In a piece in today’s Crikey sparked off by Kevin Rudd’s remarks about the difficulty Australian banks are having accessing foreign capital, Bernard Keane makes some good points about the response to the global financial crisis:
Rudd’s rather anodyne response to this threat is that “we will continue to work in partnership with the private sector to do what we can to support Australia’s credit markets.” This means more work for the Government-banking oligopoly combination. Bankers and officials have been busy discussing options while the rest of us were having a break.
This approach — and this is not to suggest there’s a viable alternative — is not merely entrenching the position of the major banks, which have been allowed to consume competitors, but also entrenching the Federal Government at the heart of our financial system.
It’s not nationalisation; it’s more like the worst of both worlds. Politicians and bureaucrats are now key decisionmakers in our financial system, but they have limited control via the major banks, which continue to operate — as they’re required to — in the best interests of their shareholders. Responsibility and accountability are diffused between ministers, Treasury, agencies and the banks themselves. And there are multiple ways in which it could go wrong. Taxpayers could be left, via government guarantees, with failed businesses and debt. Business might struggle to obtain necessary capital. The only guaranteed winners are the big banks…
The AFR’s editorial today on this mess noted “extraordinary times call for extraordinary measures, but their long-term effects are likely to be profound, and they need to be managed with as much care as possible…”
Those long-term effects have been more or less ignored until now, in the urgent need for action. What’s the Government’s exit strategy to eventually remove itself from its now dominant role in the financial system? Does it intend to exit at all? And how much of a trade-off are taxpayers getting from the privileged financial and policy-making role now accorded the banking oligopoly?
The working theory, both here and overseas where the simpler option of nationalisation has had to be pursued, is that governments shouldn’t be in finance, and will get out just as soon as they can while maintaining the stability of the financial system.
This may prove to be wishful thinking, and not only because the duration of the financial crisis and the wider recession is unknown. Wartime policies have a habit of persisting long after victory has been declared. Our better economic thinkers should be turning their attention to the new financial system we’ve suddenly acquired over the last six months — and how much of it we want to keep when — if — things get back to normal.
I think Keane is right that there’s some danger in both ignoring the longer term implications of some of the crisis management decisions being taken, and of ending up with the worst of both worlds with public involvement in financial decison-making. I think Keane’s bias is probably towards the free market end of the ideological spectrum, and I suspect that a lot of those making such decisions and defending their necessity are unwilling (unlike Keane) to contemplate their long term effects precisely because the nature of the decisions runs so spectactularly counter to their liberal predilections.
Having said that, John Quiggin is one exception to both rules, and has made an interesting case – in debate with Paul Krugman – for doing bank nationalisation properly if you’re going to do it at all:
Financial restructuring is going to be a huge challenge, involving both a radical redesign of national regulations and the construction of an almost completely new global financial architecture. To attempt this task while leaving the banks under the control of discredited managers nominally responsible to shareholders whose equity has, in the absence of massive transfers from taxpayers, been wiped out by bad debts, seems like doing live electrical work while wearing a blindfold and standing in a pool of water.
Mark,
The madness here is that the banks in Australia are some of the strongest in the world. The actions of Rudd and friends do not seem to be taking this into account. As Bernard points out the only ones winning here are the big banks – all but one of the old middle tier banks are now either going or gone. Of the last three, St George was bought by WBC. BankWest – sold to CBA. Only Suncorp is left and it is an open secret that Metway is trying to off-load it. My guess is that the ANZ may step up to the plate on that one.
All that all this is doing is ensuring that the big four are even more too big to fail – giving the government even more excuse to intervene as and when they choose.
Just insanity.
Andrew, I haven’t reproduced all of Keane’s article, but for others’ benefit who aren’t Crikey subscribers, you’re right to say that’s pretty much the point he’s making. It really is a corporatist way of proceeding – intermeshing big banks with big government – but with an uncertain long term aim, and plenty of concerns about market concentration in the short term discarded.
There are some important points here. Krugman’s piece about the US (and Buiter about the UK) advocate nationalising (temporarily) the banking sector in those countries because the banking sectors are probably insolvent, the current mess of policies/supports is creating disincentives to lend optimally, and nationalisation would make it easier to dispose of bad assets and get rid of bad management. Both, more or less, favour re-privatisation only once the regultory system in those countries has been improved.
