Banks should be public utilities

The news that banks have dramatically increased their fee income yet again will come as no surprise to most of us. Less significant in macro terms, but far more drastic for those affected, has been the atrocious practise of selling tiny debts to loan sharks, who will then sell people’s houses from under them at sheriff’s auctions. Given that these institutions exist only by the grace of the Australian government, it’s time to give them the same kind of message that Telstra received recently.

It’s time to offer the banks an offer they can’t refuse (unless they’re feeling lucky). Either withdraw entirely from the prudential regulation system, and stand on their own credit, or accept the fact that the public, as the residual risk-bearer, is their ultimate owner, and act accordingly.

To spell out the first option, the government should offer all the Australian banks the option of replacing their existing guarantee with the opposite – a guarantee that under no circumstances will Australian taxpayers bail them out, make good their obligations to depositors, or permit either the Reserve Bank or taxpayer-guaranteed financial institutions to extend them them credit or support of any kind. A window of, say, twelve months, should be announced during which the government will make depositors whole in the event of a failure, necessitating takeover of the bank in question (of course, with the shareholders wiped out and the directors and senior management subject to all available legal penalties). After that, the depositors, counterparties and creditors would be on their own. My estimated survival time for a bank choosing this option would be measured in hours rather than days, but as I say, they might feel lucky.

In the second option, taxpayer-guaranteed banks should have all their rates and charges determined by regulation, with the objective of ensuring shareholders a return comparable to the government bond rate. Salaries should be set in line with comparably responsible positions in the public service. Lending practices should be controlled to ensure acceptable risk levels.

Banks should be boring public utilities, offering safe and steady, but not particularly well-paid jobs. Anyone who wants to be a financial speculator should do so without public backing.

Update On reflection, my second option is a bit too prescriptive. It’s obvious, looking at the global economy, that the financial deregulation that took place in the 1970s and 1980s has been a failure, and the primary cause of the current crisis. Australia’s relatively mild exposure (so far) has been as much by good luck as good management. So we need a fairly comprehensive re-regulation which ensures that banks fulfil the role of a public utility. But whether the kind of price-cap regulation applicable to other utilities would be the best model remains to be worked out.

64 thoughts on “Banks should be public utilities

  1. Hear! Hear! I think perhaps Paul Keating is due for a hat tip on this, Prof Q. I may be wrong, but it was he AFAIR who first raised the utility analogy.

  2. We might ask – In what way is the public good served by having banks as organs of speculation?

  3. First option is realistic, the second is so weird that I cannot begin to describe how bad it is.

    This is without a doubt one of the dumber things I have ever read from someone with a PhD. I know that is an personal attack but seriously think about that for a sec… the government telling banks what and how much to lend? And at what rates? State bank failures? How about regulation to pump up the subprime market?

    Governments and finance never end well.

  4. Excellent idea JQ.

    I suppose the assumption is that the speculation part of the finance industry will remain very small compared to the regulated side. I do wonder though what would happen if the speculation part of the industry that is not subject to regulation grows large. Are we then in for the same problem of systemic collapse when all the funny money business between related parties goes belly up?

    In other words is it okay to have any part of the financial system not regulated?

  5. “Lending practices should be controlled to ensure acceptable risk levels.”

    If the rate of return to shareholders is to be the same as a government bond, that means no risk at all, which means no lending, which means no bank.

  6. Now I have calmed down…

    The subprime crisis was caused because Fannie and Freddie were pressured to extend underwriting in the subprime mortgage market in the US by politicans putting pressure on regulators or via congressional oversight.

    What will stop this happening in Australia under your plan?

    Who will put money in the banks who agree?

    What incentive is there for high quality risk managers to work in these banks if they can get a better paying job elsewhere?

    There seems to be a number of problems with you suggestion.

  7. “If the rate of return to shareholders is to be the same as a government bond, that means no risk at all, which means no lending, which means no bank.”

    It depends what you mean by risk. The interest rate on loans would obviously have to include an actuarially fair allowance for default risk, on top of the real interest rate, otherwise shareholders would not get their return.

    SeanG, you sound confident that any sensible bank would refuse the offer, in which case my proposal would produce instant financial deregulation. So what is your problem?

  8. The black-or-white contrast is disturbing… especially the latter. Plus your title indicates that you have a preference towards banks being like public utilities.

  9. Agreed. Great post. A government with courage and guts and a government that wanted to make their mark in the history books would do this. A gutless toadying government would not.

    Is Rudd a hero or a toad?

    He looks like a toad to me.


  10. John @8

    I disagree. Under your scheme the expected return to shareholders is the same as the actual return on a bond, and that is not as good as the bond, unless the shareholders are risk neutral.

    And aside from default risk, tailored to the individual borrower, there is beta risk, such as recessions.

    No one in their right mind would invest in a bank where the expected return is the bond rate.

    It would be easier just to outlaw the bastardry described in the CM story.

  11. Uncle M, the beta risk is largely obviated by the government guarantee, and all other risk is idiosyncratic.

    But, I’m happy to let the regulator set a return that adds an appropriate beta risk to the bond rate, as with other regulated utilities. As I said, the rate should be comparable to the bond rate, not necessarily equal.

  12. Fannie and Freddie get blamed again by Sean.

    This comes as no surprise…an ideological blindfold.

