Bank Royal Commission: Time for a spotlight on the rotten core.

The announcement by Leader of the Opposition, Mr Bill Shorten that, if elected, his government will establish a Royal Commission into banking has set a cat among the Australian banking pigeons and their many fanciers in the media and in sections of the LNP .     ( Note: there are more than a few in the LNP who welcome the idea of a Royal Commission into banking including Mr Warren Entsch and Mr John “Wacka” Williams)

As a general rule the more loudly interested parties protest about receiving some public scrutiny the more certain you can be that a close look at what they are up to is long over due.  After all a Royal Commission is an excellent “branding” opportunity if you are as white as the driven snow.

The Australian Bankers’ Association was quick off the mark with a press release.

Mr Münchenberg said the ALP’s proposal would have international ramifications for Australia. “Banks are particularly concerned that a call for a royal commission will send alarm signals to international investors about Australia at a time of global volatility,” he said.

Such delicate flowers are international investors, so easily alarmed, like a gaggle of twitchy and frightened geese ready to fly away at any moment.

Lenders also argued the commission could rattle international investors that are vital to the financial system, though analysts said these claims were doubtful. Westpac said the announcement sent “confusing messages about the strength of Australia’s financial system.  This could impact confidence in the economy.”

Confusing?  What?  Are the international banking brotherhood under the impression that a “strong” economy is one where regulators are too scared to investigate with vigor the behaviour and performance of the banking sector?The Treasurer, Mr Scott Morrison was quick to reprise “spooky” – last heard in his negative gearing / CGT discount “Fear-apolooza” national tour.

Mr Morrison lashed Mr Shorten’s “reckless” urging of the government to consider launching a royal commission into the banking sector, warning the Opposition Leader’s rhetoric could spook foreign investors.

Considering that most of the time the banking sector rabbits on endlessly about rational expectations, precise and hard headed calculations of risk and reward, business acumen, sophisticated economic and financial modelling, one would think that people like the Bankers Association and Mr Morrison would be slightly embarrassed by their scare mongering that implies bankers all wear mood rings and dash when the shade marginally shifts.

But then shameless is a fundamental quality of any decent PR person, spruiker or politician.

Yet while they do not like the idea of a Royal Commission poking around all their alleged sharp dealings in the following areas

  • Financial planning scandals
  • Life insurance scandals
  • Sub-prime lending
  • Low doc lending
  • Rigging rates
  • Over charging fees

that is NOT what they are really worried about.

They are much more concerned about the Royal Commission drilling down and inspecting the rotten and broken structure of modern Australian banking and how it is regulated.

They understand that any prolonged examination of how modern Australian banking works runs the risk that Henry Ford is claimed to have identified back in the early part of the 20th century.

“It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.”

So what then is it about how modern Australian banking operates that is likely to upset the Australian public if they were better informed?

The core of the problem is that in our system of banking the power to create money has been largely outsourced to private banks and when they create money they do so with a trailing commission attached (interest).

In other words when you borrow from a bank they create the money by the accounting entries that they make when they record the loan.  They are not simply recycling money that has been deposited by someone else.  If this sounds outlandish – read or watch the following – Bank of England (Video), Bank of England (paper)  and Dr Werner 

This means that control of public money, one of the tools most critical to the proper functioning of a civilized society, has been given over to private organisations who then unsurprisingly seek to generate profits from that near monopoly control.  And as anyone who has followed Australian Banking over the last 20 years will know – we are talking about very juicy profits – extracted from the well squeezed Australian economy.

And if that sounds like a very odd thing for a democratic government to have done, it IS a very odd thing and is largely an accident of history.

In essence the introduction of the model of Central banks as “banks of last resort” to limit the damage caused routinely by the booms and busts resulting from the fraudulent practices of private bankers – was a very poor choice.

The simple and sensible alternative was to introduce a supply of interest free public money that the public could use and save in with confidence and limit bankers to the role of inter-mediating transactions in that public money between savers and borrowers (i.e. do what most people think banks are doing – lend the deposits of savers to people who wish to borrow) .

Instead government allowed the bankers to continue their fraudulent lending practices only now with the taxpayer providing a guarantee!  TBTF – too big to fail.

