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October 26, 2010
Credit where credit is due.
Joe Hockey is calling for a financial inquiry into our financial system and for banking reform. It's about time we moved away from bashing the banks to policy; moved away from concentrating on the Reserve Bank of Australia to the inherent flaws in the financial system itself. Where is the ALP?
Martin Rowson
The international context of Hockey's proposal is the high degree of instability of the international financial system and the lack of capacity to both prevent and manage financial crises. There are calls for fundamental reforms in the global financial system, given that the IMF is the principal institution of global economic governance positioned to help deal with the current economic and financial crisis and the Fund’s legitimacy and relevance has been undermined in recent years.
The IMF no longer has a major role to play as a lender, helping to guide the global economy and financial system, and protecting the international financial system.
The global economy and financial system are in the midst of a massive deleveraging process. The increased globalization of the world economy and, more important, of the world financial system in recent decades means that countries can run, but not hide, from this crisis or future crises. European countries are facing sovereign debt crises from bailing their junk financiers.
Secondly, the finance industry has effectively captured our government and its policy prescriptions are consistent: finance unleashed would propel the economy to greater economic growth; and countries need to learn to live within their means after a period of excess—exports must be increased, and imports cut. The global financial crisis indicated that financiers or Wall Street in the case of the U.S. played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse.
The Big banks have only gained political strength after the global financial crisis. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive. The Obama administration seems helpless, or unwilling, to act against them. As in America, the state's velvet-glove approach with the banks in Australia is inadequate to change the behavior of a financial sector accustomed to doing business on its own terms, at a time when that behavior must change.
Hockey backed away from any suggestions that the Coalition advocates the re-regulation of interest rates. He says that the big four banks were now too big to be allowed to fail, that the four major banks have largely become the Australian financial system and that the major banks are using their newfound market power to collusively signal pricing intentions. He also argues for greater competition as the smaller banks are are finding it hard to get funding.
His policy suggestions are:
1. Let’s give the ACCC power to investigate collusive price signalling (that is, oligopolistic behaviour), which is exactly what Graeme Samuel has called for;
2. Let’s encourage APRA to investigate whether the major banks are taking on unnecessary risks in the name of trying to maximise short-term returns that conflict with the preferences of those that backstop the system, namely taxpayers;
3. Let’s formally mandate the RBA to publish regular—rather than irregular—reporting on bank net interest margins, returns on equity, and profitability so that we can all determine whether the major banks are extracting monopolistic profits; that is, whether taxpayers are effectively subsidising supernormal returns;
4. Let’s investigate David Murray’s proposal for Aussie Post to make its 3,800 branches available as distribution channels for smaller lenders. To be clear, the Coalition does not endorse Australia Post assuming balance-sheet risk and getting into the banking business itself;
5. Let’s ask the Treasury and the RBA to investigate ways to further improve the liquidity of the residential and commercial mortgage backed securities markets, which are an alternate source of funding for smaller lenders, including consideration of the Coalition proposal to extend the Government’s credit rating to AAA rated commercial paper in those markets to improve liquidity;
6. Let’s explore further simplification of my beloved Financial Services Reform Act, to make the business of actually getting out and doing business easier and simpler;
7. Let’s direct APRA to explore whether the risk-weightings on business loans secured by residential properties are punitive. Many small businesses tell me that they do not receive sufficient financial benefit from pledging their family home to secure their borrowings;
8. Let’s commission a resolution to the debate about whether the banks should be able to issue “covered bonds”, in the same way other jurisdictions allow their banks to, which provides a more affordable line of credit;
9. And let’s wrap up all of this work into a full review of the financial system—a Son of Wallis, or Grandaughter of Campbell, whatever you will.
Hockey advocates stopping collusion and increasing competition in addressing the core question: How to regulate banks that are regarded as too big to fail. Is this the beginning of a critical look at the the cult of finance that has seeped into the culture at large?
We now have a situation in which in our society, which celebrates the idea of making money, it is inferred that the interests of the financial sector are the same as the interests of the country. The implication is that the winners in the financial sector know better what was good for Australia than did the politicians and public servants in Canberra.
It's time to address the power of the banking oligarchy. The major banks draw much of their power from being too big to fail. It's time to break the oligarchy through anti-trust legislation in greater competition. What will the ALP do?
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It is ironic that the ALP, the party of reform, is defending the banks from Hockey's calls for greater regulation and competition on the basis that timorous foreign investors might be scared off by a debate about banking regulation in Australia.
Thus Bill Shorten, the Assistant Treasurer, said in Question Time:
That positions the Gillard Government as being anti-reform of the financial industry.