As Wayne Swan steers his banking reform package — it seems to have stopped being described as a “wave” a couple of weeks ago — here’s why you should feel some sympathy for Swan — but not too much.

One of the themes of Labor’s first term in office, and more especially its first two years in office, was a failure to reconcile its rhetoric in opposition about addressing high costs of living with its action once in government. In opposition, Rudd successfully appealed to the most selfish traits of middle Australia, which was benefiting from tax cuts and rising incomes brought on by the resources boom but somehow felt itself under siege from the rising cost of living.

In particular, Rudd differentiated himself from the Howard government, which for all its late-era flaws, still adhered to the idea that governments couldn’t do everything and shouldn’t try to.

But in making Labor’s pitch that it could do something about rising costs of living, Rudd was careful to stick closely to rational economics. They may have been sold as a dramatic determination to intervene to prevent rising prices, but Labor’s policies were economic orthodoxy: the government would ensure consumers were better informed about prices, enabling them to shop around and take advantage of competition.

The result was FuelWatch and Grocery Choice, two much-maligned initiatives that were based on the idea that competition is improved when consumers have greater knowledge.  Neither ended up getting off the ground amid opposition obstructionism, industry whingeing and inept handling by the government.

The same logic has more successfully underpinned Labor initiatives in health and education, to make more performance information available to consumers, even if it’s much harder to “shop around” for schools and hospitals.

And it’s the same logic behind Wayne Swan’s constant jawboning of credit unions and mutuals in recent weeks.  So, too, bank-switching reform — it’s no good consumers being well-informed about the great deal they can get down the road — assuming there is one — and not being able to take advantage of it because of anti-competitive impediments put in place by the banking cartel. And several of the initiatives mentioned in Peter Martin’s account today of the Swan package have consumer empowerment at their heart.

Informed and empowered consumers are a good thing for competition, no matter what, but they’re especially good in industries, such as banking, where incumbents are able to put in place impediments to those who want to move their custom elsewhere, and dissemble or obscure real price comparisons between comparable products.

More interventionist types, such as the Greens, don’t regard this approach as sufficient. They want to directly regulate particular products rather than rely on the operation of the market to do its work. Or even (re)establish a direct role for government in the industry to drive competition directly.

But the real difference in banking is that the problem is more substantial than a mere oligopoly where consumers need to be on their toes to maximise whatever is left of competition. This isn’t like Coles and Woolies exploiting their market dominance. Banking is a hybrid industry, which looks like a normal, private sector-dominated industry but where the role of government is crucial. Governments create all sorts of distortions in banking, nearly all of them aimed at improving the stability of the industry, recognising that the industry is different to others in being critical to the functioning of the entire economy. There’s a reason big banks are regarded as “too big to fail” — it’s because the damage systemic failure in the banking system would cause wouldn’t be limited to the banking industry, but extend across the entire economy.

The GFC has fundamentally altered the role of government in the banking sector from that accorded it in the post-Wallis regulatory environment. That’s the point Joe Hockey has been making, and that underpins his call — and the call of many economists — for a major new banking inquiry, rather than continuing the series of penny-ante inquiries we’ve seen in recent years from senate committees. Encouraging people to go to credit unions and small banks for their home loans has little to do with these systemic issues.

Swan’s focus on consumers also misses the more substantial, though less politically high-profile, issue of the impact of the GFC on small business and property development lending, which, as I’ve harped about at length previously, should be attracting more concern than residential mortgages (Michael Pascoe has a great piece on the focus on mortgages today).

Still, the extension of government protection to credit unions and smaller banks in a manner that at least reverses the pro-big bank outcome of the wholesale borrowing guarantee indicates that Swan is prepared to beyond pushing consumers to shop around and specifically address the competitive impacts of the government’s role in the industry.

If only he could reverse the worst government “intervention” of all — waving through Westpac’s acquisition of St George.

Peter Fray

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