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. 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.

  2. 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.

  3. 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.

  4. 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?

  5. 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.”

  6. %56 I said “but here it is Sean” I meant “but here it is Ken” in above post. I was still laughing at Sean.

  7. 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?

  8. 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?

  9. 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.

  10. 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…

  11. 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”.

  12. 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.

  13. 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).

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