Sunday, December 19, 2010


Aarrgh! Sorry, late again. This piece on the Treasurer appeared in Saturday's Canberra Times.

I fear if Julia Gillard had the numbers he'd already have been shifted. As it is she doesn't - so he stays . . .


Initially Treasurer Wayne Swan ridiculed Joe Hockey's call for a package of banking reforms. Rushing in he bestowed the nickname "incompetent Joe" and suggested his shadow "might as well give the game away". Then came Melbourne Cup day. The Reserve Bank hiked official interest rates and the other banks almost doubled the rise as they passed it on to the customers. Swan's rhetoric exploded like a bubble. Banking reform quickly became the government's chief priority.

When it was released the government's package bore a distinct similarity to the opposition's. In fact, three of the Treasurer's policies were lifted almost holus-bolus from suggestions that just a few weeks earlier he’d been mocking with derision. Swan focused public attention on mortgage exit fees, suggesting their abolition would allow people to switch mortgages more easily. That’s true, but don’t think the banks won’t find other ways to keep their profits intact. The move merely demonstrates how comprehensively the government has abandoned a chance to introduce meaningful reforms.

To begin with, exit fees will continue to apply until the middle of next year. After that they'll still apply on any contracts entered into before that time, so hopeful home-buyers seeking to benefit from this reform will have to put off purchasing for quite some time. Exit fees are not inherently evil -- they simply penalise mortgage-holders who enter into a contract and then decide to switch. They are comparatively transparent fees; one that only applies to people who want to switch. Perhaps they hadn't done their homework before signing up. Now those borrowers who remain with their current mortgage provider will have to pay to allow others to leave. Small lenders like credit unions, the ones with the tightest margins, will be heard most. As for the banks, if they can't pass on increased costs directly, they'll just find some other way of doing it indirectly. The drive for profit won’t be compromised.

In fact, shares in the big banks jumped -- no rocketed -- as soon as Swan's so-called reforms were announced. This demonstrates the market's scorn for his pretend package. Although the Treasurer is a nice man and a good surfer, neither of these attributes are indicators of a Treasurer. Swan is a good man: not a hard one. He's been desperate to appear on the front-foot since he took over the job, but this doesn't mean he's got the toughness to face down the banks, mano-a-mano, let alone the ability to push through hard and necessary reforms to this sector. Some in Labor’s ranks are now, quietly, beginning to let their discontent show.

The classic instance of Swan’s reluctance to embrace necessary change came on the afternoon the Henry Review was released. Even as reporters began flicking their way through the thick document, Swan categorically ruled out the key recommendations that flowed from Henry's analysis of the housing market. These concerned reforms that would have dramatically overhauled the way housing was taxed: making it fairer and also increasing the amount of stock on the market. But Swan was too afraid to take the risk of tampering, even slightly, with the great Australian dream of home ownership. That's because, deep in his heart, the Treasurer is a creature of politics. He knows change isn’t popular and he’s not a reformer. He shies away from significant challenges, like putting a price on carbon. Understanding of the central role that housing plays in the aspirations of the ordinary Australian is politically vital, but he's allowed this to blind him to issues of equity that can only be addressed by change. The central problem is that Swan has used his political gut instinct, rather than his mind, to inform this vital area of policy.

As a young apparatchik, he saw the chaos caused to Labor's political hopes when (then) Treasurer Paul Keating briefly attempted to abolish negative gearing on housing. Swan is playing it safe by keeping well clear of anything that smacks of fundamental reform, even though doing this will be necessary to tackle the underlying problems. Unfortunately, he's now discovering that although that path might have initially looked dangerous, it now represents the only way to find a solution. Swan’s failure to act earlier is now developing into a major headache for the party.

This government doesn't appear to be willing to take any action that would actually affect the critical issues: the supply of housing, together with the demand for it. These are the fundamental concerns for which answers will have to be found in the long-term, although currently neither political party is ready to deal with either of these vital questions. As a result, popular attention remains focused on the price of housing; which means interest rates. And this is another area where the government's actions have been disappointing. Swan's ‘package’ will do absolutely nothing to address the most serious and critical problem of all: the cost of money.

In NSW alone it's been estimated that up to six families face their home being repossessed every day as interest rates rise. Yet (although only if you’re already rich enough to qualify for some kind of ‘professional’ package) the banks are giving away money to wealthy clients at huge discounts – sometimes more than one percent. The poor – those least able to afford it – are paying through the nose for discounts to the rich. None of the Treasurer's actions will change this. He might as well be whistling into the wind.

Government spending like the stimulus package and the broadband network simply exacerbate the problem. The key target for the Reserve Bank is inflation. Glenn Stevens isn't paid to lie awake at night worrying about how many families are out on the street because the prime objective he was given was to keep inflation low. The easiest way he can do that is by jerking interest-rates higher, so that's just what he'll do. The other banks will do the same. This is what makes Swans confected anger as the banks raise rates so surprising.

Swan is paying obeisance to the current religion of economic theory and stressing the need to squash inflation. At the same time he's decided he isn't happy with one of the songs in the hymn book. Unfortunately it's all part of one package and not something that can be tinkered with. If he keeps trying to meddle he'll find the high-priests (we call them "bankers") will rapidly lose patience with his antics. Unfortunately the congregation (also known as "mortgagees" or "voters") have already noticed that despite his escalating rhetoric, Labor's unable to do anything about rising rates. They’re not likely to forget come the next election.

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