A barbaric economic relic from the past that has caused incredible damage to millions of people over the last 100+ years – even when it was more closely regulated than it has been since the dawn of  the “financial deregulation” fad in the 1980s.

The miserable idea that a fundamentally flawed monetary model can be ‘fixed’ with regulation should be the core of the Royal Commission’s work.

It is no surprise that regulation does not work for long when an industry has powerful financial motivations for dismantling the regulations or bullying those responsible not to enforce them.  Even worse are rules allowing staff employed by regulators to move freely back and forwards to jobs in the industry they are regulating.

The good news is that fixing the broken model of Australian financial regulation is NOT difficult and there are available many models of better alternatives and how to implement them.

Investigating those alternative models – calling witnesses from across the globe that are experts in the field, presenting their evidence in the papers of the nation and on evening news bulletins and talk shows, is what the ALP/Greens/Independents Banking Royal Commission can drive.

Australia managed to skate through the GFC and as a consequence dodged a serious discussion of our model of money, banking and regulation.

Now is the time to have that discussion and the best way to get that happening is with a Banking Royal Commission.

Stayed tuned for the Glass Pyramid “Draft” Terms of Reference and Letters Patent.


The Australian banking and financial sector has grown into a massive tumor on the economy and now rivals the many productive sectors of the economy in its demand for economic resources and manpower.  That means there are lots of people who will fight tooth and nail to maintain their current privileges and pay checks.

So even if some of them do understand the parasitical nature of the current model and the damage it is doing to the Australian economy, they are likely to oppose the work of an inquiry with appropriate powers and relevant Terms of Reference.

A healthy Australian banking system is likely to be much more modest in size and in levels of profits and remuneration.

A healthy Australian economy is one where most profits and remuneration lie in the productive sectors of the economy.   The people who farm, grow, harvest, mine (managed by a NEVA), build, make, teach, cure and create.

Categories: Macrobusiness

9 replies »

  1. This is reply to a further response by Flawse on MB


    Your concerns are quite reasonable and I think I can put your mind at ease that I have not lost my mind and suddenly believe that printing lots of money solves anything.

    Firstly, I am not proposing that when Bank creation of money is restricted, publicly created money is just pumped out willy nilly. The target will be neither inflation nor deflation. That means that the size of the fiscal deficit (and it will usually be deficit) will be limited to what is expected to produce little if any inflation or deflation.

    The government will still get to choose how it gets to the required fiscal deficit/surplus – for example by reducing taxes or increasing expenditure – but the end point is the same – the deficit/surplus is fixed target.

    One advantage of this approach, that you may not have appreciated, is that the use of a target rate to drive money creation/destruction via the demand for freshly created Bank Money is no longer necessary. The NRAT is used to drive money creation. If money creation is now a public utility there is no need to to pump it with NRAT.

    To a large extent interest rates between savers and buyers can be left to competition between savers. If people want to borrow but few want to save the borrowers can expect to pay more. The reason I suspect that interest rates will however be generally quite low when money creation is a routine Public utility is that once the pump priming of the demand for debt with NRAT (and the consumption that goes with it) is removed the level of saving will rise naturally.

    In summary, I am not proposing an expansion in the money supply to pump up demand. Artificially stimulated demand is a feature of the current Bank Money with interest as Public Money model. It is the locomotive driving our growth addicted economies.

    With regard to trade, the trade balance and the CAD, it is not correct to say that money is printed and then leaks out and this will occur whether or not banks create money or the public sector creates money.

    Our poor trade performance and CAD is simply because people will accept our assets or our promises to pay in exchange for their goods and services. If we stop selling assets or promises to pay we simply cannot buy more than we sell as we will not have the FX to do so. Without the sale of assets of IOUs the $AUD will decline as we buy more than we sell and as it falls the demand for imports will fall.

    Whether banks create money or the public sector creates money does not impact on unproductive capital inflows (i.e. selling assets and IOUs). To stop them requires deliberate specific regulation by government.

    However, there is one important way how the banking sector operates that CAN have an impact on unproductive capital inflows and that is if the government or a regulator specifically encourages or permits the banking sector to use unproductive capital inflows to lower its costs. Specifically I am referring to the wholesale off shore borrowing by our banks – under the supervision of APRA – to lower the price of residential mortgages and thereby stimulate higher demand for a given RBA target rate.

