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Executive bonuses blamed for global financial mess.



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2CN AM Executive bonuses blamed for global financial mess

04/12/2008

PETER CAVE: Former Reserve Bank governor, Ian Macfarlane, is calling for radical surgery to get the global economy out of the "mess" that it is in and he blames bonus-hungry executives for causing that mess.

Mr Macfarlane says the past 30 or so years of deregulation has made the world more vulnerable to financial crises and it is now in the midst of the eighth and most serious shock.

Australia's chief central banker from 1996 to 2006 says a wider and stricter system of regulation is needed in the mid-term. But first credit has to start flowing again.

Karen Barlow reports.

KAREN BARLOW: With all the strife in global markets this year, Ian Macfarlane says he is constantly reminded that his 1996 to 2006 tenure as Australia's chief central banker was in better economic times.

IAN MACFARLANE: I've actually had people say to me in the street as they're walking past 'good timing mate!' (laughs).

KAREN BARLOW: During the annual Lowy Lecture in Sydney last night, the word Mr MacFarlane used most to describe the past year was 'astonishing'.

He says it is the worst crisis since financial markets were deregulated and despite some claims to the contrary, he insists no one could have predicted a meltdown of the current magnitude.

IAN MACFARLANE: Everyone who predicted what's happened this year has been predicting it for 10 years and getting it right one out of 10 does not actually give you enormous credibility.

I mean basically, when we say we can't forecast, I think everyone, probably everyone in this room knew that after this long expansion, at some point there would be a downturn. And I think I knew and I'm on the record for saying I thought the trigger would be a financial event, some excess in financial markets.

So am I a genius? No. Are any of us geniuses? No, we're not.

KAREN BARLOW: Ian MacFarlane says the past 30 years of financial deregulation had led to a less stable system. He says too many risks have been ignored or downplayed and he says there have been misdirected incentives such as performance-based executive pay bonuses.

IAN MACFARLANE: Annual bonuses in the millions and tens of millions, I've even heard of hundreds of millions, were available to the most successful profit earners and of course were not returnable when the short-term profits were lost in subsequent years.

KAREN BARLOW: Ian Macfarlane says the Australian system is better placed than any other OECD country and has indicated an interest rate move beyond the one percentage point cut announced by the RBA on Monday.

IAN MACFARLANE: Given our starting point we've had scope to move both monetary and fiscal policy in an expansionary direction and will no doubt continue to do so and to let the exchange rate play its traditional shock-absorber role.

KAREN BARLOW: The ANZ Bank director says it is time to turn the system around to avoid a ninth global financial crisis.

He says the institution known as the investment bank is now extinct, but regulators need greater control over other institutions like hedge funds, private equity players and property trusts.

PETER CAVE: Karen Barlow reporting.

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