The author has been described by News Ltd as an "iconoclast", "Svengali", a pollie's "economist muse", and "pungently accurate". Fairfax says he is a "Renaissance man" and "one of Australia’s most respected analysts." Stephen Koukoulas concludes that he is "85% right", and "would make a great Opposition leader." Terry McCrann claims the author thinks "‘nuance’ is a trendy village in the south of France", but can be "scintillating" when he thinks "clearly". The ACTU reckons he’s "an enigma wrapped in a Bloomberg terminal, wrapped in some apparently well-honed abs."

Wednesday, December 29, 2010

Judith Sloan vs. the banks: who is right?

Judith Sloan tells us in an op-ed buried in The Australian's business section that:

"The low point for policy discussion came towards the end of the year when Joe Hockey developed an almost Marxist-Leninist position on the Australian banks.

There can be no other explanation for his statement: "I want a social compact between our taxpayer-guaranteed banks, their shareholders and our government and parliament. This must define the relationship and include direction on competition, expansion, expectations of credit and savings, community service obligations, risks and rates.""

The problem for Ms. Sloan, who I must say has been very kind about my analysis on the NBN in the past, is that Hockey's statement is nearly identical to what the banks have said themselves. For example, the Chief Financial Officer of NAB, Mark Joiner, commented last year:

"The guarantee has underlined the privileged position that banks have in the economy and that at the end of the day the state will step in to support them. It has shined the light on the obligations on banks not only to act in their own self-interest but to keep in the front of their mind they have obligations to all stakeholders."

The Chairman of Bendigo & Adelaide Bank reiterated this theme when arguing that the returns generated by banks prior to the GFC were "unusually high and beyond what one would expect of a privileged, government guaranteed utility." He further opined:

"We went into the crisis with no bank too-big-to-fail in Australia. Coming out of it, I don't think that's still the case...The structure we have now is far fewer players, and in part that's a result of a structure of the guarantee, which did give pricing advantages to the major banks. We have ended up with an industry structure that's far more rigid and in a way more vulnerable to the next shock."

The trap Sloan has fallen into is conceiving of banks as standard private concerns that operate in free markets (ie, open markets in which they receive no taxpayer subsidies and are allowed to fail in the event that their business models have frailties).

This is categorically false: banks get the benefit of a range of free (eg, the taxpayer guarantees of c. $850 billion worth of bank deposits) and sub-market (eg, the priced taxpayer guarantees of > $165 billion worth of bank liabilities) subsidies, to say nothing of having costless--in the sense of no additional premium or surchage--access to the unique lending facilities of a taxpayer-owned bank, the RBA, which has been explicitly directed to fund these private companies when they suffer 'liquidity shocks' (this is the RBA's formal 'lender of last resort' responsibility to the private banking system, which they drew heavily on during the GFC).

In his recent testimony to parliament, the Governor of the RBA, Glenn Stevens, even confirmed that smaller Australian banks benefited from an implicit, too-big-to-fail taxpayer guarantee when responding to targeted questioning from Kelly O'Dwyer:

"I think you would also, to be honest, have to in the back of your mind pose the question: in the previous world, without this guarantee, would a government stand by to let the system collapse and do nothing? I cannot think that they would. There was always some unspoken, unquantified support...We have four large institutions, but the number in a crisis is not necessarily limited to four because in crisis conditions, if people are panicked enough, even a smaller entity can end up being quite disruptive if it is in distress."

The truth is that banking policy is vastly more complex than Ms. Sloan seems to appreciate, and cannot be crudely distinguished according to centuries-old ideological labels that ignore the public-private characteristics of banks that rely on the state to vouchsafe their survival. Mr Hockey and the private banks, on the other hand, appear to understand this.