Monday 29 April 2019

RBNZ Review of Capital Adequacy submission of Iain Parker May 2019



RBNZ Review of Capital Adequacy submission of Iain Parker



1) In opening, I refer the committee to Former Vice President of the World Bank and Nobel prize-winning economist Joseph Stiglitz who published this document January of 2018;



MACRO-ECONOMIC MANAGEMENT IN AN ELECTRONIC CREDIT/FINANCIAL SYSTEM



https://www8.gsb.columbia.edu/faculty/jstiglitz/sites/jstiglitz/files/Macro-Economic%20Management%20NBER.pdf?fbclid=IwAR2R-B9teE59jy1IFq1c0kLxlN_XXvLRO3qk8BzqcdHEcIAab5d22wDqbpQ



in which he said;



“In a modern economy, banks don’t intermediate between “savers” and “investors,” as claimed in the standard textbook models. Banks effectively create credit out of thin air, backed by general confidence in government, including its ability and willingness to bail out the banks, which is based in part on its power to tax and borrow.”



“While the modern financial system based on fiat money doesn’t suffer from the vagaries of gold discoveries, it has sometimes suffered from something else: volatility in the creation of money and credit by the banking system, giving rise to the booms and busts that have characterized the capitalist system.”



“Much macro-economic instability is associated with instability in credit creation and in the fraction allocated to newly produced goods and services. The paper also explains how, in an open economy, in a system of electronic money, credit auctions combined with trade chits might enable the control of net exports, again enhancing macro-stability. Finally, we explain how under a system of electronic money, the rents that are currently associated with credit creation and that arise from bank franchises—that constitute a form of appropriation of the returns from trust in the government and its ability and willingness to bail-out banks in the event of a crisis or bank run— could be appropriated by the government to a greater degree than at present.”



End quote



This document by Joseph Stiglitz is a very recent paper that supports my long-held well-documented views on the cause and fix of money system funding structure instability.



2) My submission questions the efficacy of this RBNZ capital adequacy review, along with that of the Open Bank Resolution bail-in plan already on the law books, as a guard against the societal chaos of an old fashioned run on a bank, due to its lack of acknowledgment that the present credit liquidity facilities of New Zealand financial infrastructure is far from old fashioned.



This process has ignored the model that has come to dominate banking in the money system funding structures of the Western world in modern times.



Which has evolved into a hierarchal chain of institutions who refinance with each other at a cheaper rate of interest than that which they then on-lend.



With those at the top bestowed with the extraordinary privilege of credit creation with only those lower down, normally at the domestic rather than cross border or government lending level, actually intermediating loans of customers savings of currency originated by the higher up credit creation.



The basis of the model is no longer one of what was referred to as a fractional reserve anchor model but has evolved into one of prudential reserve accrual accounting given the official name of Dynamic Stochastic General Equilibrium, in which all potential physical and human resource capital is valued by actuarial accountants (Valuers) then used as the collateral for the base credit of money.



If more base credit is issued than the sustainable natural resource collateral to redeem the base credit (Long-term Equilibrium) physically exists, inflation, asset bubbles, and societal wealth inequality follow.



The base credit becomes counterfeit beyond the fundamentals of money as a system to the advantage of those doing the counterfeiting and the detriment of humanity and the biosphere upon which it depends.



The more members a money system has the more complex becomes the accountancy of the senior most balance sheet of currency originating base credit versus long-term sustainable natural resource equilibrium and currency stability.



The monitoring of Equilibrium of the present system that has become interconnected throughout the Western world has been appointed to a small group of accountancy firms and financial rating agencies.



This balance is even primary to another long-running debate of the ethics of interest being charged upon all base credit no matter if it is being used by a government to develop the resources it has at hand for the greater common good of its citizenship, such as the bare, non-consumer choice, essentials of life or large strategic infrastructure of the economy.



I believe most people, including most academics, would be surprised to know it is presently large privately owned institutions that have been bestowed the extraordinary privilege of computer entry base credit, that sit one layer above most Western governments in the discount interest chain, including New Zealand, as evidenced in this document from the RBNZ Nov 2015 Financial Stability Report;



Implications of global liquidity developments for New Zealand



http://www.rbnz.govt.nz/financial-stability/financial-stability-report/fsr2015-11/implications-of-global-liquidity-developments-for-new-zealand



"There are three key channels through which New Zealand could be affected by declining market liquidity: the impact on New Zealand banks’ funding markets; the impact on short-term interest rates and monetary policy implementation; and the impact on the New Zealand government bond market.