    This argument over who caused the GFC has been done to death in another post with stats.

    CDOs were invented by Michael Milken’s (of junk bond fame) Drexel Burnham Lambert. A group inside JP Morgan Chase invented credit default swaps a decade later. They were legalised in 2000 and one year later were protected from being regulated by the Commodity Futures Modernisation Act. It was never debated in parliament. There was a total failure to regulate debt derivatives.

    The companies that referred the new synthetic CDOs were the three Icelandic banks, Lehman Brothers, Bear Stearns, Freddie Mac, Fannie Mae, American Insurance Group, Ambac, MBIA, Countrywide Financial, Countrywide Home Loans, PMI, General Motors, Ford and a whole lot of builders of US home builders..

    Now if that last group doesnt suggest something – I dont know what would (the same houses buit by the same builders? they are now bulldozing??).

    At least, although stupidly privatised after working well for decades after the end of the great depression (yes – a public bank that worked well), Fannie and Freddie had some standards by way of a government compliance.

    The rest had no such regulation.

    Bring on the idea of a bank / banks as a public utility. Guess where I would put my money? In the public bank.

    A series of Governments stand by and let Australians get gouged by a circle of oligopolies in every basic necessity industry.

    When you see it on the news every night and hear it on the radio many days (petrol, supermarkets, insurance and banks…you know Australians are pretty fed up with it).

    The home warranty insurance company VERO is another classic. It provides no insurance unless a builder dies or goes bankrupt..Its payout ratio is a disgrace. It is owned by Suncorp Metway. It was set up by State Labor. One of the building Associations gets commissions for selling it. Its compulsory for jobs over 12000. Every builder hates it and every consumer cant see the point of it. Guess who owns a huge pile of Suncorp Metway shares. NSW State Labor (who set this particular scam up).

    First we need to clean up the government and then clean up the banks and the rest of them. You know when you set assignments and every third student writes chooses to write about oligopolies (as a topic) and raises collusion that something isnt right. Even the kids know it!

  13. JQ says..

    “far more drastic for those affected, has been the atrocious practise of selling tiny debts to loan sharks, who will then sell people’s houses from under them at sheriff’s auctions.”

    Thats a scam too. I bet the purchaser is know to someone…and it isnt wodely advertised when they do auction the houses (not that you would ever prove it). Im cancelling my credit card (I never use the thing anyway).

    I need a public bank (How much longer should we trust these banks with our savings?)

  14. Wow, just wow! What worries me about stories like these is the apathy of the Australian consumer. For years we’ve been told how the big banks are ripping us off and we do nothing about it.

    When I transfered all of my savings to a community bank and cancelled my credit card several years ago, I was repeatedly asked by the bank staff serving me if I was sure that that was what I wanted to do. I assured them that it was. They seemed genuinely shocked.

  15. Why do we regulate banks?

    We regulate banks because they are allowed to lend money they do not have. We have passed the responsibility of increasing the money supply to the banks and so of course we have to regulate them because their lending practices determines how much money we have in the system.

    Remove this function from the banks and increase the money supply in other ways (such as I have been suggesting) and the need for most of the banking regulations go away.

    It then means that others can more easily get into the business of “holding money on deposit” for trading purposes and then the banks will get some real competition and we will see fees and charges drop dramatically.

  16. accept the fact that the public, as the residual risk-bearer, is their ultimate owner, and act accordingly.

    Does this logic apply to the citizens also. If they get sick the government bails them out. If they lose their job the government bails them out. Does this means we should all acknowledge that the government bears our risks and that we are ultimately all just bits of state property. In the wonderful world of neo-socialism I suspect so. Although they won’t admit openly to their slavery fetish.

    The news that banks have dramatically increased their fee income yet again will come as no surprise to most of us.

    Perhaps we ought to dismantle some of the artificial barriers to entry that exist in this sector.

  17. The fundamental problem with any lending institution that is operating in a free market is that the risk calculations by the institution for individual loans is done on a “all else being equal” basis. The combined effect of these loans at the system level “creates” a new risk, as we have experienced in the USA and elsewhere recently.

    The system optimum is simply not the same as the institution’s optimum in this particular market (ie. loans market). In other words, a booming property market may provide the background environment for a competitive lending institution to calculate a loan default risk as low probability (based on prevailing interest rates, unemployment rates, salary, capital growth, etc), yet the very act of making that loan feeds back into the boom market.

    At precisely the time where a lending institution should be exercising extreme care in the loans it makes, the assessment of individual loan risk against the background environment, *and* the pressure of competition in the market produce a low default risk assessment when in fact the default (and other non-performance) risk at the system level is rocketing upwards.

    If banks are to be competitive then some form of regulation is a necessity in the lending markets. An imposed constraint provides a level playing field while limiting the self-inflicted damage by poor loan issuance.

    Caveat: I’m not an economist (imagine that 🙂 ) so no doubt there are strong arguments about my characterisation of the main problem as I see it.

  18. Alice #14 says

    “When you see it on the news every night and hear it on the radio many days …you know Australians are pretty fed up with it”

    not fed up enough to switch banks. There are plenty of other options out there. I haven’t paid bank fees for about 15 years with my credit union. Too easy.

