John Howard calls banking Royal Commission “socialism”. Ignores taxpayer subsidies

By Leith van Onselen

You’ve gotta love the myopic view of former Prime Minister, John Howard, who yesterday called a proposed Royal Commission into the banks “rank socialism”. From The Australian:

Former prime minister John Howard has slammed a royal commission into the banks as “rank socialism”, warning the Coalition that embracing such a policy would damage the Turnbull government’s fortunes…

“Our banks demonstrated in 2009 that they were among the best-run, the most prudentially supervised, and the most well-capitalised in the world,” Mr Howard said.

“I say to my former colleagues and the people I still support, don’t embrace a royal commission…”

Regular readers know that MB supports a banking Royal Commission (or a commission of inquiry) due to the numerous examples of bank malfeasance, including:

  • damning evidence of bank manipulation of the bank bill swap rate, which the banks have shown no contrition over;
  • the 1000-plus examples whereby borrowers’ loan documentation has been forged by the banks (see here, here, here and here), again with little remorse shown;
  • overall dodgy lending standards; and
  • the CBA money laundering scandal, which no doubt goes far deeper.

But what we find most interesting is Howard’s labeling of such an inquiry “rank socialism”. Given Howard hates socialism so much, then surely he too opposes the implicit taxpayer guarantee put in place since the GFC – essentially an insurance policy for the banks funded by the taxpayer? According to RBA research in 2015, these taxpayer subsidies have been worth around 20 to 40 basis points on average, implying that the majors capture an annual taxpayer subsidy worth more than $5 billion.

Does Howard support increasing the bank levy to between 20 to 40 basis points to recapture this subsidy and eliminate this form of socialism?

Let’s be honest, the Australian banking sector has been underpinned by multiple direct and indirect supports from the taxpayer, including:

  • The implicit guarantees cited above, worth $5 billion annually;
  • deposit guarantees;
  • wholesale funding guarantees;
  • multi-billion dollar purchases of residential mortgage-backed securities (RMBS) by the Australian Office of Financial Management (AOFM);
  • Australian Securities and Investments Commission (ASIC) bans on short-selling;
  • absence of ex-ante Financial Claims Scheme (FCS) fee;
  • laxity of capital buffer requirements by the Australian Prudential Regulation Authority (APRA);
  • reductions in risk-weightings, especially for mortgages;
  • massive public stimulus;
  • huge first home buyer grants, and
  • opening the immigration spigot while relaxing foreign buyer restrictions post GFC.

Amid the growing list of scandals, there is only one way to force better behaviour from the banks: remove moral hazard by explicitly cutting them off from the taxpayer teet.

One way to do this would be to explicitly refuse to guarantee the banks. However, this could unduly endanger the economy, so a better option is to tell them that any future taxpayer bail-out would involve taking a public equity stake in the bank(s) along with conditions about our own board seats, remuneration ceilings and other conditions until the bank(s) can demonstrate that they no longer require public support.

The original 1997 Financial System (‘Wallis’) Inquiry explicitly stipulated that the Government should never provide a guarantee over the banking system. Yet, since the GFC we have witnessed a build-up of moral hazards that began when the Government first guaranteed the banks’ wholesale borrowings and deposits, and followed with the RBA stepping-up its repurchase agreement operations, providing the banks with substantial public liquidity support.

These measures heightened the expectation that the authorities would support the banks as required going forward, which the ratings agencies have acknowledged provides the banks with a two-notch ratings upgrade.

Ultimately, the Australian banking system has departed in a fundamental way from the recommendations of the Wallis Inquiry, with moral hazard now entrenched, and transparency and accountability lacking.

The same thing is on display from other former policy titans today:

Former Treasury secretary Ken Henry has issued an extraordinary attack on the Reserve Bank’s framework for setting interest rates, as the nation’s top bankers said a deluge of new regulations and the prospect of a royal commission were throttling their ­ability to remain internationally competitive.

At an exclusive ­summit convened by The Australian in Sydney yesterday, ­Commonwealth Bank chief executive Ian Narev, the chairmen of National Australia Bank and Westpac, and Australian Bankers Association chief Anna Bligh said mounting regulation — which now makes up more than 70 per cent of the NAB board’s agenda — was endangering the stability of Australia’s banking system.

