Bankers, pills and plumbers

OK, it has been a tough couple of years for New Zealand's central bankers but, according to the Reserve Bank's latest 'Statement of intent ' released this week, the country has at least "been spared the necessity of zero interest rates, massive capital injections to shore up banks and companies, and unorthodox quantitative easing measures that have occurred particularly in the US and Britain".

Something to look forward to, perhaps.

Meanwhile, the united central bankers of the world have rolled out a comprehensive report of what's gone wrong with the global financial system and how it might be fixed. The Bank for International Settlements (BIS) 79th Annual Report contains hours of fun reading, not all of it pitched at technocrats.

BIS, which bills itself as "the world's oldest international financial organisation" (and is also the subject of countless conspiracy theories), has taken a reader-friendly, back-to-basics approach in part of the latest report with this tradesman-like description of finance.

"The financial system is the economy's plumbing. And like the plumbing in a house, it is taken for granted when it works, but when it doesn't, watch out," the BIS report says.

"In the same way that modern living depends on a reliable flow of water running through pipes, the modern economic system depends on a reliable flow of financing through intermediaries."

But the BIS report goes beyond merely pointing out where the leaks and blockages are. For example, its prescription for helping investors avoid buying new-fangled financial products they don't understand is to treat investments as if they were drugs, which need a prescription.

"In a scheme analogous to the hierarchy controlling the availability of pharmaceuticals, the safest securities would, like non-prescription medicines, be available for purchase by everyone; next would be financial instruments available only to those with an authorisation, like prescription drugs; another level down would be securities available in only limited amounts to pre-screened individuals and institutions, like drugs in experimental trials; and, finally, at the lowest level would be securities that are deemed illegal," the report suggest.

"A new instrument would be rated or an existing one moved to a higher category of safety only after successful tests - the analogue of clinical trials."

Under this scenario, BIS says, investment product manufacturers will be "accountable for the quality of what they sell".

"This will mean that issuers bear increased responsibility for the risk assessment of their products," and advisers might be reduced to the role of pharmacists.

 

David Chaplin

 

 

Photo: Greg Bowker