Who is responsible?

How good is our Reserve Bank? Governor Alan Bollard and his predecessor Don Brash always considered the central bank to be an innovator compared to its international peers. Both men point to its publication of the quarterly monetary policy statement, detailed economic forecasts and reasons for its decisions as examples of its world-leading credentials. Fair enough.

But New Zealanders tend to celebrate their own only when foreigners are banging on the Kiwi drum. Meet Howard Davies, former deputy governor of the Bank of England and now director of the London School of Economics.

To Davies' mind, Bollard and Brash are being a little coy in claiming credit where it is most certainly due.

"There is no doubt that the Reserve Bank has been a highly influential organisation internationally under Don Brash and Alan Bollard,'' is Davies' assessment. ''In central banking, as in rugby, New Zealand punches above its weight.''

It is hard to think of the two governors   bespectacled, slight men who carry the other-worldly air of harassed academics  as the banking equivalent of All Black heavyweights. Now we can mention Don Brash in the same breath as Don Clarke.

New Zealand developed a monetary policy framework that has been adopted by more than 20 countries, Davies says. As such, it earns a special place in global central bank history as ''the originator of inflation-targeting''.

Davies delivered those comments in Wellington recently at the 75th anniversary of the bank's inception in a speech entitled, ''The financial crisis: whodunit?''

He is qualified to give judgment, given he served at the Bank of England in the 1990s and was chairman of the Financial Services Authority until 2003. It was during these periods that the seeds were sown for the global economy's present calamity.

Davies admits that, back then, he believed the financial system could still operate with low capital requirements for banks, and complex debt derivatives were ''by and large a good thing''.

Needless to say, his view has changed but, he implies, these commonplace beliefs held by regulators played their part in allowing the crisis to develop. "Central bankers must take their place in our rogues' gallery.''

He does not mean this  to be a veiled criticism of the Reserve Bank, but rather his own and that of others. Bollard touched on this in an interview earlier this year, when he noted that his team had fulfilled its obligations but ''some of the larger economies should have tightened''.

Tax cuts in the United States and Britain helped fuel unprecedented spending  politicians and households must also shoulder responsibility.

Appropriate retail and investment bank governance was also lacking. Davies has, since 2004, served on the board and audit committee of Morgan Stanley, which ''was caught up in the enthusiasm of some of the markets that went pop''.

He is honest enough to take his share of the blame and admits ''boards did not exercise appropriate oversight [and] incentive structures gave extravagant payments to individuals who structured these deals''.

The combination of his public and private experience gives Davies a unique perspective of both insider and outsider when considering who and what caused the crisis.

Assigning responsibility is important. "This is not a situation in which we can say, 'No worries, we all make mistakes', and move on,'' he notes. Not when the cost to the taxpayers of the US, Britain, Japan and Europe is estimated at US$9 trillion (NZ$12.6t)  and counting.

But the trouble with holding institutions, systems and people to account is the lack of consensus. A quarter of all Americans, for instance, believe the crisis was caused by the Jews, an appalling statistic until you consider how many believe Elvis is still alive.

Right-wingers say government interference was the prime cause; Lefties blame unbridled capitalism.

Public surveys in Britain show the majority of people hold bankers as most culpable and, in Davies' view, "I would not wish to deny them the accolade''.

Financial innovation was also an important component in the economic catastrophe, if only because it "broke the crucial link between the lender and the borrower''. Banks were happy to lend for as long a time as it took to securitise the mortgage and get it off its books.

But the unhappy truth is "we have a complex failure on our hands''.

Change will come but Davies seems pessimistic as to its chance of success.

All we are left with is trillions of litres of red ink to share around, and a crime scene without a culprit to hang.

 

 Nick Smith is a freelance journalist.