It is very very important to point out that the state of the Australian banking system is very different to that of the US, UK, Ireland, etc. Australian banks are well capitalised and there is almost no talk of insolvency. The problem with the Australian banking sector is that there is too little competition, and the balance sheets of the majors are too large relative to the economy.
A more appropriate policy in the Australian context might be to:
a) break the majors up into smaller institutions – none of which is too big to fail
b) make sure that financial institutions (and depositors) pay an appropriate amount of insurance for government guarantees they receive
c) enforce a less light-handed approach to regulation in the financial sector
d) a la Quiggin, one could consider ring-fencing certain bank functions, though this could encourage a shadow-banking sector that could generate new problems.
I guess we may have to continually choose between various ‘moral hazards’ and bunches of business going down and the suffering that each new unemployed and their family feels.
Though I do think sometimes people are quick to draw a long bow on the mere hint of what they think government might do based on a handful of sentences. I guess Obama is going to face the same thing over and over again given he has a million things to do. Each little plan is going to have the media drawing long bows reaching to extreme conclusion in each instance.
I find that not only are the MSM for ever negative and carping about everything little thing the blogosphere is also starting becoming a negative place and is beginning to make the MSM seem more reasonable and rational.
Must be human nature to always want to find the downside of things and never the up. Always assume that the worst thing is intended and so on…the negative filter gets put on everything.
Not always, Thomas Paine, but I’ve had my fill of empty cynicism, that’s for sure. Mind you, I think there are some underlying reasons for it – both in terms of the way our political system works or doesn’t work, and also some social/cultural/behavioural ones – but I’m still teasing all that out, so maybe that’s one for another time.
Someone correct me – but hasn’t bank Nationalisation already been declared Unconstitutional during the Chifley era?
Unfortunately, years of economic rationalism being the dominant orthodoxy means nationalisation is a dirty word, and governments have to be dragged kicking and screaming into it, even though in many countries it is inevitable.
CountArach, that was compulsory bank nationalisation, if memory serves. In this case, nationalisation would be the end result of a rescue package that provided fresh capital at the cost of wiping out existing shareholders.
The pity is that the regulatory system has just made large scale improvements around the world but it has happened too late. The old system was really risk insensitive – the new one is much better.
It is still in the process of being introduced in the US after a couple of year’s argument. If it had been in place years ago it probably would have stopped a lot of this before it started – but arguments between the regulators slowed the whole thing down enormously. If it had been introduced in 2002 or even 2004 then mis-pricing for risk would have been much less wide-spread.
Yes Keane’s piece was good even though it seemed to be an act of channeling Paul Krugman The sentiments expressed by Keane were made by the Nobel Prize winning economist a week ago when discussing the half arsed proposals Obama’s
mob have to deal with banks. It can be found here http://www.nytimes.com/2009/01/19/opinion/19krugman.html?_r=1
Krugman concludes “What I suspect is that policy makers — possibly without realizing it — are gearing up to attempt a bait-and-switch: a policy that looks like the cleanup of the savings and loans, but in practice amounts to making huge gifts to bank shareholders at taxpayer expense, disguised as “fair value” purchases of toxic assets.
Why go through these contortions? The answer seems to be that Washington remains deathly afraid of the N-word — nationalization. The truth is that Gothamgroup and its sister institutions are already wards of the state, utterly dependent on taxpayer support; but nobody wants to recognize that fact and implement the obvious solution: an explicit, though temporary, government takeover. Hence the popularity of the new voodoo, which claims, as I said, that elaborate financial rituals can reanimate dead banks.
Unfortunately, the price of this retreat into superstition may be high. I hope I’m wrong, but I suspect that taxpayers are about to get another raw deal — and that we’re about to get another financial rescue plan that fails to do the job. ”
It’s good to see Keane reads the best columnists. Was a bit rich though as also on Crikey yesterday he wrote a facile piece on Obama accusing him of channeling just about everyone. Keane is still smarting from tipping McCain to be next prez But no-one ever said our commentariat wasn’t lightweight.
PS Just noted John Quiggin takes issue with Krugman’s theories. Does this mean he also disagrees with Keane?
