Economic knowledge and democracy

Once again Joe Hockey has stirred the economic establishment, and as usual it is enjoyable to watch all the vested interests squirm against and spin his statements to their advantage.

He has released his terms of reference of a new enquiry he would like to see established.

1. An analysis of the developments since the implementation of the Wallis Inquiry recommendations and lessons to be learnt from the implementation of those recommendations with specific reference to, but not limited to;

a. The establishment of a stand-alone, integrated prudential regulator, the Australian Prudential Regulation Authority, and its working relationship with the Reserve Bank of Australia, the Australian Securities and Investments Commission and prudential regulators in other jurisdictions;

b. Further policy changes made in the wake of the collapse of HIH Insurance;

c. The aggregation of financial services providers into financial conglomerates resulting in the emergence of large and diverse financial institutions;

d. The role and impact of new technologies; and

e. The appropriateness of government pledging its balance sheet or providing other support to particular entities.

2. The impact on the Australian financial services industry of the Global Financial Crisis including consideration of, but not limited to:

a. An explanation of how United States sub-prime contagion was able to be quickly transmitted to Australian financial markets and severely impede the capital flows on which Australian institutions rely;

b. The consequences for prudential supervision, confidence, stability and competition of government intervention in guaranteeing financial entities and specific products, and the associated creation of a new risk profile (“moral hazard”) for public sector engagement in financial services;

c. The reduction in the number of product providers including an analysis of the impact of entity mergers and changes in the level of business activity of international banks in Australia;

d. The implications for current and future funding of the domestic economy;

e. Changes in global competition that occurred as a result of the crisis;

f. The impact on non-bank lenders and hybrid domestic financial entities such as Cash Management Trusts and Mortgage Trusts;

g. The reduction in liquidity and scale of investment markets such as the corporate bond market, Real Estate Investment Trusts and the RMBS and CMBS markets;

h. Wholesale funding challenges for entities and the need for alternative funding products such as covered bonds or other forms of asset-backed instruments;

i. The impact of new Basel III capital and liquidity rules on stability and competitiveness in the Australian financial services sector; and

j. Any unilateral actions by other jurisdictions that may limit or restrict the Australian financial services sector and how these decisions should be managed into the future.

3. Factors likely to affect the evolution of further stability and competition in financial services, including, but not limited to:

a. Economic growth, demand for credit, domestic savings and investment, technology and industry structure;

b. Efficiency of the domestic financial services system relative to international peers having regard to regulatory, structural and cyclical differences;

c. The emergence of the $1.5 trillion superannuation system and the relationship with the broader banking system including the structural shift of savings from the core banking system into superannuation; and

d. Emerging challenges for cost of capital and required rates of return to ensure both availability of capital when needed and funding of growth in the domestic economy.

4. Consider and recommend policy measures which can facilitate stability and further competition including, but not limited to:

a. Initiatives that reduce the complexity and duplicity of regulation whilst maintaining certainty and predictability in the delivery of financial services for consumers and small business;

b. Facilitation by government of industry wide rather than specific entity competitiveness;

c. Better use of existing government infrastructure such as Australia Post and Medicare Offices, for distribution of financial products to facilitate improved competition, but without government assuming balance sheet risk by competing directly with the private sector; and

d. An improved regular and independent reporting framework that provides comprehensive information on the risks and returns generated by the banking system; and

e. The specific ranges of risk and return that could be reasonably expected to be produced by institutions operating within the unique regulatory sphere of the modern banking system.

On the surface we would openly support an enquiry with these terms of reference. However they are certainly not the only thing that matters. In our opinion it is much more important to determine the underlying reason why Joe thinks the enquiry is required; and that it where we have large concerns.

As we have stated previously in reference to Joe’s ideas.

Joe Hockey is suggesting that the government should extend its government guarantee further to allow other banks to compete in the mortgage market and therefore reduce the risk of “price gouging” by the big 4 banks. This may well fix the “effect”, but if it did it would most probably make the “cause” even worse.

Joe Hockey along with most politicians seems to be venturing into unknown financial territory with the sole purpose of providing even more cheap credit to Australians so they can continue to indebt themselves on ever more expensive houses. Australia does not need this; it needs different economic thinking.

There are many points in the terms of reference above that are valid. However in our opinion there are 2 major things that need to be done that would address most of these terms; and also the much broader issues present in the Australian financial system.

These are:

1) A public forum and enquiry that determines how to re-introduce self-effecting risk back into the entire financial system anywhere it has been removed by implicit or actual government backing. Most importantly this would cover the areas of wholesale debt and securitisation.

2) A second public forum and enquiry to determine how best to restructure the economy away from speculative “investment” in housing into productive investments that deliver real ROI to the economy.

The reason we are suggesting public forums and enquiries is , because unlike vested interests, we believe that the economy is a public asset. The population have a right to be properly educated about how their financial system actually works, so they themselves can make better decisions about the shape of their own economic future. That is one of the major reasons we started this blog in the first place. We were sick and tired of vested interest hogwash being reported as fact, and we felt there was a need to highlight the other side of the story.

In our opinion there is a huge need for economic democracy in Australia. For far too long macro-economic decisions have been made and/or influenced by a small number of mostly un-elected people who in our opinion have done a pretty terrible job.

Australia is now in a position of having half a trillion dollars in foreign liabilities almost completely devoted to housing debt; which has now been made into massive moral hazard. We are in the middle of a resource boom with large capital inflows yet the government still can’t balance the budget or provide full employment. At the same time our productivity has been sliding down a hill because we have been giving up our capacity in the belief that Australia is getting richer. But it is not, it is just getting more indebted.

Yet visionless, addict like pro-housing policy continues to flourish. Australia has spent trillions of dollars in the last 10 years selling and re-buying houses. This needs to stop, and in our opinion the best way to determine how it should stop is to educate the populace about the problem and then together determine how to fix it. Australian needs strong long term policy frameworks and that can only come from an understanding of what could be achieved with better policy.

Tomorrow we will endeavour to help start just that.

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