    I think its time Australians started taking to the streets again to demonstrate how fed up they are with environemntal inaction, bank rip-offs etc. Maintain the rage! The Prime minister will always end up being a “toad” if the people let him relax between elections (the media is too pathetic to do it). Hopefully the uni students will soon get dispondent that there are no jobs after graduation and put some energy into worthwhile community and nation changing projects and demonstrations.

  19. Donald #18

    As another non economist I understand you 🙂

    What you are saying is correct. It is an example of sync. Take a look at a description by Steven Strogatz

    or read the book

    Sync is a mechanism that explains the evolution of order from chaos. So we have the “chaos” of banks lending money to lots of people at random becoming orderly or in sync and so we get systematic failure of the system.

    The way we create money and the way we create loans means that it is inevitable that we will continue to get our financial institutions acting in unison with respect to creating loans. This in turn means it is inevitable that we will observe business booms and busts. Regulation is one way to try to stop sync but it by stops the system being dynamic and able to evolve and adapt.

    The reason why we get loan sync is that we have a system where money enables loan creation and loans enable money creation. One way to prevent sync is to break the positive feedback by stopping creating money through loans.

    I have been attempting to describe ways of creating money without loans and have coined a new word for the general mechanism – amasset (short for money to asset and it sounds like something that will increase). If anyone can think of a better name let me know.

    The main criticism of the idea appears to be that I cannot fit it into the common economic models and show it will work. Unfortunately traditional mathematical modelling will not show sync because sync is an emergent property of the system and so far we have difficulty with before the fact modelling of emergent properties but “we know it when we see it”.

    When we change the underlying mechanisms in dynamic systems we get new emergent properties and it is important to design an amasset to result in beneficial emergent properties. We don’t know what these will be before we do it but we can make educated guesses and we can look for the outcomes we want and tune our mechanisms to achieve the desired results.

    I came to this idea of amasset from trying to design a system to get rid of water restrictions so that I was allowed to water my garden in exchange for fewer showers:)

    I then realised it had general application and we can reduce ghg emissions by rewarding me for constraint provided I spend my Rewards investing in ways to reduce greenhouse gases.

    I then found it had other applications because it enables us to redirect resources through open transparent markets.

    It is a mechanism that solves the tragedy of the commons by breaking the sync that can be so damaging to our economies.

  20. If you want to regulate banks for one reason or another, that seems like a different goal to just bank-bashing, which is what the start of this article is.

    I’ve personally always found banking rather cheap and reasonable in Australia — last time I checked, administration fees were costing me around $5 per month (and that’s the CBA, the biggest bank in Australia) which is no doubt a tiny fraction of what the supermarket makes out of me each time I shop (and I’ll assume there are probably free accounts if I looked harder — and there are countless providers to choose from). If banks now offer non-essential services at a cost (like, for example, mortgage insurance), I really don’t see what’s wrong with that, as no-one is obliged to use them. I also don’t see why they should be obliged to participate in the entire process of collecting money — if there is a problem with loan sharks and debt collectors, then it’s them that should be targeted, otherwise every business in Australia is going to have to become debt collectors also.

  21. Anyone who calls himself THE DON does not deserve “repsect”. You know when people like THE DON attack you, you’re on the right track (provided they don’t take out a contract on you!).

  22. E23: Hey, there is only one Don – me – and the motto that friends have stuck on me is “Is Don, Is Good” (Thanks to Don Smallgoods adverts).

    Imposter dons are not condoned by this Don. Please cease and desist in using my name in vain.

    Don. And don’t forget it.

  23. Lol Don! The only Don…I dont like the way the imposter DON is getting heavy with the Prof!

  24. Terje says
    “The news that banks have dramatically increased their fee income yet again will come as no surprise to most of us.

    Perhaps we ought to dismantle some of the artificial barriers to entry that exist in this sector.”

    We did that Terje (financial de regulation and we privatised the Commonwealth bank). A whole lot of new banks flooded in…then there was Wizard and Aussie etc – how are many of them travelling now (gobbled by majors allowing majors, and consumers pouring out of second tiers back into majors, allowing them to become even fatter oligarchists – yet not as bad as the US financial oligarchists – why 4 pillar policy)?

    Dismantling the barriers to the banking sector (and allowing them to be both banks and investor / gambling houses) is a large part of the problem with the banks, not the solution Terje.

  25. The Labor party has a notoriously long insitutional memory. I reckon they’ll remember what happened to Ben Chifley when he proposed something like this – and that was in a climate when memories of the banks’ utter bastardry during the Depression were fresh.

    I don’t think the Ruddster will take you up on this. A pity.

  26. There’s a lot global support for that NZ couple who went on the run after a bank error gave them a few million dollars. I reckon a move to nationalize the banks would be just as popular at a political level – maybe Malcolm Turnbull should consider it before he too hits single digit approval ratings eh?

    I mean, it’s not like cheap populism has ever been a problem for the Coalition, right?

  27. Excelletn post, though I think there are many solutions, and total govt ownership of all banks may not be the best one. Banks are now effectively natural monopolies as well as essential services. Govt regulation requires their use for receipt of payments, super & even wages. Without regulation its a recipe for moral hazard. I see several options:

    A. greater regulation to protect consumers
    B. limits on exec salary while in receipt of govt assistance or guarantee (helps shareholders too so should be agreeable to genuine investors)
    C. limits on bank fees just like limits on real estate fees
    D. tighter application of TPA on bank mergers (a “too big to fail” test?)
    E. govt owns one bank to ensure competitive products for base level customers
    F. govt owns several or all banks

    I think A, B, C and D are all rational in the name of efficiency alone. E is desirable. I don’t favour F – remember that State banks went bust too in the early 90s. But A to E would all be politically popular IMO.

