Posted by: Dirk | September 1, 2010

“Financial deregulation gone mad” – Oceania in the 1980s

The economist, Christopher Wood, is quoted to have said about the level of Australian (private) debt: “Indeed, it might be called an example of financial deregulation gone mad.” (source) This quote is already 20+ years old. The financial regulation in both Australia and New Zealand in the 1980s might be worth a look in order to understand what the arguments were back then and compare them with the lessons we have learnt today.

Here is an extract of the comments by Kenneth Davidson on a 1993 paper by Ian Harper and Phillip Leslie (source):

The bottom line in measuring the effectiveness of ‘financial deregulation in the 1980s is its impact on the productivity of the other sectors of the economy that it serves. Over the past decade financial services share of GDP has increased from 8 to 9 per cent to 11 to 12 per cent of GDP, or, by some $8 to $12 billion a year. This increase in resources consumed by the financial sector has occurred without any discernible expansion in the productivity of the industries it served.

In fact, quite the opposite happened. Productivity growth in industries subject to the discipline of takeover fell during the 1980s while productivity growth of GBE’s not subject to this discipline accelerated. Privatisation will put the assets of GBBs ‘into play’ in the 1990s in much the same way that corporate assets were put ‘into play’ in the 1980s. Without fundamental reforms of the financial sector based on an understanding that the financial sector exists to serve the ‘real’ economy rather than vice versa, the financial services sector of the economy will live off privatisation in the 1990s in much the same way as it lived off takeovers in the 1980s, with some meagre returns.

This is how it is supposed to be. The financial sector serves the real sector, and its only measure of success is the productivity in the real economy. If that doesn’t move up ceteris paribus, then we are better off with a banking sector of the traditional sort. So, the recent news that bank profits in the US are at pre-crisis levels must not necessarily mean good news.

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