Looks to me as though Rudd is just posturing, looking as though he’s doing something while letting Australian bank execs get on with it. It may be necessary for Australian banks to have government oversight/guarantees in their dealings with foreign banks, who’d assume that if they have to have government oversight then an Aussie bank asserting its independence from government would probably be dodgy.
Isn’t it true to say that, apart from a lot of jaw-boning (or more aptly sermonising) the only thing the Fed Govt has done in relation to the banks is to guarantee deposits?
This move was unavoidable in the depths of the credit crisis, after Ireland did the same thing, because the Australian banking system faced the real prospect of deposit flight to Irish-type deposit insurance regimes.
Since then, to a measurable extent, depositors have voted with their feet and have chosen the Big Four as safe havens during this period of peril, deserting the smaller banks. This is to be expected, even though the smaller banks are also under the government’s protective umbrella.
The major difficulty for the entire banking system is the scarcity of credit at economic cost. It may be the case that the Big Four have easier access than smaller banks to credit markets.
Are “toxic assets” a major problem for Australian banks? Some of them have owned up small amounts. Is it likely that there are still some big nasty skeletons in the closet?
Katz,
No it is not true and the deposit insurance thing was not required. The government simply panicked.
On the question of the larger banks, the whole process of centralisation is being driven (at least in part – BankWest’s sale was caused by HBOS UK’s problems) by the new regulations. While they are better and more risk-sensitive the only way you can actually use them properly is by being big. The process of the disappearance of the smaller banks is now probably irreversible.
Others have begged to differ, AR.
Do you have any figures on capital movements in the period between Rudd’s stated intention to maintain the status quo and when he announced the guarantees?
Trouble with these decisions is that they are irreversible. The captain of the Titanic could have said “full steam ahead, we are unsinkable.”
Labor Outsider has it spot on. Having a cosy oligopoly that the government is in bed with certainly has its downsides – ie chronic ripoff of consumers and a lack of innovation. But currently consumer ripoffs are the least of our worries, and innovation in banking practice is what got us into this mess in the first place.
Those chronic ripoffs are precisely what has made our banks stronger than those of most countries. Yes, Harry, in the long term corporatism is definitely a Bad Thing, and a sensible government should be keeping one eye open to that long term, but a bit of crony capitalism is pretty much what is called for just at the moment.
Has Bill Posters been prosecuted yet?
Katz,
I was not aware that Rudd was on the Titanic. He looks too young.
Whatever justified motive there might be for nationalising the banks in the present crisis (and as a socialist, I’d love to see it happen, on grounds of principle if nothing else) I think the previous post that questions its constitutionality is probably on the right track. And you can bet some RWDB would challenge it constitutionally in the High Court on principle,too. And, given the constitutional prcedent, probably win.
Not sure about that PB.
If things turn as dire in Australia as they have in Britain, Ireland and Iceland (to name but a few) then rather than fighting nationalisation to the last ditch, the banks might be crying out to climb under the petticoats of the state. (Memo to AR: that’s another metaphor).
When Chifley nationalised the banks in 1949 they still had assets that Boards of Dirctors and shareholders fought hard to protect. When negative equity is achieved, there is nothing to fight for and thereofre no incentive to fight.
The bank nationalisation bill was 1947. And Paul Burns is right; it was declared invalid by the High Court and by the Privy Council.
Yeah, I got my dates wrong.
But if you read the judgements, you’ll see that the two courts declared unconstitutional the way in which the legislation proposed to effect nationalisation.
It is not inconceiveable that legislation could be framed in a constitutional manner.
A looming problem in Australia is that foreign banks, which have supplied a substantial chunk of commercial, industrial and real estate loan funding, have essentially stopped lending and in many cases are calling in loans instead of rolling them over.
Yesterday Laura Tingle and Robert Guy reported in the FIN:
Given that Banks’ prudent tier one capital adequacy ratio is currently considered to be somewhere north of 10% of loans, the question is whether the local banks have the balance sheet capacity to take up all the worthwhile exposures that foreign banks are shedding, or whether they may need anything up to $15 billion in additional capital.
