Irvine: Give us the Banking Royal Commission

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More good Jess, bad Jess today:

In reality, the high returns on equity enjoyed by Australian banks owe in large part to the higher leverage they hold. Australian banks are some of the most heavily exposed to household sector debt in the world. Aussies would rather sell their kids than miss a home loan repayment. But our high household debt remains a key vulnerability, not just for banks, but the economy as a whole.

Even more important, then, that the issuers of that debt be held to high account for their behaviour.

That behaviour has fallen well short of acceptable standards in recent times.

Time and time again, bank chiefs have been embarrassed by systemic failures within their organisations. Their financial planners have dudded customers. Their insurance arms have denied funds to the dying. Their ATMs have been unwittingly used by criminals for money laundering. Their employees have manipulated key money markets.

What confidence can the public have that such failures are the exception, not the rule?

Banks have long fought the idea of a public inquiry…It was the economist John Kenneth Galbraith who formulated the idea of “countervailing power”. In a free market, the price of goods and services would be determined by free bargaining. In reality, markets are dogged by imbalances, such as the power imbalance between employers and employees. Some “countervailing” powers, like trade unions or consumer groups, are needed to even the field to produce efficient outcomes.

And so it is with the massive power wielded by Australia’s banking sector.

A public inquiry would act as an important countervailing force against the banks. It would also serve to remind politicians and policy makers – who increasingly find comfortable jobs in the banking sector after departing public office – of their important role in checking the power of banks.

Well put. Let’s not forget the multitude of public guarantees, either. Ethics is the least of what we should demand in return.

One just wonders how it is that Jess can recognise such corruption, leverage and risk but not see the same in house prices!

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That’s right, she pens for Domainfax, one of the great beneficiaries of said corruption, leverage and risk.

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.