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.

Al Capone was done for tax evasion

It now looks possible that the fate of the Adani Carmichael mine will be sealed by an adverse assessment of the mine’s impact on the black-throated finch.

That’s a far less satisfactory outcome than if the Queensland Land and Environment Court had accepted, as its NSW counterpart has done, that the climate (and health) damage from burning the coal produced by the mine was relevant in assessing the costs and benefits. That reasoning leads to the conclusion that no new mines should be started, let alone marginal projects like Carmichael.

But even disregarding the main issue, the Galilee Basin has all the problems associated with large mining projects, and on a huge scale: disturbance of a large land area, heavy demands for water use, and the problems of shipping through the Great Barrier Reef, and conflict with indigenous owners. Even if these aren’t the biggest reason to reject a project that would open the entire Basin to mining, they are big enough.

This is, of course, a fairly common pattern in political and legal decisionmaking. It may be impossible, for procedural reasons, to reach a determination on the central issues that are at stake, so some less central but more definite point ends up getting to the necessary outcome.

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Opportunity cost and new coal mines

Opportunity cost provides the best way to think about the recent decision to reject a new coal mine at Rocky Hill. That’s the central theme of my latest piece in Inside Story and also of my forthcoming book, Economics in Two Lessons. Given a tight budget of the carbon dioxide and other greenhouse gases we can afford to emit while stabilizing the global climate, every new source of emissions comes at the opportunity cost of an existing source. Since phasing out coal is among the cheapest options any new coal mine comes at the expense of faster closure of existing mines. Almost invariably, its more costly to open a new mine, than to maintain production at an existing mine. So we should not start any new mines and, in general, not expand old ones.

100 per cent renewable electricity: the next steps

I’ve spend the last few days at a workshop on the transition to a renewable energy supply for Australia, which focused primarily on electricity. The presentations should be available soon, and I’ll write a longer post if I get time, but here are a couple of quick points I took away.

  • Adding storage to a system that is at or close to 100 per cent renewable will cost around $25/MWh, that is, about 2.5 cents/kWh
  • The big problem for Australia is transmission, to connect solar and wind resources to the grid. AEMO and AEMC are in denial on this. My view – we need to renationalise transmission immediately, and replace the current NEM alphabet soup with bodies that will plan for a rapid transition

The culture of financialised capitalism

After the righteous fury that pervaded Royal Commissioner Hayne’s interim report on the financial system, the final recommendations came as a letdown to everyone (except of course the insiders who bid up bank shares in anticipation of the news).

This ought not to have been a surprise. Hayne correctly identified greed and dishonesty as the key drivers of wrongdoing. But greed (or, more politely, incentive) is the guiding principle of financialised capitalism as is seeking profit to the limits of legality, even when this involves what would ordinarily be called dishonesty. In these circumstances, it’s unsurprising that those limits are regularly breached, particularly given that most such breaches go undetected, and the few that are detected go largely unpunished.

The financial system is at the core of the problem but, as Bernard Keane observes in Crikey (paywalled, I think) its effects are pervasive. As he says, it’s not individual industries, it’s our system. Ross Gittins is also good on this. Even Eugenie Joseph of the Centre for Independent Studies has noticed that there is a big cultural problem here.

The only thing that will change the culture of greed and dishonesty is a reversal of the policies of financial deregulation that produced it.

The CIS and social democracy

Readers may be familiar with the concepts of “subtweeting” and “vaguebooking”, referring to social media posts which are clearly aimed at someone in particular who is, however, unnamed. (There’s nothing specifically “new media” in this – the Oz does it pretty regularly, for example.)

I’ve just had the reverse experience. An article in the Guardian by Eugenie Joseph of the Centre for Independent Studies starts out by linking to my piece on a (partially) socialist utopia, also in the Guardian. I assumed, reasonably enough I thought, that Joseph would offer some kind of critique of my piece.

Reading on, however, it became clear that far from offering a critique, she hadn’t even read it. That at least saves me from the trouble of writing a detailed response. I’ll just note a few of the weakest points, and leave it at that.

Most obviously, Joseph and the CIS want to have it both ways: when playing defence, she ascribes to capitalism all the good things that have occurred in the last 200 years, , even though social democratic governments and public institutions played a central role in many of them. But the rest of the time, the CIS interprets the term “capitalism” in terms of free markets and a minimal state. This kind of bait and switch has been christened, the Two-Step of Terrific Triviality by my Crooked Timber co-blogger John Holbo.

As an example, Joseph claims, that capitalism has given us “our mobile phones, the internet, vaccines, and antibiotics”. This is a quarter-truth. Capitalism can reasonably claim credit for mobile phones. But vaccines were around before capitalism, which has done a lousy job in supplying them because they are such low-profit items – who wants to sell a product that costs almost nothing and is only used once in a lifetime? The Internet was developed by the universities and the non-profit sector with seed funding from the US military. Its current messy state reflects the takeover by corporations like Google and Facebook, which have recreated the “walled gardens” of the Internet’s early competitors. Antibiotics were the other way around. Penicillin was first developed by publicly funded and non-profit researchers, then produced on an industrial scale by the War Production Board in the US.

After the obligatory swipe at Venezuela, Joseph cites only one example of successful capitalism – the Nordic countries, whose welfare states she mentions with approval. (When not addressing a mass audience, the CIS message is rather different “Mimicking European policies is the surest way to economic disaster.”)

Still, I’ll take agreement where I can find it. As Paul Krugman remarked in relation to my piece,

Quiggin’s scenario — it really is more of a super-Denmark than a true Utopia. But that’s kind of the point

So,   if Joseph and the CIS are happy to support an expanded welfare state, Scandinavian tax rates and a sharp cutback in the power and influence of the financial sector, I’m happy for them to keep on calling it “capitalism”.