In an unusual move, Dr Henry, the NAB chairman, said regulators should have done a better job recently explaining it was their attempts to cool housing markets that forced banks to lift rates on interest-only investor loans.

“I will probably get myself into trouble,” he said. “We do need to have regulators out there explaining why they’re taking the regulatory action they are taking. And they also could do us all a favour … by explaining that they do expect these things to have an impact on borrowing rates.”

He said the ­Reserve Bank’s 20-year-old practice of independently setting the cash rate each month had misled people into thinking the RBA controlled mortgage rates.

“There is a very poor understanding of what affects market interest rates in Australia today,” he said. “The Australian population has become conditioned to the idea that banks should adjust mortgage interest rates only if and when or as the overnight cash rate of the interest is adjusted.”

“I don’t believe it is driven by what they consider to be the public interest but about what they perceive to be a political ­opportunity,” he said.

Ms Bligh said banks were facing “the most intense period of ­reform that the banking industry has seen in Australia since its ­inception”. A new banking executive ­accountability regime has given APRA the power to fine executives and amend pay practices it does not like, while the government has tasked the Productivity Commission with investigating competition in the sector.

Is this Ken Henry the policy doyen talking? Is it Anna Bligh hero of the QLD floods? Or is it paid shills of the banking system? It’s not an idle question. It goes to very heart of the problem of our contemporary banking system.

Either these folks have to fess up and pay for the public support that they happily exploit. Or, it’s time to end the banking socialism and cut the taxpayer cord.

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Unconventional Economist
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  1. 1. screw up the country and completely wreck everything

    2. lose office

    3. disappear for a few years

    4. come back with a reinvented “elder statesman” identity and impose yourself into every political issue around, with nobody to call you out on it bc everybody has already forgotten how crap you were.

    it’s the john howard/george w. bush approach to post-political life.

    • The man is also a war criminal and mass murderer. That’s how he should be introduced . “War criminal and mass murderer John Howard is against a royal commission believing it to be rank socialism”.

    • Honest John, face the fact, capitalism won Cold War, to go out and call for an investigation into the inhuman and unethical behaviour as ‘socialism’. You who has profited from unethical and inhuman behaviour yourself, is beyond pale.

  2. Can we just tell em the four pillars policy is now a three pillars policy? Let them fight it out over which one will fail.

  3. Then why is it ok to have a royal commission on unions?

    We need not conduct deep financial analysis – just do the opposite of what rich pricks want.

    Rich pricks want to abolish the luxury car tax? Increase it! Then expand it to luxury yachts and houses.

    • Well the Qld ALP have just announced a stamp duty surcharge on cars over $100k if they win the election.

      Great news for German car dealers in Tweed Heads.

      • How would that work? Would not people just buy cars from another state?

        However, QLD can stop letting kids of 457 visa staff study in QLD schools for free.

  4. How petit can bourgeois John get? I mean, not even a raving bucaneer bankster would embarrass himself by saying that a RC after all the arrant bad behaviour was “rank socialism”. He might be fretting a little over a small portfolio of bank shares.

  5. The real problem here is how the Libs have stopped listening to voters. The fact the Howard is calling a banking commission ‘socialist’ says only that he has spent too much time talking to Americans. I suspect he is drawing his ideas about what an Australian conservative is like from America, and I suspect that is what most of the Coalistion is doing in one way or another. I know some pretty conservative people and none of them want to get rid of medicare, Youth allowance, AUSTUDY or HECS. Some of them think the dole is a bad thing but they’re not all that wedded to the idea. In other words, they actually quite like socialist Australia. Socialism isn’t evil. It basically means European.

    • good observation, this is becoming a massive problem – the americanisation of our politics, resulting from people who either interact too much with americans or spend too much time on the internet. especially notable with people in my generation. there’s a growing number of aussies going around talking about “gun rights” and even citing “the constitution” (???) in their arguments — it’s super weird.

      • Media [propaganda] has been one of the U.S. major exports for yonks….

        disheveled…. Albeit market share in the market place ™ of ideas – demands – it….

