The financial sector: discredited but unchallengable

The Economic Society of Australia regularly polls a panel of members seeking responses to statement on policy issues. The most recent was unusual both for a low response rate (admittedly, it was run in January) and for the unanimity of the answers. This may be attributed to the strong formulation of the statement “There is no way to significantly increase the degree to which Australian retail banks act in the interests of consumers.”

None of the respondents accepted this, but the answers broke into two categories: those recommending reforms broadly in line with the recommendations of the Hayne Royal Commission and those (including Allan Fels, James Morley and me) who wanted radical reforms that remain outside the realm of political feasibility.

My response:

None of the options that have been proposed so far are likely to do much good. What is needed is a reversal of the massive expansion of the financial sector that began in the 1970s. In the banking context, this would entail a “narrow banking” model in which retail banking was separated from trading and investment banking and regulated as a public utility, along with the recreation of a publicly owned “no frills” bank, along the lines of Kiwibank in New Zealand. These proposals may be beyond the realm of political feasibility, which is why I have expressed only modest confidence in my view.

This isn’t just a problem in the Australian retail finance sector. The whole structure of financialised capitalism is a recipe for greed and dishonesty. Everyone knows this, but there’s no obvious way to tackle it, given the entrenched power of the financial sector.

The situation is reminiscent of the last decade of the Soviet Union. Those in charge are utterly discredited but apparently irremovable.

32 thoughts on “The financial sector: discredited but unchallengable

  1. @Smith9

    Well “highly questionable” generally suggests at least some disagreement. I’m indicating my dissent from a shared premise (“all that did was double house prices”) rather than taking sides. My contribution was intended to be deliberative rather than combative.

  2. Smith9 says: FEBRUARY 18, 2019 AT 6:37 PM

    “Banks were banks before financialised capitalism became a thing, ” so what?

    “With good reason, Gough Whitlam used to say, “You really can bank on the Wales””. So what.

    I’m looking forward positively, not pointing out the obvious from the past.

    And you are mixing credit cards, banks, mortgages, capital lending etc. Op says “narrow banking” – your bankbank sees no bounds.

    And you obviously don’t have enough caplital to state this;
    “They’d refuse you a loan that you did need and could repay, and they’d do it just because they could, and humiliate you into the bargain.”

    See you in the future with a level narrow bank and good culture for all.

    Hostility > mirror.

  3. can some one tell me if it is true that the “banks”/”housing market” require personal housing ownership turnover every seven years to keep prices from collapsing?

    is that real?

    or bulldust?

  4. “can some one tell me if it is true that the “banks”/”housing market” require personal housing ownership turnover every seven years to keep prices from collapsing?”

    Prices are much more likely to collapse when banks lend indiscriminately. Remember the GFC? At its core was poor lending.

  5. KT2 asked about my reference to the ‘strong’ version of Samuelson invariance. He correctly tracked down the correct Samuelson paper.

    Samuelson set out conditions under which assets will be valued at the same amount by taxpayers whose effective tax rates differ. In effect, if there is ‘economic depreciation’ then people with different effective tax rates have correspondingly different discount rates…that will generate the same valuation of any given productive asset.

    This is often treated as a proof that effective tax rate differences can never produce different productive asset valuations. Because of this, productive assets are worth the same to tax-exempt charities and to tax-liable businesses.

    ‘Strong’ Samuelson invariance arguments go very much further. They posit not only that productive asset valuations will be the same for taxpayers whose effective tax rates differ, but that all economic decisions about the use, holding and sale of productive assets will be the same though taxpayers have different effective tax rates. This ‘strong’ Samuelson invariance is, I said, effectively disproved by the recent history of demutualisation and of privatisation of financial institutions.

    You may take a different view; but that’s what I was referring to.

  6. Thank you. chrishod says:
    FEBRUARY 19, 2019 AT 8:51 PM

    “This ‘strong’ Samuelson invariance is, I said, effectively disproved by the recent history of demutualisation and of privatisation of financial institutions.:

    Proof. Like it.

    I was amazed the paper seemed hard to find. And at the Chicago school. Doesn’t it go against many a chicago school grain. I couldn’t even find an rebuttal just a couple of later addons and alterations. Wikipedia needs a page on it. Invariance yes but not directly Samuelson. I’m inspired now to maybe! become a wiki page poster hoping some exoerts may adjunct my feeble attempts. That is what wikip is for.
    Thanks again. It is in my saddlebag now, even though it is like a mountain to me. I’ll traverse slowly.

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