  28. Addition to 32 above

    G. Audits on banks, not just equity tests. Why not? Given their public role, regular govt audits of their operations woudl reduce the degree of bank fraud and crime (it happens but is rarely reported let alone prosecuted).

    Bankers think they are scrutinised now but that is BS. They have no idea what other professions have to do in the name of QA, EH&S, and various regulations on professional practice.

  29. 32 Socrates – I think you hit in the first 6 points (A to E). I reckon that would be sufficient to get a whole lot of people wanting to use the one public bank…and put pressure on the privates to toe a reasonable line.

  30. Pr Q says:

    Banks should be boring public utilities, offering safe and steady, but not particularly well-paid jobs. Anyone who wants to be a financial speculator should do so without public backing.

    Banks have, through government guarantees, been able to eat their risk minimizing cake and have their reward maximization too.

    Thats a recipe for morally hazardous financial activity.

    I would also suggest a return to one decent sized publicly owned bank, designed to keep the b*stards honest. A Peoples Bank, a Commonwealth Bank.

  31. Pr Q says:

    It’s obvious, looking at the global economy, that the financial deregulation that took place in the 1970s and 1980s has been a failure, and the primary cause of the current crisis.

    In this moment of Left-wing triumphalism its probably not a good idea to throw out the competitive financial de-regulation baby with the exploitative financial de-regulation bath-water.

    Hard-core financial de-regulation is definitely dead and buried so far as the RoW is concerned. Especially given the vast sums wasted on de-regulated financial market remuneration and the huge resources squandered by de-regulated financial market fluctuations.

    But AUS is something of the odd-man out of the GFC, something I have been harping on for nearly six months. We have, by a combination of good luck and good management, been able to get some of the benefits of financial liberalism without paying all the costs.

    Financial de-regulation has been something of a boon for AUS’s inter-national financial transactions. The problem with financial de-regulation is when its becomes open slather intra-nationally, particularly in the property market.

    Greater liberality in financial transactions has reduced the cost of AUS’s internationally traded capital and smoothed the domestically banked revenues for our volatile internationally traded goods.

    Its a good thing that AUS’s banks can participate in international capital markets. They took advantage of low-interest rates in thrifty NE Asian countries to carry cheap capital to the domestic market. Increased domestic competition cut the cost of credit to retail borrowers during the nineties-noughties. Gittins SMH analyses:

    After we emerged from the recession of the early 1990s, the banks’ margin between the official interest rate and their standard variable mortgage rate was a swollen 4.5 percentage points.

    By 1996, however, the margin between the official interest rate and the standard mortgage rate had shrunk to about 1.7 percentage points. It continued to average that until recently.

    The remarkable decline in this margin was caused partly by competition between the banks, but mainly by a new source of competition from non-bank “mortgage originators”, such as Aussie Home Loans and RAMS. These outfits would make home loans, then package them up into mortgage-backed securities which they sold to pension funds and other big investors.

    Because the banks’ interest margin was so fat, the non-banks were easily able to undercut them on price. They quickly pinched a lot of the banks’ market share, forcing the banks to slash their margins. All home borrowers benefited.

    Also, its generally a good thing that AUS’s currency is internationally traded. Sure it has some bumpy rides due to being a commodity-based currency. Gittins SMH explains how “the dollars fall is not a bad thing” because large changes in its international “price” smooth out changes in international demand for our exporters:

    These days, movements in the exchange rate – in either direction – have surprisingly little direct impact on retail prices. This is why a fall in the dollar doesn’t offer much joy to import-competing, as opposed to exporting, industries.

    by boosting the real income of the boom industry and by stimulating production in the other export industries, a sustained fall in the dollar would increase demand relative to supply…

    And, on balance, I think that’s good news. Why? Simply because it will take a bit of heat off our export industries, particularly the farmers, manufacturers and service exporters such as tourism and education.

    AUS, in some ways and so far, has not experienced a massive de-regulation inspired credit crisis or economic collapse. So I am dubious about the prospects of a “roll-back” of financial de-regulation in our “Lucky Country”.

    Of course its still early days in the GFC and the Great Recession. A large spike in interest rates or collapse in our terms of trade would see our economy plunging into a tail-spin that would make Iceland feel smug and superior.

    It would also smash the two remaining justifications for financial de-regulation – cheaper capital costs and smoother export revenues – that I have outlined above.

    I have predicted* that these are unlikely events owing to the underlying strength of the PRC’s economy. I guess that is the “good luck” that Pr Q is always ambivalenting about.

    But if we scrape through relatively less-scathed then financial de-regulation will probably not get the tarnish in AUS that its getting in the RoW. Which is kind of “bad luck” when you think about it.

    *Self-congratulation Alert:

    In 02 FEB 09 I predicted that AUS would probably escape the worst of the GFC and Great Recession, beating Pr Q to the punch by months, incidentally. But I so far have not been credited with priority, despite endless whining and self-serving back-patting all over the internet.