    • There seems to be a generational divide in conservatism among those I speak to. The older group can appreciate what was provided for them, and the opportunities they had when growing up. The younger are more Americanised, to use your term. Amongst the older group I find that there is a conflict of beliefs and language. Their beliefs were formed and crystallised when they were growing up, yet they get their language from today’s media, often News Corp., which doesn’t represent their beliefs. I’m sure that I’m the same on different topics. It’s just one of the quirks of being human.

    • ErmingtonPlumbingMEMBER

      An interesting opine there Rob,…you got me thinking of these “Australian Conservatives” and what motivates them.
      Last Tuesday at the Brush park bowlo, during our Monthly ALP Ermo branch meeting,…ACs had 30 to 40 members of their party, preselecting a candidate for the Bennelong by election in the conference room,…at the same time Kristina Kennelly was visiting our meeting of just over a dozen members!

      Fortunately or unfortunately, Kristina left and our meeting closed before “they” emerged from their meeting.
      Speaking to several of them at the bar afterwards, I was impressed with how motivated and committed they all were to their new party, the ex liberal mayor of Ryde was very enthusiastic about the parties prospects.
      These conservations I had with them, really had me thinking about just how deep the discontent runs, with average people off all political leanings,…mine included.
      The need for Real reform of our whole democratic system seems so obvious and desperatly needed.
      The people at the top to eaisly ignore us all.

  6. Mike Smith said Hitler attacked the banks, so in effect those wanting a Royal Commission are fascists.

    Now little J says attacks on the banks is ‘rank socialism’.

    Looking forward to Trumble’s ‘satanists’ mudslinging next week.

      • Did you say John Howard is a war criminal?

        Yes, you’re right. John Howard, our former Prime Minister, is a war criminal.

  7. reusachtigeMEMBER

    I agree with Mr John! The whole saga is a commie attack on the freedoms of banks to maximize profits!!

      • reusachtigeMEMBER

        This place is infested with sick neo-nazi commies! You are all blindly lead by a white supremicist marxist dude who digs turds out of pipes!

  8. The billions he spent on house inflating buyers’ grants that helped swell the banks’ business was the free market at its most efficient. lol

  9. When there is a bail-out, it will be for the entire banking system.

    Nationalise it, break them up, and recast the charter for banks in Australia [‘Back to the Future’: the Wallis Report of ’97-NO MORE BAIL OUTS]

    Fire the directors and execs, repopulate these positions and progressively re-list these smaller, more numerous institutions on the ASX.

    Never let a crisis go to waste!

    • THIS. The discussion must start now before the crisis hits, we cannot afford to let it go to waste.

  10. The teat you want is a ‘teat’ not a ‘teet’.

    Author: There are plenty on the taxpayer teat. Why just remove the banks ? What about Big Pharma ? What about the medical fraternity ? There are many others.

  11. Taxes don’t pay for bank subsidies, that view plays right into the neoliberal narrative, its just accounting, offsets would be a better term. The government does not pool taxes and then give banks a check, tho some private businesses and industry front groups are known to give political party’s and individuals checks….

    disheveled… taxes are a derivative of expenditure, not the inception of it…. horse – cart thingy…

  12. in 2008 our banks have been bailed out by USA Fed – that was real international kind of socialism for the rich.

    • adelaide_economistMEMBER

      This! It beggars belief that Howard doesn’t know this given he was only booted from office a year or two before the GFC. It’s not even ‘secret’ that the Federal Reserve had to implement emergency measures to save the Australian (yes, Australian) banking system from collapse.

  13. adelaide_economistMEMBER

    I love the bit about threatening the international competitiveness of Australian banks. LOL. One of the lesser known certainties in life (after death and taxes) is that Australian bank forays into international markets always end up failing. It’s an endless cycle. The irony I guess is that their lack of competitiveness is because they get to dominate in this heavily regulated and controlled (er, socialist) domestic system that we have here and by the logic of the free marketeers this explains why they always make a mess of expansions elsewhere (other than NZ, being basically an extension of Australia in a regulatory sense).

