Are we going to have this debate every time there’s an interest rate cut? How much should be passed on? Has the Prime Minister been fooled by the banks? How good is the jawboning ability of the Treasurer?
In a competitive market, those questions would be irrelevant. Moral suasion should not be the primary tool for pricing credit.
Needless to say we don’t have a competitive banking industry. We have an oligopoly that behaves in a manner very close to that of a cartel. And the credit crisis is going to make it significantly worse. Today’s AFR provides a neat demonstration of just how our major financial institutions are going to use the crisis to eliminate what’s left of competition. Mortgage lender RAMS, victim of the credit crunch, disappeared into Westpac in January, and St George will go the same way soon. Bankwest is about to vanish inside the Commonwealth. Suncorp is facing division and sale. Which all comes after the non-bank mortgage sector has been smashed by the credit crunch.
The painful dilemma is that, without intervention by the major banks and insurance companies, some of these targets face obliteration in the current climate. The choice is to be taken over or disappear. And even for the most aggressive competition regulator, that’s no choice at all.
Hitherto the Government’s response on oligopolistic behaviour has been to urge consumers to be better informed and more aggressive in voting with their feet. Direct intervention by the government through regulation or market entry was, rightly, out of the question. But it abandoned that stance when Wayne Swan announced he was making $4b available for triple-A rated residential mortgage-backed securities. There’s a strong rationale for that change of tack – credit is one area where the Government can intervene directly, and a lack of competition in credit provision increases costs throughout the entire economy – although you could probably make a similar argument in relation to petrol.
The $4b to tide small-bank and non-bank lenders over won’t, and isn’t intended to, address the long-run problem that our banking sector is a cosy oligopoly. It’s the same problem as in so many other areas of the Australian economy, where oligopolies and monopolies dominate key sectors. Unless there’s an unlikely return to the era of easy credit that non-banks lenders exploited in the nineties and early part of this decade, the only competition to the big banks will come from lenders with access to strong external balance sheets, like Wizard – although GE Money has put the For Sale sign up on Wizard.
The tendency to oligopoly in Australia remains our key unsolved economic problem. A decade and a half of competition policy, while effective at reducing the blight of government-owned monopolies, has failed to seriously address a native tendency to consolidation. This is the real market failure we need to address, even as the financial crisis comes and goes. The Treasurer has referred to the RMBS intervention as a temporary measure. Having decided that Interest Rate Watch isn’t a viable economic or political option, the Government should give hard thought to a more permanent form of market intervention. It could continue to support mortgage providers outside the big banks by providing access to cheaper money than that available internationally – or it could revise altogether the view, held by just about all of us for the last couple of decades, that government has no legitimate business operating in the financial sector.
Otherwise, we’re condemned to years of trying to persuade the big banks to drop us a crumb from their table.