  32. Congratulations, John, on an excellent troll.
    Your parody of the neanderthal school of political economy was very good. Vintage Wheelwright it could have been.
    And so many of your readers thought you were serious.
    Well done!

  33. Re #36:

    In 02 FEB 09 I predicted that AUS would probably escape the worst of the GFC and Great Recession, beating Pr Q to the punch by months, incidentally. But I so far have not been credited with priority, despite endless whining and self-serving back-patting all over the internet.

    I remember! Unfortunately my ability to spread your claim far and wide in a credible fashion is somewhat limited…

    I hope you are not premature in claiming credit however – there is still a while yet before we know for certain how Australia fares. One factor which I’m currently wondering about is the strategy being employed by the Chinese with respect to Australian commodities; any future depressing of coal and iron ore (and other metals) prices by the Chinese may be a result of current hoarding (if that is what they are doing) of our commodities. The stratospheric contract price hikes, prior to the credit crunch infiltrating the economy, stung the Chinese sufficiently so that they will have a long memory of that recent past. Perhaps I’m completely mistaken, but if not, you heard it here first 🙂

    Don. [Not THE DON (BTW, “The Don” Bradman is the only cricketeer to pull up stumps with a batting average in the 90s – twice!!)]

  34. Ken suggests

    “JQ is sounding like “Vintage Wheelright” and calls Wheelright “neanderthal political economy”- this is an insult from the threatened JQ.

    I bet Ken has never read Wheelright (just heard his name somewhere… the little troll) and doesnt want others to read Wheelright because Ken knows most would soon agree with Wheelright over the “you are all so much better off now – you can afford all these cheap imports even when you dont have a job – credit is cheap!” expounders.

  35. Re 37#

    What really annoys me is that JQ is the most reasonable economist. He allows a forum for all views be they left or right and still he gets trolls like Ken who dont have an opinion, dont offer any economic view, and just get in here and spray insults (at him). They shoudl be so lucky they get the chance..

    Not fair Ken. There are quite a few educated conservatives in here who offer their views and dont carry on like your post at 37# and Ive agreed with quite a few on a number of occasions (like ABOM and Sean). You need to learn some manners. If you dont like Wheelright come up with a decent critique or…..up!

    Wheelright was a good man with some highly intelligent views and deserves more respect (and a more educated response) that your three line insult, whether you agree with his views or not.

    If you dont like the idea of a public bank – state your objection, not your insult.

  36. OK, Alice, accepting for the moment that JQ’s post was serious (though I am still not sure):
    1. His proposal would amount to blackmail of the banks to join his scheme. As he says, they would have little option. That is not a good way to implement economic policy in a more or less free society.
    2. I remember when banks were regulated. To get a home mortgage you had to be a bank customer for several years then beg and suffer the bank manager’s gratuitous advice on what you should be buying. This was because interest rates were fixed and banks rationed home loans. As a result banks were far more arrogant than now. A return to that kind of banking system (and JQ’s proposal is for much tighter and more direct government control) would, I have no doubt result in atrophy of large parts of the economy.
    3. JQ’s premise that Australian banks escaped the recent crashes more through good luck than good management is unsupported. They took the guarantees to prevent panic not because they needed them. In fact the Australian bank regulation system came through very well. JQ knows this and that is why I suspected he was being intentionally provocative.

    So, my advice is for everyone to calm down, not use the crisis to ride their hobby horses but to quietly and methodically decide what regulatory changes would be a good idea.
    The world economic system will survive.

    Oh, and I have indeed, read studied and listened to Wheelwright. These days, his stuff is wonderfully musty and old fashioned. If he was a building, he would have heritage protection.

  37. Well Ken…glad you have an argument then. Much better Ken and try to avoid insulting JQ – your views are as welcome as anyone elses !

    (No need for the final insult on Wheelright though. Some of us here like his writings – like me! So stick to the argument Ken – noy musty building analogies…you must be young….thats all I can suggest.)

  38. Ken@43
    The Australia banks came through better because we have the 4 pillar policy maybe….but it hasnt stopped the 4 majors acting as a law unto themselves (a price rigid oligopoly) as regards fees and charges and interest rate changes. I tend to agree that ONE public bank might keep them honest…and the more speculative Mac banks controlled. It would give people better choice options.
    In the absence of that I agree with some Austrians – to lower the fraction banks can lend, to stop risky lending and malinvestment (that undid the US banks)..if its harder to get a loan so be it. I grew up with that, and it was well known you had to save for your deposit…not borrow 100% plus costs on a real estate purchase. You might not be young Ken, but I suspect I am still older than you. The world economic system does need regulatory changes yet I am in favour of one public bank in Australia right now…I would be happier for a lower less risky return. In light of the GFC I dont trust any of the majors and seriously thought of getting the lot out before Rudd’s guarantee. If I want risk and higher returns in my excess savings Ill take it elsewhere, but for base savings Id be happy for less risky growth and fewer fees on current transactions. I like most others, need that money for ordinary outgoings (not a speculative gamble).

  39. Alice – one major problem with a government bank would be that governments almost inevitably rig the game in favour of their business. Qantas, Telstra et al had protection from competition.
    Once (you are probably still too young to remember) the Commonwealth Bank was the only one allowed to have a savings account.
    BTW MacBank brought great benefits to savers with the CMT paying much higher interest and safely.
    My objection to the old regulated banking world was not that you had you save 25% of the cost of a house but the begging you had to go through with the all-powerful bank manager. And he probably required you to take out like insurance from a company that paid the bank commission.

