Is the "people's bank" back on the agenda? Ahmed Fahour has been appointed CEO of Australia Post...A very curious move indeed. Fahour is notoriously ambitious, and only recently took a job as CEO of a major Middle Eastern bank. He now claims that he accomplished his objectives in merely four months. He's smart, but that smart? I am guessing that Mr Fahour did not take the Australia Post gig just to sell stamps. I would look out for Australia Post to jump into the banking game as a pre-election initiative by the government to optically combat the specter of the major banks’ oligopolistic powers (see here for my summary of the Labor Party's history of keeping the big banks honest).
Having missed out on the top job at NAB, the Australia Post position also provides Fahour with the presumably attractive opportunity to stay in the CEO-elect frame with the likes of CBA and ANZ (Ralph Norris is expected to move on in the next 12-24 months). Fahour was the mastermind behind the unsuccessful attempt to establish 'RuddBank', which was to provide him with an exit strategy from NAB, and is widely known to be close to Wayne Swan's Chief of Staff, Chris Barrett, who is a fellow Boston Consulting alumnus.
As far as I know, the phrase ‘the people’s bank’ first entered the public vernacular as a result of the paragraph enclosed below from this 'open letter' that I co-authored with five other economists. The letter ended up being covered on the front page of Fairfax newspapers with the suggestion that we were calling on the Prime Minister to use Australia Post as a conduit for delivering competitive savings and loan services (it turns out that the SMH and Age have also picked up on this link today here and here):
“Should citizens who feel unsure and unqualified to shop wisely in our financial markets be able to access basic savings, payments, and wealth management products that have been vouchsafed by governments as being safe and professionally managed (for example, why can't Australians invest with the Future Fund)? Is there a role for a publicly-owned entity to offer essential services in Australia's finance sector that leverage off unique government infrastructure, such as Australia Post, the tax system, and the government bond market?”
I have written at length in the past about the utility-like nature of our banks, which have to be subsidised by taxpayers in a multiplicity of ways due to the inherent flaw that sits at the heart of their business models: they borrow ‘short’ via at-call deposits and wholesale debt, and then lend ‘long’ through 25 year home loans. This asset-liability mismatch gives rise to enormous vulnerabilities during crises when either depositors withdraw their funds (aka a ‘bank run’) or wholesale investors refuse to roll over their debt.
In the open letter referenced above, we commented:
“Has this crisis reminded us that Australia's major banks fulfill a unique community role akin to public-private utilities that warrant special controls to guard against system stability risks? It is odd that we've been repeatedly told that our banks were lucky not to have had substantial overseas exposures and yet they now appear to be rushing offshore to obtain exactly these.”
There are, however, interesting alternatives to a ‘people’s bank’. For example, earlier this year I observed that we compel workers to save via super but offer no publicly-managed alternative. I proposed that the government create a government-owned fixed income investment solution (aka ‘KangaSupa’) for mums and dads that want a very low-cost, capital guaranteed super alternative. This idea has been subsequently backed by the Cooper Review and Alan Kohler.
The rationale here is that the Australian government would offer at least one low-cost investment product that they would stand behind and which would be conservatively managed by only investing in fixed-income securities. Many risk-averse employees would doubtless find this attractive. Importantly, the government could then invest these savings into cash-starved areas of the economy such as highly-rated bank debt, corporate debt, and mortgage-backed securities, which have been inadvertent casualties of the GFC.
Indeed, KangaSupa might offer a superior solution to taxpayer guarantees of bank debt, and/or taxpayer investments in senior ranking corporate debt, mortgage-backed securities, and commercial property debt. It could also provide one of the first retail avenues for mums and dads to invest in government debt, which is about to balloon.
What is potentially most interesting is that a capital guaranteed national superannuation fund that only invested in fixed income securities would, heaven forbid, actually serve as an effective surrogate for a publicly owned bank (aka the ‘people’s bank’). That is to say, KangaSupa could help significantly enhance competition in the banking and finance markets by supporting what is known in the jargon as 'non-intermediated' forms of funding. Indeed, KangaSupa would, for all intents and purposes, look like a bank.
Think about it: workers would be investing their savings with the fund, which would then redistribute those savings into corporate and household debt securities (ie, business loans packaged up as corporate bonds and home loans securitised in the form of RMBS). Critically, this is finance that does not ordinarily involve the big banks – that is, it would compete with the 'intermediated' funding offered by the major banks.
So with a single policy initiative Kevin Rudd and Wayne Swan could address: (a) the absence of simple government-managed super solutions; (b) the flaws associated with many super asset-allocation strategies that leave members overexposed to listed equities; (c) the lack of liquidity in the corporate bond, and securitised residential and commercial mortgage markets; and (d) the parlous state of competition in Australia’s banking and finance sectors.
