Chris Joye has another barnburner today at the AFR about the Son of Wallis inquiry:
Fearful that the implicit subsidies from which they benefit will be properly priced, banks are furiously lobbying Hockey and his advisors to focus on “how to fund Australia”, which is code for getting them cheaper and more stable money.
Having been stripped of its banking regulatory authority by the last inquiry in 1997, the Reserve Bank of Australia is also understandably anxious.
…The source of financial system hazards is attributable to two related dysfunctions.
The first is when the mediators take in deposits, investments, annuities, and insurance premiums with a liquidity expectation that is mismatched with the liquidity of the assets they buy…the greater this mismatch between …our savings and the investments that this money is committed to, the stronger the chance that – if we one day demand our money back – the mediator will not be able to deliver on their promise to pay.
…The second financial system dysfunction is when regulation itself becomes a source of instability and interferes with the transparent pricing of risk (or the terms on which we part with our savings).
If regulators allow banks to become too big to fail, executives are given an incentive to assume higher risks in the search for superior returns, which only further heightens the probability that the institution will need to be bailed out.
CJ concludes the inquiry must independent of both regulators and banks. I support that but on one condition. There is another hazard in the financial system that CJ does not mention. That’s the Government itself. It may be that Australia is not yet in the position of the US where lobbyist cash virtually buys legislation. But we have our own equivalent in a politico-housing complex that has shown no inclination to address the unsustainable dimensions of our financial architecture. On the contrary, it has warped just about every rule of the former system in an effort to sustain the unsustainable. When you’ve got a hotline to the Prime Minister, the RBA is small beer.
To get this right Joe Hockey must subordinate his short term political interests to the longer term national interest and that means selecting a committee that is “frank and fearless” and not beholden to any pre-conceived Government outcome. I repeat, Frank Milne is an ideal candidate.
