Tuesday, 14 February 2012

Interest rates are rising, bank bashing is futile

In the last 12 months a cyclone in Queensland wiped out the banana crop and the price of bananas went through the roof.

My local market in South Melbourne sourced bananas through their usual wholesalers but most people cut back their banana consumption. But did anybody attack the farmers and wholesalers? Did Wayne Swan demand that the pre-cyclone price be retained? Did he suggest that South Melbourne people should take their business up the road to the Queen Victoria market?

No, there was no banana bashing then. There was no political benefit in bashing the local fruiterer or the farmer.

A financial cyclone has just been through Europe and the US. Some banks went broke and others have had to be bailed out by their governments. Now, a lot of governments are close to going broke and the banks are not in a good position to lend money to business.

In Australia, the environment in which banks operate is partly determined by international markets, the extent of competition allowed by the Government, the role of the Reserve Bank (RBA) and the demands of the shareholders. So, for example, if the RBA wanted to reduce interest rates then it could do so tomorrow. In the UK rates are close to zero. If Mr Swan really wanted to, and if he was silly enough, he could legislate to allow the Gillard Government to dictate interest rate policy. He could introduce the funny money scheme being touted by Bob Katter. The Government also has options to restructure the banking system to introduce more competition or make other changes.

For many good reasons, the Government has chosen not to make structural changes to a banking system that works pretty well. But governments like to look as if they are doing something. The public are worried and would like to know the Government is managing the situation. So instead the Government prefers to jaw-bone the banks through the media and tell the public that one of the problems is that the banks are greedy.

It is an easy option for a Treasurer with nothing else to offer. The banks have not helped their own cause. The public have had a gut full of shonky financial products and are easily stirred up by Tatts-like bonuses being paid to bank CEOs although no one cares about big payouts to footballers, entertainers and celebrity chefs.

But just because it's easier than ever to bash the banks, it is not a reason why bank bashing is a good idea. In fact, it might be that now is the worst possible time to be undermining the importance of the banking system.

Australians are not the only bank bashers.

US politicians ramped up their bank bashing in about 2007, just before the sub-prime fiasco. They needed to disguise the fact that the sub-prime disaster really got underway when the US Congress passed a law to 'encourage' financing of home loans to low income people. It's great for people to have their own home but, like a credit card, it's no help to let people rack up huge debts that they can't service. Of course bankers should take their fair share of the blame but it's pretty rich for US politicians to deflect public scrutiny of their own behaviour which played a key role in the whole mess.

The situation in Europe is different. Most banks were slow to adopt the sophisticated financial instruments being concocted in London and New York and so they avoided some of the worst problems of CDOs and other schemes. But they still needed some financial support and that was enough to highlight the fact that government debt was out of control well before the GFC.

The banking system in Australia is not in a mess, it's in good shape. We had neither the problem of the US with bad loans or the massive government debts racked up by European politicians. And even when debt was climbing under Keating, there was a heated public debate about debt and sufficient public understanding of the issues to support genuine fiscal reform such as the GST and the successful Howard program to pay off all Commonwealth debt.

Instead of bank bashing, Treasurer Wayne Swan should explain what is happening rather than trying to lay blame. It is all pretty obvious; the price of money is rising and our banks have to pay for it. It's like the bananas; when the price goes up you either cut consumption or resign yourself to the higher price. It's pointless to blame the middleman. Similarly the Coalition should drop its suggestion that the failure of the banks to respond to Swan is because he has no authority.

The banks should not be responding to Swan any more than any other business should be told how to run their business by the Government. Julia Gillard can barely run her office so she should not have a minister telling a bank what to charge for their services. Governments are hopeless at running businesses which is why Liberal and Labor governments sold so many government businesses in the '80s and '90s. For this reason it is inane for the Coalition to say that the Treasurer is weak because the banks don't take any notice of the Treasurer. A much better line for the Opposition would be to suggest that no one in their right mind should listen to the Treasurer on how to run their business. This line would allow the Coalition to still attack the Treasurer but avoid bank bashing.

For Swan, a bit less bank bashing and a bit more explanation of what is happening would be in the national interest. It would do him no harm either because he is sometimes far too shrill for a Treasurer and comes across as a second tier player. A bit more gravitas and less overt politicking would boost his chances of hanging onto the Treasurer's job when and if Kevin Rudd returns.

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