    And I still think Wheelwright reads like a period piece these days. The battle he and many on the left were fighting then was to create a non-communist socialism. Most of what he said and wrote came through that prism. An artifact of the 50s and 60s.

  40. Once (you are probably still too young to remember) the Commonwealth Bank was the only one allowed to have a savings account.

    This simply isn’t true, and makes the rest of what you say highly suspect.

  41. Thats nice of you to say Im might have been too young to remember!!..I think I can remember that (Cwealth bank only having a savings account…I think I had one of those – didnt everyone?). Yes, I admit you did have to beg the bank manager. I had to beg for my first (tiny tiny) loan to buy a car despite secure employment – the bank wanted a guarantor and when I told my parents they were furious about decades of banking…with the bank manager. The bank relented but it wouldnt happen today – they dont know their local customers at all and nor they care (the less they see them the better) – the bank managers are twenty or thirty somethings and turn over rapidly…

  42. Ken#46

    Wheelright is worth reading if you have not yet Ken (out of interest – a very good writer and a very good man). There is nothing wrong with socialism in some areas of our lives. I think its actually very important in areas like health education and transport (and now I think… banks and… childcare – thankyou Eddy). SJ also notes Commonwealth wasnt the only bank to have a savings account(they may have been the most popular as I recall, in the 70s but we have always had more savings accounts than the C’Wealth since the 1800s. We banked the new immigrants monies in the 1800s Ken.)

    SJ – I think Ken might be spinning a few tall tales on his age?

    Come on Ken – fess up!

  43. Age? Age? Let us not allow this discussion to become agist. I did mention age, I admit, but only in the context of things that we had experienced and remembered from many years ago. Age and experience are only useful to try to avoid making the same mistakes.
    I shall not mention Wheelwright again. RIP.
    SJ: Sorry, tis true (or was). I’m not sure of the date when the other banks were first allowed to establish savings bank subsidiaries – maybe the late 50s early 60s.

  44. JQ says

    “Banks should be boring public utilities, offering safe and steady, but not particularly well-paid jobs. Anyone who wants to be a financial speculator should do so without public backing”

    Great news, now we can fund the best social projects, forget about credit histories, eliminate poverty, cordinate large scale projects (including wars), own a house and live happily everafter knowing our future is secure as spectators watching over the arena of those greedy self centered speculating bankers and entrepreneurs. Of course the winner in the arena of economic warfare will share there wealth with the spectators and the looser to the gallows.

    Furthermnore, the possibility that politicians will use the government banks for there own purposes to fund things like wars, elections and contracts for there best mates is unlikley because of the expertly regulated system and the flawless integrity and honesty of those running our public banks.

    We can ignore the fact that it is the peoples money and the state has no right to dictate how its distributed. That was the deal when we agreed to the fiat currency idea !

    I think the answer to the Ozzie banks sturdiness during the GFC is the lack of money leveraging relative to the rest world. See we are always about twenty years behind the rest of the world. (Leveraging to a banker has the same affect as to a pirana in bloody water.) But soon the government bank will leverages us all into our own houses, cars and whatever else we voted for. The Public banks are more expensive to run so cost cutting measures will mean the Public banks will outsource most of the work and underwrite the mortgages for the private banks.

    What started off as a good idea will loose its gloss by the next time the GFC comes around and those greedy independent private banks may look like a better option(again). Of course the other option is the facist ideals of a technocracy.

  45. Okay, now the shock and beer have worn off I can discuss this rationally.

    Alice – CDOs manage debt that has already been issued. We are talking about lending that debt. Origination in other words. You are focusing on the wrong part of the chain here… look at lending standards rather than the products made later.

  46. I guess that makes the government/public the ultimate owner of me. If I ride my bike to fast down a hill (risky speculation about my ability) and crash (inevitable consequence if I keep taking those risks) then the public will support me in hospital and with disability support if I need it.

    Ditto for every other industry that has significant tariff, subsidy or similar support.

    Also, I’d be careful about those Bailiff sale stories. A hell of a lot of notices need to be personally served before you get to that point.

  47. PS, the govt support is for the benefit of deposits and lenders to the banks and also for bank customers, not the banks. Do you think the government would provide support if the only people hurt by a bank collapse is bank shareholders?

    So, if the bank is only an unintended beneficiary of the support where is the moral case to heavily regulate banks because of the express or implicit public support?

  48. 50# Ken says
    “Sorry, tis true (or was). I’m not sure of the date when the other banks were first allowed to establish savings bank subsidiaries – maybe the late 50s early 60s.”

    Ken – youve been caught out clean by SJ and Im embarrassed I totally overlooked that comment (Sat night is my excuse so good on SJ!).

    I knew there were banks in the 1830s and 1840s and you would only have to take a drive to country towns and look at the dates on the old bank buildings…

    but here it is Sean from the RBA website itself to clarify..banks are almost as old as settlement.

    The Archives also has a collection of records of savings banks that amalgamated with the Commonwealth Bank of Australia, dating from 1832. The earliest record held in the RBA Archives is a legal document from September 1824 between John Austin and Thomas Wylde, relating to the sale of land in New South Wales. This document, part of the Savings Bank of New South Wales collection, is thought to have originally come from an earlier bank called Campbell’s Bank, which was established in 1819.”