    Offshore borrowings related to mortgage operations involve very large volumes of unproductive capital inflows which push up the exchange rate. A higher exchange rate undermines competitiveness and DRIVES a consumer preference for imports.

    Buy Australian campaigns will always FAIL while government/RBA/APRA policy specifically undermines them with a model that depends to a large degree on massive unproductive capital inflows.

    As I say over and over again – the big three are:

    1. Offshore borrowing for mortgage operations

    2. Sale of government IOUs offshore

    3. Sale of industries, land, tax farming opportunities, infrastructure etc.

    The solution is straightforward

    1. Public control of Public Money

    2. Regulation to restrict most forms of unproductive capital inflows.

    And the results are likely to be

    1. An $AUD that starts to reflect our trading performance and not our capacity to sell assets and IOUs

    2. A recovery in those areas of the economy that export and compete with imports

    3. A decline in those areas of the economy that are current stimulated by torrents of Bank Money being sprayed in their direction – existing residential housing I am looking at you.

    4. Little inflation or deflation as the size of the fiscal deficit/surplus is adjusted to avoid either outcome.

    With a bit of retraining the banks will soon learn how to connect borrowers in the growing productive areas of the economy with savers at an appropriate price.

    Those saver who do not want to put their Public Money savings at risk by lending can do so but naturally they are unlikely to receive any interest.


  2. However unless we correctly identify the flows we are going to reach the wrong answers and not address the real issues. Now the whole system is a whirling loop. So especially to those sitting within the system it APPEARS as if we are borrowing Foreign Funds to finance housing. However that is not the case. As you. Keen et al point out the Banks can create funds without deposits. The problem is the CONSEQUENCES of doing so.

    Now your Royal Commission into Banks will be run by people, Lawyers and Judges, who directly benefit GROSSLY from the current system. Evidence will be given by the RBA who are TOTALLY invested in the current system and cannot change without destroying all their own careers. Treasury are in the same boat. Superannuation fund mangers who are currently able to glean so much personal benefit will give evidence that all is good. People who have funds in the Superannuation Funds heavily invested in Banks will not want any untoward evidence coming out. Lastly and most importantly every shiny arsed Economics Chair who is totally intellectually invested in the current system and dependent on it for their status and personal wealth will be on the TV every night defending the current status quo. We have already seen how they distort maths to make -2 +-2 = +4 and this tripe is given credence and the stupid interviewers will sit there gazing in wonder because the answers that sort of thing can produce allow certain social agendas.

    All we are going to get, for the enormous cost involved and a new Habourside residence for the Judges and lawyers, is the revelation of a few minor discretions by a few minor underlings.


    • Good points Flawse. I don’t for one minute believe Shorten has any real idea of what he has suggested, terms of reference thus far mooted are very loose which indicates a walk down the garden path but not into the rabbit hole. A few bells and whistles, but essentially no fundamental change.

      A waste of taxpayers dollars, a retirement fund for lawyers. $53m? Not on your Nellie, multiples of that.


    • Flawse,

      As I noted in my post and specifically the warning – there are lots and lots of people who have good reasons to undermine the investigations of a Royal Commission into the issues I have raised.

      For an excellent example look at the comment by 3d1k.

      Whereas some will oppose an effective Royal Commission because they fear it will interfere their paycheck many others will oppose for no better reason than they think it might disadvantage the political football team they support.

      The solution is not to not have a Royal Commission but rather have one and keep it under the spot light as much as the Banking industry and monetary system it is investigating.

      There may be alternatives to a Royal Commission, as they have very real limitations and are expensive, but the fact is that they attract attention and get people talking and thinking about the issue.

      Sadly with a Public Service that has been white anted by party politics and regulators that are secretive and have a track record of doing little of substance in a timely way what other alternative is there?


  3. I’m not sure a Royal Commission into Banks is enough. It will prove pretty pointless without we question the whole basis of economic thinking. After all, within teh Economics profession at the moment, is there a single person anywhere who gives a RA that we have sold most of our productive assets to foreigners? Is there a single person anywhere in the Economics profession that gives a RA that we are $1,000,000,000,000 in debt – even after selling all our assets.

    I think you incorrectly identify interest on the created money as the main problem. Yes interest on created money does distort the economy but it returns to our economy mainly through bonuses to Bank Management with a bit given to shareholders and a bit given to depositors. So it does end up back in circulation albeit after parasitising productive enterprises in favour of non-productive and consumption.

