their regulators were there to protect their interests, and not those of the Finance industry, particularly by making sure they didn't offer unlimited safety net guarantees to organisations who engaged in aggressive risk taking.
Australian negotiators in Basle needed to have the confidence in their own practices and not follow the big boys – the United States, the United Kingdom and European countries – by agreeing to any proposals which shifted the finance industry's risk to the taxpayer, he said.
Professor Kane explained that part of the reasons Australia had escaped the worst effects of the GFC was because it had experienced a previous crisis and its financial system had absorbed the lessons from that.
"Because of this certain things were in place," he said.
"The US is ignoring the lessons from Australia on regulation."
Professor Kane said during the GFC American taxpayers absorbed via government bailouts the losses of companies that were deemed politically , systemically, or administratively difficult or too important to fail and unwind.
"Authorities created a loss-shifting "taxpayer put" that allowed insolvent firms to operate as corporate zombies," he said.
"However by financing zombie firms such as Bear Stearns, Lehman, and AIG regulators allowed their managers not only to pay themselves undeserved bonuses, but to gamble improvidently for resurrection at taxpayer and creditor expense.
"In the end private debt became tax payer debt.
"Unsecured or poorly collateralized funds that are advanced to a zombie are actually equity investments whose chance of repayment is dicey and depends on the firm re-establishing itself with the underpriced credit support officials give to it."
Professor Kane said as investors taxpayers deserve to be empowered to monitor the value of their equity stake in the financial sector by the provision of relevant information.
"Both within and across countries, financial systems can be made more stable by gathering and reporting this information on a regular basis," he said.
"Regular disclosures would also have the further benefit of making market signals more informative.
"Estimates of the taxpayers' investment in these risky companies can be improved by reconfiguring the way that they keep their accounts and how they report to regulators and how regulators conceive of their responsibilities to taxpayers."
Professor Kane said understandably in the US this argument had been met with dismay by regulators and the Finance industry.
"What you need to remember is that even in good times, politically powerful financial firms shape and reshape their lobbying activity, product lines, accounting systems, and organizational forms to collect government subsidies and ensure they can engage in risk-taking behaviour while protected by national safety nets.
"However with each crisis the debt of the taxpayer has increased, to the point in some countries such as Iceland, Greece and Ireland where the level of insolvency is so great, the taxpayer can no longer fund it.
Professor Kane said this situation would only change when taxpayers became energised like those in Ireland, Iceland and Greece and not only became informed about how the crisis came about but also demanded regulators monitor private and government sources of financial risk and required companies to create a 'living will' which outlined, how if it failed, the company should be wound up.
"If taxpayers don't defend their interests then they will continue to be treated as suckers by the Finance industry."
Professor Kane said extending stockholder liability would also limit risky behaviour by encouraging holders of assessable shares in difficult-to-fail firms to monitor the firm more closely.
"These well-informed investors' efforts to trade away from their extended liability would transform movements in the stock price of publicly traded institutions into a clearer and more timely signal of the strength or weakness of unfolding business plans," he said.
Professor Kane also argued for better training for government regulators via an equivalent of a West Point for financial regulators.
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