  14. Worst. PM. Ever.

    Pick your reason, there’s aplenty.
    Proof that Australians can be as dumb as Americans when it comes to “choosing” their politicians…

  15. I like the way Ken Henry is flagging an “out of cycle” rate rise (or keeping rates as they are if the cash rate drops) and pinning it on the RBA, which will help to pay the fines (yawn) that drop out of a Royal Commission. Brilliant strategic play, and he’ll get away with it.

    • “Former Treasury secretary Ken Henry has issued an extraordinary attack on the Reserve Bank’s framework for setting interest rates, as the nation’s top bankers said a deluge of new regulations and the prospect of a royal commission were throttling their ­ability to remain internationally competitive.”

      how internationally competitive are they now? and why? hmmm? nick off Ken you bludging tick
      one might say whatever internationally competitive traits they have are based on false pretences which you Kenny boy put in place.

  16. Holding criminals to account is “Socialism”…….

    Repeat after me Howard: “The Mega pension paid to me by everyone’s taxes is not Socialism”….good boy

  17. Every time the liberal party isin trouble, they wheel out this tosser. Like a bad smell, he refuses to go away.

    Seriously, has anyone noticed how war-criminal ghouls like the rodent, bushes, McCains, Kissingers seem to live forever? It must be all the child sacrifices, which would explain Abbot’s support for Pell.

  18. “rank socialism”
    Wow what an interesting choice of words.
    Personally I’ve always considered Socialism’s goals to be extremely uplifting, Socialism is a group trying to find the best possible solution for the group as a whole. Capitalism on the other hand always attempts to motivate the individual to out do their peers and gain an inch of advantage by standing on the shoulders their drowning colleagues.
    Which system best fits the description Rank?
    France is a proud Socialist nation, lets see their national goals are: Liberté, égalité, fraternité
    for those that cant remember their high school French it translates as: liberty, equality, fraternity, are these Rank goals for any community? surely these goals are the corner stone of any just community conversely denial of these goals (labeling them Rank) represents the denial of justice for any community.
    Shame on you John Howard, our banks are not above the community, matter of fact even in well functioning capitalist systems, banks serve their community. This modern Australian invention of the banks enslaving their community is a cancer that needs to be excised, if anything the process of enslaving the local community to pay foreign bond holders would seem to fit the description Rank!

  19. So it’s ok to do whatever you like as a bank…money launder, act unethically, sell dodgy loans, and at the end walk away with millions and no consequences. It’s not socialism, it’s fraudalnt and criminal.

  20. agree, let not have socialism in the banks
    lets bust the the 4 of them up and have 20 smaller banks, sure their cost stucure per unit of production may be more expensive but the competition will drive down prices on the things people buy which is interest rates on loans. this is what we want in a free market as socialism is giving them a right to practice in the first place in a supply limited market (govt hands out very few banking licences because if I could get a licence I would do so and extract monopoly rents)
    lets do it and stop stuffing around

  21. Socialism was probably the wrong word to have used. But Howard is right, we don’t need a banking Royal Commission. Another diversion from all that needs remedy in the Australian diaspora. Most bank issues (not all) involve equally culpable customers. There’s ombudsmen and social media, APRA and the courts to address grievances. A banking Royal Commission: an ill-defined and lengthy witchhunt meets lawyers picnic.

  22. If the banks had nothing to hide they would no so vehemently oppose a royal commission. The stronger the opposition to such the better the outcomes for the average punter. They must have some serious shit to hide.

  23. Good, the best thing our old mate Howard can do now is put himself on the wrong side of history. When the inevitable RC happens and the pus comes out, the RC will seem like a very good idea indeed, and anyone who was adamantly against it will have their opinions further downgraded.

      • Absolutely. Unless he screws up his public image, he is going to be seen as the next Menzies. Just as gen X conservative today romanticise the 50s, so too will future generations romanticise the period of Howard.

  24. proofreadersMEMBER

    Howard should shut up and disappear in to the woodworrk, as he is would appear to be responsible for a lot of the intractable problems Straya now has. As for the banks, in the absence of a government guarantee, they would probably be toast as they fund themselves with a largely hot money book.