The conflicted Murray Inquiry is making a mockery of the the Coalition’s claim to better budget and economic management. Here we have one of the bankers principally responsible for the run-up in foreign borrowing in the big four banks that led to their GFC insolvency and off-balance sheet nationalisation running the inquiry into the run-up in foreign borrowing in the big four that led to their GFC insolvency and off-balance sheet nationalisation. It is surely a watershed moment in the fast history of Australian plutocracy.
And what has Mr Murray concluded about these issues?
“Ongoing access to foreign funding has enabled Australia to sustain higher growth than otherwise would have been the case. The risks associated with Australia’s use of foreign funding can be mitigated by having a prudent supervisory and regulatory regime and sound public sector finances.”
In short, the government had better manage its liabilities properly because the banks sure aren’t going to. Or, put more simply, keep the bailout gun loaded, people, we’re going to need it.
This is not necessarily a problem, of course. Having government sponsored current account funding enterprises (GSECAFE) is fair enough. What is not fair enough is that it is done while pretending that these are private institutions. The profits of the GSECAFE’s are being privatised while the people of Australia carry the risk. That’s not private enterprise, it’s market failure.
Now, I know the inquiry has made reference to negative gearing and the need to boost capital ratios on mortgages, as well as improve business lending. That’s all to the good, as I said yesterday, and it may crimp the foreign borrowing at the margin. But that does not address the extant risk on the liability side of the bank balance sheets, which has begun to grow once more and is trending up as mortgage credit growth accelerates:
This growth is possible largely because the credit rating agencies give the banks a material 2-notch ratings uplift owing to their public guarantees. They’ve said so openly and that’s what keeps the price of foreign money down.
And so, you, the Australian taxpayer, are:
- directly subsidising major bank profits
- carrying the risk for when it all goes pear-shaped
- encouraging the banks to make this as big and perverse as possible because of the rents it delivers, and
- throwing away your choices about how you’d like to see the national budget used.
The only way to restore market discipline to the banks is to put a price on your support. You are perfectly entitled to insist upon:
- an insurance premium paid to your government, roughly the equivalent of the the ratings upgrade
- an equity stake in the banks of the same magnitude
- much higher charges for use of the RBA’s cash for coconuts facility
- at least one board seat in each bank, and
- a major say in setting remuneration levels.
It’s probably in the order of 5-10% of equity and profits, and a $1 million cap on all banks salaries has a nice ring to it. That would be a reasonable structure for a GSECAFE that does not corrupt markets, pays its dues to the social contract in which it operates, and provides its democratically chosen function.
Would it make your finance more expensive and turn you into a ravening communist? On the contrary. That structure is quite safe for markets. It may even lower costs further by stabilising the guarantees. One thing it’s certain to do is motivate the banks to rid themselves of the foreign debt addiction and your presence in the bank. Deposit rates would rise and we’d have banks going in all sorts of interesting directions seeking an exit from public support and returning our banking system to a functioning market. The choice is not between capitalism and socialism, it’s between capitalism and plutocracy.
In short, by allowing the Murray Inquiry to whitewash the issue, Joe Hockey is ripping the budget blind, ignoring your rights as a tax-payer and allowing free-wheeling bankers to determine the nation’s economic course.
If he agrees with that then he should not be the Treasurer.