Six economists renew call for a ‘people’s bank’
by Patrick J. Byrne 25 July 2009 News Weekly
Over the past eight years, former ANZ bank chief Will Bailey has repeatedly called for a new government-backed development bank and for a review of Australia’s banking system.
He argued that a new government-backed bank was needed as financial deregulation had failed to protect some “highly valuable specialist institutions” like the former Commonwealth Development Bank and the Primary Industry Bank. New privately-owned community banks filled only a “tiny part” of the void left.
Mr Bailey, a former managing director of ANZ Banking (1984-92) and deputy chairman of Coles Myer (1992-95), went on to call for a review of the banking system, given that the financial deregulation had begun with the Campbell Inquiry (1981) and that this was last reviewed by the Wallis Inquiry in 1996.
Now, six leading Australian economists have called for a major review of the financial system, which has evolved rapidly since the Wallis Inquiry.
They also called for a new government-sponsored “people’s bank”, asking: “Should citizens who feel unsure and unqualified to shop wisely in our financial markets be able to access basic savings, payments, and wealth management products that have been vouchsafed by governments as being safe and professionally managed (for example, why can’t Australians invest with the Future Fund)?
“Is there a role for a publicly-owned entity … to offer essential services in Australia’s finance sector that leverage off unique government infrastructure, such as Australia Post, the tax system, and the government bond market?” (The Age, Melbourne, July 8, 2009).
The economists behind the call include Joshua Gans, professor of management at Melbourne Business School; Nicholas Gruen of Lateral Economics and a former commissioner with the Productivity Commission; Christopher Joye, managing director of Rismark International and former chairman of John Howard’s 2003 Home Ownership Taskforce; Stephen King, the dean of business and economics at Monash University and a former ACCC commissioner; John Quiggin, professor of economics and politics at the University of Queensland; and Sam Wylie, a management consultant and senior fellow at Melbourne Business School.
These economists warned that there were “fundamental flaws in Australia’s ageing regulatory architecture” and an “inadequately defined role of government” in dealing with financial crises.
Given that Martin Wolf, associate editor of the UK Financial Times, has shown that the worldwide economic downturn is, to date, tracking that of the 1930s Great Depression (see News Weekly, July 11), it is possible that the situation will worsen.
In the US, EU and Australia, household debt is at record levels, meaning that consumers are likely to withhold spending until these levels come down substantially. That process has hardly begun.
Banks around the globe are facing more losses from more toxic securities, and, given the inter-connectedness of the world’s banking system, more crises overseas will likely have an adverse impact on the Australian financial system.
The six economists warned of the dangers posed by Australia’s massive net foreign debt: “As a nation with a large foreign debt that has continually increased its liabilities via enormous current account deficits, Australia’s vulnerability to foreign shocks is in many respects greater than most of our peers.
“It is, therefore, critical that policy-makers take this opportunity to thoroughly review the existing system and evaluate whether changes need to be made to it. Although the dependence of financial institutions on national governments has been reinforced by the crisis, global capital market integration is not going away.”
The economists raised a number of questions that an inquiry into the financial system needs to answer.
In part they asked: “Will the Australian Government seek to establish a regulated clearing-house for the hundreds of billions of dollars of over-the-counter derivatives contracts that are otherwise beyond the remit of policy makers? …
“Will the deposit and/or wholesale funding guarantees be phased out and, if so, what new policy guidelines will explain how they might be redeployed when capital markets seize up again, in a manner that minimises disruptions to other sectors?
“If they are not phased out, how will the terms and price of these subsidies be determined and what regulatory constraints will be applied to prevent the emergence of moral hazard risks. More broadly, what parts of the credit markets will or will not be guaranteed in the future?
“Should APRA [the Australian Prudential Regulation Authority] impose ‘automatic stabilisers’ that require banks to accumulate capital in good times to serve as insurance against the bad? …
“Should the RBA lean against incipient asset-price booms fuelled by increases in system-wide leverage?
“Should Australia’s global foreign debt position be the subject of any general policy oversight and, if so, what measures should be pursued to ensure that these exposures are prudent?”
These and other issues need to be addressed by a thorough inquiry, so as to strengthen the financial system, to ensure competition, and ultimately to preserve the nation’s economic sovereignty.
