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Jul 8, 2009

Back the debt truck up — we need big ideas like the People’s Bank

Some of our best economic thinkers from across the ideological spectrum have penned an open letter urging a comprehensive review of the Australian financial system. About time!

Back at the start of the year I suggested the economic crisis had taken us into a new world where the role of government had been transformed, and hoped that our best economists should start thinking about where we go from here.

Today several of our best economic thinkers from across the ideological spectrum did exactly that, with an open letter urging a comprehensive review of the Australian financial system — and how it interacts with those across the globe.

The timing couldn’t have been better, coming the day after Malcolm Turnbull revived the debt truck from the early nineties and the ALP — who had evidently been waiting for just such a moment from the Coalition — replied with the clunkier “Supporting Jobs Truck”, which presumably hasn’t been donated by John Grant. While our politicians mess about with trucks, there are pressing issues to deal with.

There are a couple of key issues identified by the economists that have so far not received the attention they deserve. One is that the collapse of the residential mortgage-backed securities (RMBS) market — in essence, non-major bank lenders — has indirectly put pressure on business lending, and particularly higher-risk business lending, because the big banks have moved to fill the gaps left by the RMBS market. This goes, as the Prime Minister would say, to the vexed issue of whether bank capital costs really have increased, as they claim.

Another is that it is not merely global capital markets that are interconnected, it is government policy that is similarly interdependent. New policies already implemented, and being now developed in other countries will have significant impacts on the Australian financial system, but we don’t as yet have any comprehension of the nature of these impacts — and no process for doing so.

Above all, they worry that it may have been good luck rather than, or in addition to, good management that meant the Australian financial system was relatively safe from the sort of disasters that beset the American and European systems. How will we fare next time?

The letter raises fourteen specific questions, each of them meaty issues. There is plenty to alarm the big banks, but the most disturbing will be a suggestion that consideration be given to a basic financial service based on existing Government infrastructure such as Australia Post.

In particular, the group wonder whether there is a role for a publicly-owned entity like Kiwibank in New Zealand, which operates from post offices and participating retailers, but offers both deposit-taking and lending, including business lending.

A more minimalist option would be the establishment of a deposit-taking entity that invested in the Future Fund. That would increase competition for deposit interest rates, whereas a full Kiwibank model would challenge the big banks across most of their activities. It would require significantly greater infrastructure and expertise than a simple deposit-taking entity, but not necessarily need to replicate the full branch-based structure of the major banks.

The proposal flies in the face of what was accepted wisdom before September last year; now, however, even in Australia government is deeply enmeshed in the financial system via the bank guarantee and its own efforts to prop up the RMBS market (not to mention the stillborn ABIP proposal).

It merits serious consideration because the long-term project — pursued by both sides of politics — to maintain competition in lending in Australia is failing. It depended on the availability of externally-sourced capital for the RMBS market, which was fine while the world financial system was spilling over with finance but ended the moment the crisis hit — especially after the bank guarantee massively strengthened the hand of the major banks over what was left of the non-bank lending sector.

Now we are left with a true oligopoly, operating in a manner indistinguishable from a cartel and unable or unwilling to reduce business lending rates.

It’s hard to see what downsides there are for the Government in conducting the sort of inquiry urged in the letter. It has handled the triage stage of the financial crisis very well. Now is the time to take a step back and consider an overarching strategy. As the Prime Minister noted in his comments overnight in Germany, managing the recovery sustainably will be as challenging as managing the crisis itself.

How long until the Government is again confronted with one of the banks unilaterally raising interest rates, particularly for business lending? The problem of Australia’s banking oligopoly needs a long-term solution.

Crikey understands that one of the Wallis Inquiry members, Prof Ian Harper, also strongly supports the idea of a new inquiry.

As Christopher Joye told Crikey, “…the financial world has changed more in the last 13 years since Wallis than it has in the last 40 years… The key message of the letter is that it would be a massive mistake for the politicians and bureaucrats to persist with the self-congratulatory hubris. The fact is Australia was very lucky to skate through the crisis unscathed. Our system is good, but also has many glaring flaws.”

Something for the politicians to think about while they’re playing with trucks.

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7 thoughts on “Back the debt truck up — we need big ideas like the People’s Bank

  1. Richard Wilson

    I agree. We need a people’s bank but one run by the people not the government. I am inclined to the view of of UK MP Kate Hoey who wrote in the UK Guardian on June 8, 2009:

    ” I believe the time is right for a people’s bank to be established through the post office and for Northern Rock to be incorporated into it”.

    Now I wonder where the idea for today’s SMH story came from!

    But critically, Hoey doesn’t want the government to get their hands on the people’s money and states unequivocally:

    “The national interest would be better served (than selling it to Virgin Money) by integrating it(Northern Rock) into a nationally owned bank, not state run nor shareholder driven, but locally based, prudently managed, and responsible to a public interest trust as its governimg body”.
    In other words, a not for profit entity entity protected from any government getting its grubby hands on the bank’s wealth. I mean how safe is the future fund really!

    As Ross Gittens so aptly put in the SMH this morning (July 8, 2009):
    “When you earn your livelihood from banking or politics, it is not hard to be always fully abreast of market conditions….But because banking and voting constitute such a small part of our daily lives it is hard to be well informed about what the sellers are up to. This gives them a considerable advantage over us”.

    In a world where big government and big business are becoming increasingly linked and collectively tarnished, there is need for a third way. That way is for the people to protect their interests through the not for profit sector efficiently run for the benefit of its members, not corporate interests nor recipients of government boondoggles or conferred monopolies.

  2. Peter Phelps

    How about calling the new bank ‘Ruddie Mac’ or ‘Swannie Mae’.

    Seems appropriate for its presumptive role as politicised sub-prime lending institution.

  3. j-boy57

    Tonka Turnbull
    I dont think Malcolm realises how much he has damaged himself
    with the thinking electorate out here.
    I for one was hoping for a genuine attempt at some kind of intelligent
    debate in the parliament,not petrol ,pensioners and perfidy.
    Maybe malcoms just another overated white shoer with ambition and ego

  4. Altakoi

    What the financial services sector has lacked is an ethical acceptace of the sort of agency relationship which is assumed by professions like medicine and law. In these it is considered malpractice to put your commerical interests ahead of the interests of your client. This might be improved by a publicly owned bank, but it would also require a less sociopathic orientation among the top executives in finance who seem to feel that its all their money.

  5. harrybelbarry

    Not for profit bank would be good, but they would have to put some legal paper with NO loop holes and not sold off like the CBA , when we get a change in parties.

  6. Bernard Keane

    My god Phelps, I’ll actually pay “Swannie Mae”. Nice.

  7. JamesK

    Not enough here by way of detailed programmatic specificity