New Zealand banks fund a significant proportion of their balance sheets by accessing offshore wholesale debt markets. They do this by borrowing in foreign currency, then ‘swapping’ this back into NZD. Conditions in global financial markets are therefore an important determinant of New Zealand bank funding. New Zealand banks tend to focus on the primary market (new issues) rather than the secondary market for debt. Hence, funding liquidity is of more immediate importance than market liquidity. Funding liquidity refers to the ability of the banks to raise debt as required at a reasonable cost. Reserve Bank discussions with bank treasurers suggest that funding liquidity conditions have deteriorated somewhat in 2015, owing largely to greater market volatility caused by events such as the Greek crisis mid-year and recent turbulence tied to China.



New Zealand banks typically use market makers to help facilitate the foreign currency swap leg involved in borrowing from offshore. Market makers take the other side of the transaction with New Zealand banks (providing NZD in exchange for foreign currency that the banks have raised), while charging a spread. This spread has widened as costs have increased for the institutions providing these market making services for the reasons described above. Overall, the cost increases have been manageable thus far, but this highlights the flow-on effects of changes in market liquidity to New Zealand entities seeking offshore funding."



end



The privately owned institutions are touted as receiving fair remuneration for their expertise in keeping the money system in long-term equilibrium and cover their business costs.



The private bank owners claim governments cannot be trusted to administer the base credit of money.



New Zealand predominately borrows the base credit of our money from Western institutions for ease of convertibility into Western currencies that some companies stipulate they will only accept as payment for goods and services along with assurances of the protection of wider Western financial regulatory protection agencies.



This is represented in a contract between governments and the privately owned financial institutions referred to in New Zealand as the Policy Target Agreement, promising that they as their part of the deal will deliver stable inflation and price stability.



In New Zealand, it amounts to a public-private partnership of which the major intersections of that partnership happen within the State Services Commission and the New Zealand Debt Management Office, a private institution that operates under the umbrella of New Zealand Treasury.



I contend the average farm or residential property price versus average income from the normal course of business ratio has made it clear the private banking sector has not delivered its part of the contract.



Assisted by the fact that the land portion of property was removed from the consumer price index in 1999.



Which has, in turn, made a mockery of the Interest Rate Inflation Targeting regime as admitted by many such as former IMF Cheif Economist Olivier Blanchard when referring to the failure of the great moderation.



3) Most of the foreign institutions from which the base credit of New Zealand money is borrowed have been fined hundreds of billions of dollars for counterfeit credit based frauds they committed causing the 2008 global financial crisis, with barely any of the perpetrators being jailed.



Most of the major accountancy houses and rating agencies were heavily fined for having been taking bribes in return for giving covering legitimacy to what former FBI forensic accountant William B Black termed Accountancy Control Frauds.



Which is when the owners and executives of market listed companies use fraud to falsify profits to gain from stock price related remuneration packages. Selling out and departing with their proceeds of crime before the fraud becomes obvious leaving the accountability with the nonhuman entity company shell.



In this regard, the massive increase in corporate debt bonds within New Zealand then being used for share buybacks rather than productive investment just screams out with very concerning residual current account balance problems with accountancy control fraud tendencies?



Back in the 1980s William B Black prosecuted and jailed many hundreds within the private banking sector for committing the same crimes many essentially got away with 2008.



William B Black says the 2008 GFC related fines amounted to a pittance of the proceeds of crime the perpetrators gained and the chances of it happening again is more 'when than if' as the necessary meaningful reform of the system has not happened.



With that in mind I contend this investigation of safeguards needs to extend far beyond capital adequacy requirements, tenure of share ownership or concerns of old fashioned runs on banks, into an examination of the creditworthiness of credit entering our economy and the origins of the purchasing power of private equity funds now roaming the globe seeking rent seeking hard assets, to ensure they have not been criminally gained.



The latest review of this process released by the RBNZ making mention of contingency credit lines being used as collateral for loans and preference share deals, along with a recent decision to not go ahead with the full privatisation of our nations electronic settlement system in the national interest, gives me hope the RBNZ has already begun to broaden its thinking on these matters;



Capital Review Paper 4: How much capital is enough?



https://www.rbnz.govt.nz/-/media/ReserveBank/Files/Publications/Policy-development/Banks/Review-capital-adequacy-framework-for-registered-banks/Capital-Review-Consultation-How-much-capital-is-enough.pdf?revision=2d386b12-1159-483e-9b53-34ecfebed91a&la=en



4) In recent decades I contend there has been a terrible level of odious, destabilising, wealth inequality inducing, predatory lending of counterfeit credit within the money system funding structures of the world, of which the victims deserve compensatory debt relief that has not been forthcoming and the measures being mentioned in this review will not deliver, let alone protect them from into the future.



I refer the committee back to the January 2018 published Joseph Stiglitz document in full with which I opened and suggest they investigate thoroughly the recent money system funding structure reforms implemented by Japan, with which we still trade and accept their currency, as written about often by the impeccably credentialed Adair Turner, in a hope they may continue to broaden their thinking even further in the face of empirical evidence of the highest credibility.



Yours sincerely

Iain Parker

Concerned citizen