Op-Ed Contributors

Lesson is to go back to basics

By Xiao Gang (China Daily)
Updated: 2010-09-16 07:48

Fiscal and monetary policy has fundamentally contributed to our financial stability. The reason is simple: Every financial crisis in history has been closely linked to currencies. Few people deny that the long-term extremely low interest rate environment in the US sowed the seeds of the crisis, which made the money too cheap and too easy to obtain.

Attending an executive program at the University of Toronto, Canada, in May and June, I was really impressed by the fact that Canadian financial institutions had been less hurt than their counterparts in other countries by the worst financial crisis in decades. Despite the close linkage between Canada and the US, no Canadian financial institution has gone bankrupt or is in danger of doing so. Why?

Canadian budgets were balanced and the monetary policy was sustainable before the crisis, in contrast to the situation in the US. In Canada, mortgages are not deductible from tax, and the down payment for buying a home is bigger and the leverage is limited.

Canadian banks are regulated more carefully and are more cautious about lending. They held onto most of the mortgage loans in the original, rather than repackaging them and selling them off. Hence, there was hardly a housing bubble or many toxic assets in the financial system of Canada.

Australia, a member of G20, is another good example in this regard. After sidestepping three crises over the past decade - the Asian financial crisis in 1997, the bursting of the dotcom bubble in 2001 and the global financial crisis in 2008 - Australia has maintained an uninterrupted growth streak, which is now into its 19th year. This was partly because of a prudently supervised banking industry that avoided toxic debt investment.

Australia entered the crisis with a large surplus in budget, and its interest rate peaked in early 2008 at 7.25 percent. The country's highly profitable big four retail banks have maintained their double-A ratings and are among the strongest in the sector across the world.

Understandably, the public is furious at the financial institutions that have made grave mistakes. Yet reform aimed at assuaging public anger cannot prevent a large-scale financial crisis from recurring. Reform policies are no gimmicks to attract public applause and cheers and to win votes. Politicians must be cool-headed and rational while addressing the real weaknesses in the financial industry. Over-politicizing and over-emotionalizing the problems existing in the financial industry help little to solve them.

The reform will be a long and dynamic process, and the regulatory rules might change from time to time. But the basic principles of good banking and good fiscal and monetary policymaking will not. And they deserve our immediate attention.

Emphasizing the basics does not mean we are not going to reform. Rather, it is only when governments and financial institutions adhere to those basic principles that our reform can be successful and sustainable both.

(China Daily 09/16/2010 page9)