BANKING: by Patrick J. ByrneNews Weekly
Six economists renew call for a 'people's bank'
, July 25, 2009
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.Major review
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