  49. %56 I said “but here it is Sean” I meant “but here it is Ken” in above post. I was still laughing at Sean.

  50. OTT: Re #53: I was once such a bike rider – the chin hitting the ground first at speed gave me a beauty of a concussion. Everything was black and white for a couple of minutes and I was wondering what this black stuff dropping to the ground was – blood, of course.

    But I was only a kid, at the time, so all they gave me were some stitches to the chin and a scar that I hate shaving over. Even had to go to school in the afternoon!

    Regards, Don™

    PS: Perhaps that was my first brush with what happens when there are no automatic stabilisers?

  51. Pr Q updates:

    Australia’s relatively mild exposure (so far) has been as much by good luck as good management. So we need a fairly comprehensive re-regulation which ensures that banks fulfil the role of a public utility.

    This update is wrong on both economic and political grounds. AUS’s economic good fortune has been more of a well-managed co-incidence of interests than mainly good luck. And our good luck will have to run out sooner than expected to generate the political crisis needed to give the banks the re-regulatory hit they so richly deserved. (And that Pr Q has laboured so mightily to agitate.)

    The Strocchi theory of AUS’s continued economic good fortune, endlessly harped on over the past six months, is that we are the mirror image of the US in having higher quality of loan-providers and loan-servicers.

    Our bankers are providing their loans subject to stricter prudential regulation by APRA. And many of our borrowers are servicing their loans, one way or another, by a massive intake of high-IQ immigrants. This created a housing shortage, pushing up rents, propping up property prices pre-emptively solving bank credit crises.

    The Quiggin theory of AUS’s continued economic good fortune, tirelessly propounded over the past 15 years, is that it has mostly been due to an astounding run of “good luck”. Next to none of it has been due to “good management” by either the neo-liberal Keating or neo-corporal Costello administrations. To quote Pr Q quoting himself:

    In 1964, Donald Horne described Australia as ‘a lucky country, run by second-rate people who share its luck’. This epigram could be applied, with equal or greater justice, to the Howard government and its term in office, particularly as regards economic policy. Sooner or later, however, this kind of luck will run out.

    It hasn’t run out yet, though.

    Pr Q is surely right that “good luck” does come into it in more ways than one. The NE Asian economic juggernaut has showered a multitude of blessings on our humble soil. And ones that several AUS economic administrations can take little credit for. All the immigration in the world could not sustain AUS metro property prices for a moment longer if we were unable to:

    – borrow capital at ridiculously low interest rates from thrify NE Asians.

    – flog our minerals at lucratively high rates to industrious NE Asians.

    Not to mention the aforementioned swotty NE Asians flooding into our crowded unis and empty nests, easing their liquidity crises.

    But its churlish to deny Keating and Costello credit for their “good management” in continually cultivating the NE Asian economic relationship. And liberalising AUS’s economic relations with same.

    The property boom has been a way of capitalising on this relationship in a fairly populist way. So far we have gotten away with astronomical levels of debt because debt-servicing has not hit the skids.

    So long as both interest rates and unemployment rates stay below 10% (a fairly sure bet in my long-held view) I bet the run of well-managed good luck will continue.

    Any takers?

  52. A post-scripted prediction and reservation.

    The “lucky economy” will probably skate through relatively less-scathed from the Great Recession. All things going well we should be well out of it in 12-18 months. By that time household debt levels will be at more manageable levels and banks will be more securely solvent.

    Caveat: all my predictions will be refuted the moment interest rates go over 10% or the terms of trade plunge below pre-boom levels. Back in 04 FEB 09 I, following Treasury and Uren, was figuring on a 17% fall in the ToT. That works out to about a four percent fall in GDP. One years nominal growth, manageable with a hefty stimulus. Uren sounds a cautionary note:

    The commodity boom brought a 60 per cent increase in Australia’s terms of trade. Treasury expects there to be a 13.25 per cent fall in 2009-10. This is a large annual change, subtracting 3 per cent from nominal GDP, or around $35 billion.

    However, it leaves Australia with terms of trade that are about 45 per cent above the average in the decade before the boom. Treasury says there will then be no change in the terms of trade in the following year, 2010-11.

    In its latest economic update, the Reserve Bank, using slightly different dates, forecast the terms of trade would drop 20 per cent this calendar year, leaving prices 40 per cent above the long-term average.

    Nobody in the government or the private sector got the terms of trade right in the boom, and the odds are they will be wrong in the bust. Treasury’s average forecast error on the terms of trade over the last five years has been 5.5 percentage points.

    In every previous commodity boom — including the big ones in 1952 and 1973 — Australia lost all its price gains, and then some, when markets collapsed. Prices overshot on the way down, just as they had during the boom.

    Should the PRC economy fall into a hole we would probably face something more like a 50% fall in ToT. That would work out 12% (or three years) negative growth. I cant see us public-borrowing our way out of that one. That would see a full-blown recession, with unemployment in excess of 10% and property collapsing like a house of cards.

    I, unlike Pr Q, have been a fairly consistent booster of the long-term political and economic prospects of the PRC. Their brand of dictatorial market statism based on churning out millions of nerdy and greedy engineers and marketeers appears to work.