If there is a gap and if it is not plugged, perfectly viable Australian businesses will be forced into insolvency. Whether additional banking capital is needed and, if so, whether and how the government should supply it, is just one of a number of awkward issues that Treasury and Reserve Bank are grappling with. But however it plays out, given what has emerged so far and in absence of further nasty local surprises, talking about nationalising Australian banks is simply a red herring.
Katz,
The banks (along with other protected and heavily regulated entities) may well cry out to head under the petticoats. Like the pleas for tariffs, subsidies, protective regulation and other perks for those with a well paid lobbying arm, that does not necessarily mean that this course of action is good for anyone but the entities, bureaucrats and politicians who see their powers increased.
It’s a pity he didn’t. A contributing cause for the sinking was the attempt to turn away from the iceberg. They failed, and consequently the iceberg tore a long hole across three bulkheads. If instead they had rammed the iceberg, only one part of the ship would have been opened to seawater. The Titanic would have been crippled but probably would not have sunk.
On the other hand, she was built poorly with shoddy rivets. So she was pretty much guaranteed to sink at some point.
I believe you are making a dangerously libertarian argument, Mr Reynolds. Don’t you know that what we need is sensible, rational oversight? Bankers are evil, short sighted, foolish, grasping and need to be told what’s best for them, since the idea that they are rational agents is preposterous.
We should regulate them. By contrast with the bankers, the bureaucrats are flawless bhodisatvas who never ever make any mistakes and have no motives of their own. They are purely rational agents of the people and we can absolutely trust them to do what is right for us in all circumstances.
Labors new-old left green chestnut where all live in the same valued shoebox.
Yeah it the latest grooviest thing. Let’s get government fatarses and corporate fat arses together to discuss ways we can screw everyone even more so.
.
Meantime we’ll just continue to a. Argue for socialism b. Argue for liberalism c. X-box and cones.
Count @ 6: “Someone correct me – but hasn’t bank Nationalisation already been declared Unconstitutional during the Chifley era?”
The actual ownership of a bank by the Commonwealth is not unconstitutional. (Remember that up until 1991 the Commonwealth Bank was owned by, well, the Commonwealth.)
What was unconstitutional about the Chilfley’s bank nationalisation was that a prohibition on private banking would be a restriction on trade, commerce and intercourse between the states, a right which is guaranteed until s 92 of the Constitution.
Sorry about the typo: “under s 92″
Please don’t nationalise the Com Bank again. It finally seems OK. Today I went to a St Gearge bank with lots of change to convert into a note or so, and was looked at like an idiot, told to put it into “these” plastic bags, and stand aside as there was a que behind me.
Pfft. I then went to said Com Bank where I had other business and they happily chucked it all into some counting machine behind them, whilst listening aghast at my story from St George. I left with $13 paid back, and wondering WTF was going on with this topsy turvey world.
i thought the banks were already using risk weighted capital ratios. i had this feeling it was possible for a bank to convert its residential mortgage portfolio to highly rated MBSs to increase its capital ratio and make more loans. but maybe that would make it too obvious that something wrong was going on.
drscroogemcduck,
I could bore you senseless on the whole subject of the difference between the risk capital regimes under Basel I and Basel II. I have been blogging on it for years and I have not got to the bottom of it.
Perhaps start here and give Bernanke a go here.
“We should regulate them. By contrast with the bankers, the bureaucrats are flawless bhodisatvas who never ever make any mistakes and have no motives of their own. They are purely rational agents of the people and we can absolutely trust them to do what is right for us in all circumstances.”
I for one applaud the introduction of “bhodisatvas” into economic debate. (It’s about time lazy journalists dropped “mantra” IMO. This comment prompted by hearing a BBC reporter use “refrain”. Other possible terms include: formula, cliche, slogan, phrase, campaign theme, summary, bon mot, …. but ‘refrain’ is good. It points to the repetition without judging it.) Will “bhodisatvas” be followed by other terms of like provenance? Are you going to drip feed them into discussions?
To return to your point, Jacques, I’m surprised that the self-interest of bureaucrats (not to mention other commentators) seems to be ignored, e.g. if a recommendation for tax cuts is put to the Treasurer, how may the recommending noble and selfless bureaucrats be personally affected? Better off? Worse off? A statement at the meeting would be handy. As when a newspaper prints “The columnist holds Telstra shares” at the foot of an article.