A PANEL of international economists addressed delegates from the Irish business community yesterday, at the inaugural International Financial Services Summit at the Four Seasons Hotel in Dublin.
Nouriel Roubini, Martin Wolf and Willem Buiter joined a panel of experts to ponder the future of the global financial services regulatory framework and consider the original errors that had thrown the world’s economy into chaos.
Willem Buiter, professor of European political economy at the London School of Economics,greeted the audience by quipping: “It’s always interesting to be in the eye of the storm.”
Mr Buiter warned that the Government was protecting creditors and exposing the public to great financial risk in its Nama plan.
Mr Buiter said: “The Irish Government’s approach to the banking crisis appears designed to maximise the cost to the taxpayer.”
He said that stripping out the balance sheet of failed banks and effectively creating “good” banks holding good assets and value creditors, such as depositors, and “bad” banks holding toxic assets and equity in the “good” banks, was the international best practice solution to the collapse of lending institutions across the globe.
Mr Buiter said there was little chance that such a model could be implemented in Ireland, as there was no unsecured debt left.
Mr Roubini, who was dubbed “Dr Doom” by the New York Times, struck a characteristically pessimistic note, warning of dire consequences should governments and non-state actors fail to embrace the current opportunity to design and implement a powerful new global financial regulatory system.
“The next time we encounter a new financial bubble, the economic cost, the fiscal cost will be too dear; this time around we have to get it right or it will detrimentally effect the forces of both capitalism and globalisation,” he said.
“We had a ‘too big to fail’ problem in the past, but now the ‘too big to fail problem’ has become bigger . . . We are creating a bigger monster,” he said referring to the mergers between large US banks. “We have no way to deal with insolvency in an orderly way . . . If a financial institution is too big to fail, it’s too big. If it’s too big, we should break it up.
Economic commentator Martin Wolf also struck a downbeat note, saying the current wave of government intervention in the banking sector will only encourage bad lending again, as institutions will have the benefit of either an explicit or implicit government guarantee.
“These institutions know they are going to be rescued, and if they don’t know it, their creditors sure do and the lower cost of funding may lead another bubble to expand substantially,” he said.
Mr Roubini concurred: “These large institutions know that if they get into trouble, they will be bailed out, because they are too big to fail.”
Mr Wolf endorsed the concept of narrow banking, whereby normal deposit banking is stripped away from the current integrated banking system.
This sentiment was echoed throughout the afternoon, with both Nouriel Roubini and Willem Buiter advocating the disassociation of public utility banking from investment banking, or what Mr Buiter dubbed “casino banking”.
Mr Roubini said that the world had to reject the idea of the “financial supermarket” system which has been the norm for the past eighty years, where interdependence had exposed shareholders in commercial banks to risks not associated with the actual business of commercial banking.
“Banks should provide credit to the real economy, and the separation of commercial banking from investment banking has to be considered,” he said.