    Their stimulus packages tend to work pretty well because they use both carrots and sticks. And they tend to kill two birds at the same time, by propping up state-run industries they dampen political unrest and rev up the flagging economy.

    Its only in the throes of a crisis that cosily administered industries ever get to feel the regulatory lash. The ebbing of the crisis will take much of the political pressure off banks to submit to their long-awaited day of economic judgement.

    (I can already see Henderson c 2011 poring over his press clippings, snipping out the more hysterical doom-laden predictions, cursor dripping with smug self-congratulatory “I didnt tell you so”.)

    By that time I cant see Mr Kevin “I’m here to help” Rudd taking on AUS’s most powerful interest group just in order to appease the somnolent Economic Left. So the Big Four banks are not going to be turned into public utilities, especially now that they are now in the global Big League.

    More significantly from the ALP’s apparatchik pov, massive rates of immigration, the salvation of our financialisation, are much beloved by the Cultural Left, for reasons that I best not go into. The Economic Left is not going to bite the Cultural Left hand that politically feeds it. I daresay the Ecological Left is in the same boat.

    I think the old expression “you make your own luck” pertains.

  53. While on the topic of banks, it is worth keeping an eye on the small regional banks in the USA. The fallout of the GFC will probably result in the destruction of many regionals, during the course of the next financial year. Presumably that won’t be good for regional projects, or local savers. I can’t really see the US government bailing out say a thousand or so regionals as they go under.

    In other words I am reasonably convinced that a second wave of trouble is going to hit the US next financial year, and then presumably other countries indirectly. Non-economist Alert

    In Australia we are experiencing a slower unwinding of the excess optimism of the recent past. Personally I believe that there are well over 10,000 home loans, second mortgages, and reverse equity loans (ie home is collateral for a new loan) that are doomed to fail. A look at the marketing of St George in Western Sydney around 2002-2006 (and they were not alone) would show that they were offering 105% home loans even after the property boom wave had broken.

    On Sky News this morning it was reported that there had been a six-fold increase in homelessness, and that the homeless rate (of increase, I think they said) is the largest it has been in Australia for 120 years. Now this could be just a blip or lousy interpretation of the statistics, or it could be a pointer to much worse times to come. On the other hand house sales are still happening…

  54. Donald Oats Says: May 25th, 2009 at 10:49 am

    In Australia we are experiencing a slower unwinding of the excess optimism of the recent past. Personally I believe that there are well over 10,000 home loans, second mortgages, and reverse equity loans (ie home is collateral for a new loan) that are doomed to fail. A look at the marketing of St George in Western Sydney around 2002-2006 (and they were not alone) would show that they were offering 105% home loans even after the property boom wave had broken.

    A “slower unwinding of excess optimism” is a very delicate and restrained way of describing the current stampede of first home owners to capitalise their government house buying grant into the vendors sale price. This scheme is starting to take on a very sub-prime look. News Ltdreports that wave of mortgage-backed asset-price inflation washing over the outer-suburbs is now reaching alarming proportions:

    THE average loan size for first-home buyers has risen by $52,000 – or 23 per cent – in the past two years, raising fears that the much-publicised government incentives for young buyers are artificially inflating the market.

    A report commissioned by Brandmanagement, a market research firm specialising in the finance sector, says the average size of loans being taken up by young home buyers is jumping by an “unsustainable” amount, The Australian reports.

    In total, the first-home buyer average loan size jumped by $52,000 to $280,600 in the two years to February.

    The actual number of first-home buyers also rose sharply in the year to February 2009: rising from just over 9000 to more than 14,400 in the year to February 2009.

    Its a very delicate balancing act trying to prop up the property market in general without over-heating any sector in particular.

    The outer-suburban bottom-tier housing market is a very weak reed and can be expected to snap if unemployment and/or interest rates creep up over 8%, a quite likely probability. McMansion land ownwer are unlikely to have well-heeled relatives or bulging super war-chests on hand to bail out below-water mortgages.

    OTOH, even if the worst comes to worst the net result of distressed sales of non-performing mortgagees is not likely to send the property market into free-fall. The bankrupt owners will then be forced out on the street, lighter by ~ $50,000 or so, then to take their chances in the over-heated rental market, along with this years batch of 300,000 immigrants.

    The previous owners may well flip the old property back into their own names at a hefty discount, after pocketing a nice capital gain on the original sale. And probably rent the property back to the skint tenants. Nice “work” if you can get it.

    But this kind of wheeling and dealing can only go on for so long until a crucial wheel falls off or our luck fails. If Rudd does not take the steam out of the over-heated first home owner property market in the next six months then we will be joining the Iceland/Ireland brigade when the funny penny finally drops. I will consider all my bets off in that event.

    So, having boldly crawled out on a limb with my relatively benign view of the AUS financial system’s future I must now prepare for an abrupt about-face and ungainly scuttle back towards a more skeptical view. Boy, roller-coaster financial markets sure make for “interesting times”.

  55. It would be a dream come true, but a lack of competition has left Australian banks so arrogant they would never give up their cash cow of fees for the PR of a government guarantee.

  56. I hate to tell you this but banks are already structured and regulated as public utilities. That’s how we got in this mess. Congratulations though, your article was written as a true socialist. Ignore government intervention and blame the mess on the free market (that doesn’t exist).

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s