Patrick J. Byrne is national vice-president of the National Civic Council.
Peter Westmore, “Will Bailey answers development bank critics”, News Weekly, December 1, 2001. URL: www.newsweekly.com.au/articles/2001dec01_bailey.html
John Ballantyne, “Leading banker calls for development bank”, News Weekly, June 18, 2005. URL: www.newsweekly.com.au/articles/2005jun18_devbank.html
Joshua Gans, Nicholas Gruen, Christopher Joye,
Stephen King, John Quiggin and Sam Wylie, “Rules underpin prosperity”, The Age (Melbourne), July 8, 2009. URL: www.theage.com.au/opinion/rules-underpin-prosperity-20090707-dbsl.html?page=-1
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Mad furore surrounding the so-called “people’s bank
A few days ago, I was part of a group of 6 economists who wrote an open letter arguing for a new Inquiry into the financial system—a so-called “Son of Wallis, Daughter of Campbell.”
Put simply, so much had changed in our understanding of finance, banking and economics and so much ‘on the fly’ policy had been undertaken, that surely stepping back and reviewing our policies above the political fray would be a good idea.
We had hoped that this might get a little media and perhaps push the government into putting an inquiry onto the agenda. Our letter was a long and not particularly reader-friendly affair. But towards the end we asked the following:
“Should citizens who feel unsure and unqualified to shop wisely in our financial markets be able to access basic savings, payments, and wealth management products that have been vouchsafed by governments as being safe and professionally managed (eg, why can’t Australians invest with the Future Fund)? In this regard, is there a role for a publicly-owned entity, akin to KiwiBank in New Zealand, to offer essential services in Australia’s finance sector that leverage off unique government infrastructure (eg, Australia Post, the tax system, and the government bond market)?”
I should stress the word ‘asked’ because this wasn’t a policy proposal but a policy area that might be evaluated. So it was to my surprise that I opened the newspaper (actually I didn’t have to open it was on the front page) to read “People’s Bank to break Big Four” in the Sydney Morning Herald on Wednesday morning. Thereafter, my five co-authors and I spent the day in the midst of a media frenzy about our ‘proposal.’ It was all about the ‘People’s Bank’ but to my knowledge, none of us had ever used that or any other name. To say this was unexpected is an understatement.
The media and political reaction suggests that this broad idea hit a nerve. While some opposition bordered on the hysterical, across the Tasman where they recently established a government-owned bank, there was a show of support.
But in all of this there has been no statement as to why a government-owned bank might be seriously considered as an option as part of a broader inquiry.
The basic case for this type of institution is actually quite straightforward.
From time-to-time, including significantly, the past year, economic uncertainty rises so much that banks and other financial institutions cannot be sure that loans established will be paid back on commercial terms.
Not surprisingly, they cut back on liquidity and also reduce the interest rates on deposits (as they don’t need the funds to lend out). This is a perfectly reasonable commercial reaction but from an economy-wide point of view, it comes at just the wrong time. During such times, you want an institution who will commit itself not to act on purely commercial terms. That is where a government-owned institution can come in.
Add to this another factor: if we move away from blanket guarantees on deposits to a world where (as we had just a few months ago) we want depositors to form their own judgments as to the soundness of particular financial institutions, then we have to recognise that there is a significant number of citizens who would gladly sacrifice interest payments, glitz and convenience of commercial banks for something safe and secure.
Once again, a government-owned institution, to the extent that, despite potential commercial flaws, could compete for and attract deposits, suggests that there is demand to be satisfied. Providing that option is, therefore, socially valuable and not something any government should shy away from. In New Zealand, KiwiBank attracts 3 percent of deposits in competition with the same major banks we have here.
Think about how many other government services are legitimately provided to similar size segments of the population and the whole notion seems broadly reasonable.
Now I am not suggesting that a ‘People’s Bank’ be established nor what precise form it would take.
What I am saying is that there is enough demonstrable inefficiency in the markets operate to conceive that there are gaps that could be covered by a government-owned and operated institution. However, as even the above basic case suggests, whether this is worthwhile depends on the entire system of regulations. And that is why we need a broad-based inquiry to work all of this out.
– Joshua Gans is an economics professor at Melbourne Business School. He contributes to the economics.com.au blog.
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