Bank Rolling the Dream and the Rudd Challenge.
The Australian Banks are increasingly placing a burden on the lives
of many Australians, conditioned their living in debt based upon this
paradigm of ‘economic growth’, wealth creation and the ‘let the good
times roll on’. Fortunately, the Rudd Cabinet in week 1 has restored
some degree of sanity by outlining new measures to restore the
independence of the Reserve Bank Board. Monthly Reserve
meetings to set the interest rate agenda have in recent years been
promoted as a key monetary policy mechanism of the nation but if we
look at recent history and the state of play this may well be over
simplifying the situation. As the major banks begin to step up interest
rates it is well worth pondering the broader picture of banking, the
options available to the Rudd government and the implications of
unprecedented levels of debt permeating impacting such a broad
spectrum of Australian society. As the horses is begin to bolt from the
stable it is interesting to reflect on where this trend emerged from and
where it is going.
One pathway leading to the current situation does in fact meander
back to the early Howard days as Treasurer under Malcolm Fraser.
The Campbell enquiry (Howard’s first baby) reported and inevitably
recommended the de-regulation of the financial sector and trade to
open and expose the emerging global markets. Certainly, many new
channels of international finance were opened up since these
recommendations were implemented, launching Australia as a player
on the international stage and integrating our finances more closely
with the global Federal Reserve Banking System. It’s interesting to
note that Paul Keating as Treasurer did confer with John Howard the
merits of this expansionist financial ideology in the time leading up to
his famous “Banana Republic’ statement, words which reflected
perhaps a shared belief that any country which did not make
allowances for more liberal banking and trade would be subject to the
vagaries and vicissitudes of a third world state, a scenario unfit for a
resource rich nation like Australia. In lifting the interest rate ceiling
Keating was placing faith in the mysterious ‘invisible hand’ of the free
market an approach espoused by monetarist economists such as
Milton Friedman, prescribing interest rate policy as the most correct
lever to control the level of available money within the economy and
therefore a means to accelerate or decelerate according to the policy
settings of the day. Demand side economists on the other hand, such
as John Maynard Keynes, preferred to utilise fiscal policy and one
role of the Reserve Bank would therefore be to print money (on
instruction) to fund public works or provide social services, for
example. The money once pumped into this process would pass from
paid worker to shopkeeper to supplier and a win win situation would
follow from the original expenditure which would cascade predictably
through the market offering social benefits, jobs and peace of mind
simultaneously.
The common equation in both models is money while the difference
over the course of history would be the source of that money and the
effects of that money on the long-term prospects of the economy. In
the past, if an independent Reserve Bank was to print money for
circulation the currency was seen as good for a transaction and
redeemable in cash and or the exchange of goods and services. The
concept of debt was not so relevant as the government issued
currency was intended to facilitate exchange rather than as a means
of measuring or creating an obligation of debt. A difference in the
models is the relationship between money and physical entities – ie
the concept of money as a simple tool of exchange. In Keynesian
economics the object of a public spending program could be a road
or a public building – the money created for these ventures has a real
connection to such and the ripple effect payments thereafter maintain
a connection to real objects of expenditure and therefore the concept
of inflation (value beyond the real exchange) is not seen as a risk
unless the amount of money provided to create demand is beyond
the reality of the goods and services that need to be exchanged. In
the monetarist (economic rationalist) approach of today, money is
injected and withdrawn from the economic pool of activity but the
connection to real physical assets or requirements of exchange is lost
or not thematic in the game. This philosophical fork in the road hailed
by Howard and accepted more or less by the mainstream may seem
like a mute point but it illustrates why politicians now seem to look at
the Banks as autonomous agents rather than entities within the
system which could be directed through policy change.
So what has changed? The political intention of maintaining absolute
control over money for governmental purposes appears to have
diminished and this, as stated, had its origins in the early blueprint
laid down by young John Howard as Treasurer. When Paul Keating
lifted the ceiling on interest rates on advice or pressure from the
Australian Banking Association, government control of local banking
and its effect on consumers was seemingly removed or at least
diminished. The J curve had gone pear shaped.
What else changed? When John Howard took the helm as PM he
made even more fundamental changes to banking regulation via the
establishment of the Australian Prudential Regulation Authority
(APRA)…theoretically enabling the Reserve Bank to focus on the all
important task of running monetary policy…fine tuning interest rates
to ensure consumer spending was never running too hot or too cold.
APRA in the meanwhile could prudently monitor the banks and keep
track of the flood of newcomers to the now open financial markets.
Looking back however, how seriously can we take this role of
watchdog when it failed to anticipate or become active during recent
financial hiccups including the HIH collapse and financial irregularities
in international trading inside the National Australia Bank? Was’nt this
the original justification for taking away responsibility from the
Reserve Bank or was this just another Red Herring?
In summary the Reserve Bank is now seen as less than independent,
not in absolute control of interest rates and its sister institution APRA
is less than vigilant in the tasks once the domain of the Reserve.
What other clues do we have that describe the current paradigm of
banking in Australia and how much of this Howard formulae will be
unwound by the Rudd government which until now has had little to
say about the fundamentals of banking in Australia? The current
jitters in the US sub prime mortgage market suggest that either
Australian Banks are meddling cause and effect with regard their
modus operandi (to further raise interest rates), or that we are indeed
now truly enmeshed with the global lending market or a combination
of both? Further integration was seen in 2006 when the major
Australian banks became signatories to the Basel 2 Accord, a Global
Banking agreement purporting to measure and manage risk within
the international family of Reserve Banks. How such agreements
figure in the policy framework of our Reserve and APRA and indeed
Cabinet would need to be understood to anticipate this governments
approach to the current situation of debt and liquidity now highly
relevant to many people in Australia. Given that the current financial
state of play has emerged over at least thirty years and contains both
liberal and labor policy to varying degrees, it will be interesting to see
how the next chapter plays out or more particularly whether the
option of writing a new script is considered.
Early moves to restore Reserve Bank independence may suggest a
softening of the dry hard-line monetarist approach of the Howard
years and could be followed by further measures to restore the
Reserve to its prior role of wider financial governance and the less
than vigilant history of APRA would support this. If its true that the
booming household and white goods sector bolstered by negative
gearing and first home buyers grants was a central plank of the
Howard boom years this would be a consideration in any
modifications to current Banking Policy – not so wise to remove the
ailing patient from life support until some alternative cure is found or
envisaged! Noting also that banking de-regulation has spawned
profitable investment in mining and energy, it could well be a return to
some old fashioned Keynesian style economics to keep the ball
rolling via well directed public expenditures without as much direct
emphasis, this round, on the Great Australian Dream. Leaving the tap
on over-night may result in many of us being woken up rudely by a
Great Australian Nightmare.
The Rudd cabinet have certainly inherited a sticky financial pie with
many strange fingers still in it, so one would imagine they are hastily
exploring options to see which belongs to who and which ones might
be posing a little too much risk for the average aussie battler trying to
maintain and pay off that debt ridden dream. Not an easy undertaking
by any measure but an interesting and core challenge which will
determine the success or otherwise of the freshly installed Labor
Cabinet.
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