Peter Mair, looks ahead to Friday when the Reserve Bank Governor will meet the Parliamentary ‘Banking’Committee (EFPA) to report on some economic and payments system policy issues.
This Friday December 6 the Reserve Bank Governor meets with the Parliamentary ‘Banking’ Committee. There is potential to show a sense of the accountability of the Reserve Bank — we will see if the potential is realised this time.

A. CREDIT CARDS

– credit card rorts

Hopes that the ‘Smokey’ Dawson Committee reviewing the trade practices legislation might have reported at end-November are dashed, the new target is end-January. This public inquiry process has been very ‘private’ so far. Hopefully the Dawson Committee will eventually address shortcomings in legislation which is unable to stop banks collectively setting prices, against the public interest, for retail payment services (credit cards, debit cards, BPay etc.).

Some elements of this issue are canvassed in a story “Secrets and the system” published the current issue of ‘CFO’ magazine (cfoweb.com.au). Other elements of this issue were canvassed over recent months in ‘CFO’ and on ‘crikey.com.au’. One focus is the farce of the pursuit of credit card schemes and the ineffectiveness of the Reserve Bank in bringing banks to book. The Parliamentary ‘Banking’ Committee might let the Governor explain the divergence from expectations based on evidence he
previously gave to this Committee, as recently as 31 May this year.

I feel the community has been let down by the Reserve Bank.

– card ‘fraud’

It is difficult to know what the community is expected to make of card fraud involving the surveillance of customer PINs; the electronic ‘skimming’ of account data stored in magnetic stripes on bank cards and the subsequent manufacture and fraudulent use of duplicate cards.

Banish any suggestion of ‘sympathy’ for the banks who cover the cost of this fraud from inflated fees for card services. Rather, recall press reports in the late 1990s about the ‘firm plans’ to abandon insecure ‘magnetic’ cards and use the IC chip for fraud-free, smart-card technology.

To be a separate product the credit card relies on primitive ‘signature’ authorisation of transactions. Once all card transactions are securely protected with PIN and Chip technology there will be little fraud at all — at that point it will, however, be obvious that the credit card product is simply an unnecessary and overpriced contrivance. There will then be no material difference between a customers ‘credit card’ and their ‘debit card’ except that the use of the credit card generates excessive revenues from what the Reserve Bank euphemistically calls ‘collective price setting’ and which it says is against the public interest.

– EFTPOS reform

There are very different arrangements in place for pricing credit card and debit card transactions — and the EFTPOS reform process is allegedly underway.

Keep an ear on the convoluted discusssion of the debit card, point-of-sale purchase system, EFTPOS. The Vatican has envoys in Australia to monitor ways language can be used to confuse understanding
of the commercial reality of Australia’s EFTPOS system. The immediate responsibility for EFTPOS reform has been allocated to ‘the industry’ by the Reserve Bank, creating the prospect of nothing-doing delay and industry wrangling before the Reserve Bank can re-emerge in a ‘saviour role’, and justify further delay.

But be warned — it is conceivable that the EFTPOS debate will ultimately be resolved by allowing separate interchange fees to be payable to both ‘card issuers’ and ‘transaction acquirers’ — all at the
expense of the customers paying higher retail prices generally.

B. HOUSING

The temptation to say a little something about the ‘housing’ market is irresistable.

– the housing mess

Australia’s inability to generate ‘savings’ was to be ‘fixed’ by ‘lower taxes’ and a ‘superannuation’ scheme bolstering the prospects for more ‘self funding’ retirees. The additional savings would be investment capital fueling growth in the local and global economy. So much for good intentions — welcome to a hell of a reality.

This plan seems to have failed. In essence retiring boomers are selling the ‘family home’ to their children at grossly inflated prices and will spend the proceeds on consumption in their retirement – consumption paid for by their children now mortgaged to the hilt. This is akin to a ‘Paernt Support Agency’ .

Concurrently the people have resisted the idea that ‘superannuation’ is a sensible place for non-compulsory savings — if the managers of companies have not run off with the profits (and sometimes the assets) then the financial planning industry has its fingers in the till reaching for the rest. People don’t believe the superannuation dream — why would they?

There is a reasonable presumption that ‘someone’ responsible for sound economic policy dropped the ball — that ‘someone’ was asleep at the wheel when the illusion of growing personal wealth swept the country as the price of existing housing assets doubled and confidence in the ‘superanuation system’ fell apart.

There was of course more than ‘one’ responsible for this shambles – but none of the ones apparently had the character to tell the government that the protected status of the family home held the seeds of the mess that has eventuated.

– don’t blame the Reserve Bank

The Reserve Bank Governor recently talked about ‘residential property prices’ (pages 59 and 60 of the RBA Bulletin for November 2002, “Monetary Policy in an Uncertain World”).

The Governor says that the doubling of residential property prices over recent years was a ‘logical’ outcome and had little to do with “overshooting or bubble-like behaviour”. Indeed it was, he says, over
the past year or so only that any overshooting became evident as the flow of lending for housing was directed towards ‘investors’.

Spare my days — ‘owners’ of ‘family homes’ are investors as much as anyone else and the so-called ‘investors’ are simply landlords holding rental stock pending its sale to ‘owners’. Both ‘owners’ and ‘investors’ operate in well-connected segments of the same market and both are driven by burgeoning tax lurks as ever more innovative schemes allow owners to leverage the equity in their ‘owner occupied’ houses.

The Governor goes on to say that it seems the market is now actually beginning to work as it is supposed to — that growing recognition of overpriced, excess housing stock is (anecdotally) reflected in ‘flattened’ apartment prices in the September quarter. Ultimately the Governor says that the rapid inflation of housing prices was a reflection of Australia’s success — that if the economy had slowed earlier, so would the inflation of housing prices have stopped.

He does say these things.

What we know of course is that the market always works and that markets are driven by the ‘animal spirit’ of expectations about assets likely to perform better and worse than others. It is the job of economic policy makers to set policy in a way that provides a stable financial foundation by managing expectations of relative prices. It is the job of economic policy makers to manage ‘success’.

The Reserve Bank (among others) has a responsibility to put their hand up and clearly signal situations where policy inappropriately favours particular asset classes, such as housing. The problem now evident — overpriced housing and national savings being squandered — is not new, it is a repeated mistake. The problem is the predictable outcome of the political failure to address the sacred status of housing. While one might accept that politicial leaders lack moral fibre, it is less easy to excuse ‘independent’ authorities, such as the Reserve Bank, which have a responsibility to speak up to ensure that important national policy issues are sensibly described, rationally debated and effectively resolved. That helps underwrite good leadership.

I think we were let down by the Reserve Bank as the housing mess unfolded.

The Reserve Bank was not responsible.

Have a banana. We are protected by the British Monarchy.

Peter Fray

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