It has only been a few decades since interest rates were pretty much regulated and there was a raft of controls on banks. That ended with the Wallis Inquiry of the late 1990s. Since then, political-economic equilibrium on banking control has held because of the twin gifts of loose monetary policy and competition against the major banks. Those gifts have now been returned.
Yet, in the wake of the US government making its implicit guarantee of Fannie Mae and Freddie Mac explicit, there are numerous calls for Australia to leave the market to itself (eg, in today’s AFR editorial). I believe this is the wrong call economically because there is ample evidence that the market does not provide a sufficient level of liquidity on its own. But it is also a poor political strategy as well.
Consider this. Over the next year we will have tighter monetary policy at the same time as the real competition in home lending has dried up. We have already been seeing the result of this: interest rates rising faster than the RBA targets and credit rationing of small business lending. And all while the major banks keep telling everyone that things are just fine.
That will last until the first profit statements from those banks appear. I predict they will be a bumper year for Australian majors. Then the politics will shift and we will see a raft (yes, a raft as per The Hollowmen) of measures to claw that back. Most of these will just tie banks’ hands and not truly deal with structural competitive issues. But the demand politically to do something may be overwhelming.
This is a solid reason, apart from hedging the economic risks, that banks, the Treasury and the RBA need to seriously consider structural options. Christopher Joye and I have been suggesting a structural solution to this for sometime.
That is, along with the Australian Securitisation Forum, we see a role in Australia for a government-sponsored enterprise like Fannie and Freddie (well, at least what they were before privatisation, political capture, and slack oversight). Put those in place as a backstop for the bad times and banks and other financial institutions can make the case for continued de-regulation and a light hand in the good times. The alternative is a heavy hand at all times. Banks playing the political game would have to consider just what they are risking.
Joshua Gans is an economics professor at Melbourne Business School. He blogs at economics.com.au. His proposal with Christopher Joye is available here.
I agree The privatisation of the Commonwealth Bank has not been good for the Australian economy or banking consumers (only chareholders). It was the main reason for the explosion of bank fees during the 1990s, and the super profits made by all Australian banks since then. If the CBA was still owned by the government they would have been contrained politically from imposing big fee increases. Then if the CBA was not aggressively increasing their fees, it would have been a moderating influence on the sector overall, and the other banks wouldn’t have been able to increase their fees either.
I agree The privatisation of the Commonwealth Bank has not been good for the Australian economy or banking consumers (only chareholders). It was the main reason for the explosion of bank fees during the 1990s, and the super profits made by all Australian banks since then. If the CBA was still owned by the government they would have been contrained politically from imposing big fee increases. Then if the CBA was not aggressively increasing their fees, it would have been a moderating influence on the sector overall, and the other banks wouldn’t have been able to increase their fees either.
Excellent work professor..The most sensible suggestion I have seen since the panic developed from collateralised debt obligations ( a form of casino chip) to the full blown credit crisis we have exemplified in the USA overnight.
I’m pleased too that your colleague has had the input of an 80s entrepreneur Ian Joye ..who I’m sure has brought his own perspective from the events of Oct 87.
This Aussie MAC enterprise could be up and funded in a matter of monthss..and staffed with some of the qquality people in the banking sector who are wondering if they have made the right career choice. Presently there is a veritabletitable
What we need is portability of loans, like the portability of mobile telephone numbers. The banks know damn well that it’s difficult for people to move to an institution with a better offer.
The government CAN fix that. I’m not so sure they should, or know how to, run a commercial retail bank.
Besides that, an improved profit performance for the Big Four will PROVE that they’re operating as a cartel.
With the USA on the verge of its largest financial crisis since the Great Depression,caused in part by the flawed home lending system with Fannie Mae and Freddie Mac at the pinnacle,every Australian should be very thankful that we DO NOT have a similar system.Otherwise we would be in deep doggy dodo just like the yanks.At least when an Australian bank issues a homeloan to a borrower, things like the value of the loan to the amount borrowed and the capacity of the borrower to repay the loan are considered.And that is why the level of defaults at Australian banks are still at very low levels compared to the USA.