A NEW FINANCIAL SYSTEM

Perhaps it's time for a new financial system.

If you were going to have one you'd have to begin by reforming the Reserve Bank, so perhaps that's a good place to start.

This column published in the Canberra Times considers the Bank, and then the banking system . . .

THE RESERVE’S ALREADY BEEN BANKED

The Reserve Bank is impotent. Completely and utterly. For proof just look at the callous insouciance with which all the major banks have treated Governor Glen Stevens’ pronouncements on interest rates.

On the first Tuesday of the month, the Bank’s board decides – with great solemnity – if it should raise or lower official interest rates. It’s a moment economic commentators love, because it’s also their moment to shine. From early in the morning they can be seen rushing from TV studio to radio station, happily offering percentage odds on the likelihood of a rate cut. Then, once the bank’s decision is announced, they happily do the rounds again but this time to decipher the entrails and explain exactly what it all means.

There’s only one problem with the complicated dance that’s being preformed for our delight and edification: it’s absolutely meaningless. The explanations do, indeed, bear a slightly greater relationship to reality than the star-signs; but only just. The respected economic commentators won’t let us in on the really big secret for one important reason – if they did, they’d be out of a job.

What’s the mystery? Well, the remuneration of certain groups of people (for example bankers, economists and, in particular, politicians) quite properly depends on their ability to convince the public that they comprehend and, by implication, can control what’s happening in the economy. It’s a nice conceit, but ask yourself – if they actually do understand the financial system so brilliantly, why is it that it keeps going bung? Lets begin with the Reserve Bank.

Although at one time this institution preformed a central and respected role managing the financial system, but those days are long gone. Further proof of the central banks irrelevance arrived last week. On Tuesday it announced an interest rate cut of a quarter of one percent. In its commentary the Reserve took the opportunity to point out that the big four banks were having “no difficulty” in accessing funds. The central bank’s expectation was obviously that the commercial banks would immediately pass on the full benefit of the rate cut to consumers. Fat chance. Instead there was a three-day standoff. The regulator eyed the banks, but the four institutions stared right back at them.

Pause for a moment and you’ll understand exactly how gratuitously the Commonwealth, the NAB, Westpac and the ANZ were behaving; exactly how much of a personal “up yours” they were sending to you (as a customer) and you (as a citizen). Everyone knows the important role of the big four is to lend money to homeowners and businesses. It keeps the wheels of the economy moving, but the process has to start somewhere and it’s the Reserve issuance of bonds that kicks off the whole merry-go-round. The difference between the Reserve’s inter-bank cash rate and the interest rate the banks charge you is their margin to cover expenses and, importantly, profit. This is the oil that keeps the banks lubricated. At the moment they’re being very satisfactorily greased indeed.

Look at what happened last week. On Tuesday the Reserve cut its interest rates by 25 basis points to 3.25 percent. On Wednesday the banks did nothing. Ker-ching. On Thursday the banks did nothing, but perhaps that’s because they were too busy figuring out the size of their bonuses. Ker-ching. Until finally, and in a welter of self-serving bleating about “increased costs” and “meeting obligations”, the banks began to act. Not by passing on the full reduction in rates, of course. The big four merely allowed a few measly coins to slip through their grasping fingers, and even this was just the loose change left after they’d taken their own cut to pay for the bloated salaries of their own executives.

Today the profit motive can be used to justify anything and the banks pressed this button to rationalise their own greedy extortion. Rampant avarice is never proffered as the reason the banks won’t pass on the interest rate cuts in full. Instead the big four claim it’s increased costs that prevent them from acting as the Reserve desires. Piffle. The reality is simple. Greed is good. Those with the ability are gouging whatever they can from other people’s purses, and it’s the bankers who are hogging the best spots at the public trough.

To some extent this is explicable. Business shouldn’t be expected to operate as a public service. The banking system, however, is different. Government guarantees provide free support for the four institutions and there are significant other barriers preventing competitors from getting established. Perhaps that’s why the banks are perceived as increasingly operating like a cartel. Because there’s certainly no doubt who’s getting screwed, and it’s not the bankers. Instead, it’s the very people the system’s meant to assist. The wealthy are offered extra discounts courtesy of the big four’s private banks while the honest battler gets done over.

The point is that it needn’t be this way. If the Reserve were actually regulating the system it pretends to be in control of it would do much more than simply provide commentary by prattling from the sidelines. While at one time the banking system may have resembled a gentleman’s club where members could be expected to do the right thing, today, money talks. And the noise it makes is quite loud enough to drown out any vague considerations of ‘appropriate’ behaviour.

This is why we perhaps shouldn’t be surprised that the Reserve’s boss was so keen to lift his salary to the million dollar mark – way more than any other public servant. Stevens’ expectations perfectly match those of other bankers. It’s the grasping vortex of covetousness at work. Of course, the Governor would actually earn his salary if he could get the other banks to act the way he wants – but he can’t. That’s why we need to completely re-think the way the economy’s working.

Global factors are now the ones that determine our options, not the prescriptions of old economic textbooks. It’s time to recognise this and stop the blather. And this column didn’t even mention the Securency scandal.