    Banks have taken over the economy. They no longer service it and I’d say haven’t serviced it since Keating/Hawke et al let them loose. My own experiences as a small business man are that they think nothing of adopting corrupt practices. So bring on a Royal Commission. My own evidence is a bit old, as in 20 odd years old, and would now be only ‘hearsay’
    One more time….mate you drink a bit much of the Kool Aid of some of the morons and social conscience apostles parading as economists sometimes.
    Banks can create deposits of which some PORTION flows back to them. In a ‘self-contained’ economy, with the government running a balanced budget, all the money would flow back to them. Where a government runs a surplus then the government absorbs someof those deposits. Where, as in our case (and the UK!) we run a substantial Current Account Deficit then a large proportion of those created dollars disappears in the external account. They do NOT return as deposits.The Bank of England paper in this regard is totally worthless – a point I’ve made many times. When I pay for my imports out of my account that deposit disappears. (This WOULD create a self-correcting mechanism in the economy, through decreased money supply, if we did not immediately turn around and borrow the necessary USD and turn them into A$ deposits)
    The problem that we DO have is that the created money exceeds our production and thus results in the Current Account Deficit. At THAT point we require FOREIGN funding – typically USD so we have to either borrow them or alternately sell off some of our productive assets to foreigners.
    This policy has been in force for 60 years. Now note here I am not arguing with you really. Created money that is not saved results in CAD’s – no question so we are on the same page. However unless .


    • I agree – that a Bank Royal Commission is not enough.

      I think that having a close look at the whole basis of our economic thinking must start with thinking about the problems with our current monetary system

      I don’t think that the charging of interest is the main problem but it is a huge problem when the process of creating Public Money involves the attachment of an interest trailing commission. As I noted in my post I am not proposing that people cannot charge interest when they lend their deposits of 0% Publicly created money to people who wish to borrow them. As the charging of any interest is inherently deflationary – it will need to be closely regulated.

      Quite a few people think that the charging of any interest is a problem. I understand their concerns as history demonstrates that private interests constantly try to take control and monopolise the money supply.

      My current view is that if we can stop the charging of interest as part of the process of creating money and return control of Public Money to the public – we will be solving the major part of the problem. Having done that I anticipate that the interest rates that savers will be able to demand for their savings of 0% public created money are likely to be extremely low as the problem of an artificially constrained money supply (burdened with an interest trailing commission) will be greatly reduced.

      In other words borrowers may have lots of savings to choose from.

      Yes – The banking finance sector has grown enormously since deregulation and that is not a good thing but I thought I made that pretty clear.

      Not sure what Kool-Aid you are referring to as my position on the issue of trade, the exchange rate etc is much the same as yours.

      If we sell assets – real or financial – to foreign parties they will need $AUD to complete the transaction. The demand for $AUD to complete those transactions will push up the value of the $AUD and that will make our exports comparatively more expensive and thus less competitive. It will make imports more attractive. The result will be or is likely to be fewer exports and more imports – a trade deficit – and less employment and production in export and import competing industries.

      This process can continue for as long as foreign parties wish to purchase our real or financial assets. In recent times as foreign interest has sagged the government has even offered taxpayer guarantees on some of those assets sales to foreigners – mainly the sale of Bank IOUs – to maintain foreign interest. That is disgraceful. It is bad enough that we have a bunch hair brained economists telling everyone that it is smart to borrow off shore and use unproductive capital inflows to support current consumption and to bid up the prices of existing houses.

      We agree on all of that but it is not really relevant to the point I am making that Private Bank powers to create money should be restricted and/or completely removed.

      There is nothing in what I have written that in any way suggests that I think that removing/restricting the Private Banks privilege to create money and placing it under Public control makes it OK to continue to sell real and financial assets off-shore to fund consumption.


    • Cmon flawse no money leaves the economy when the CAD blows out, Zimbabwe proves that, either your imports cost more or you borrow from those who want to sell you stuff. The problem with the interest is, because of who is capturing that income, it doesn’t flow into the economy, it flows into bubbles in equities and real estate and crashing interest rates, if it went into the economy – and perhaps once upon a time it did – you would have point, to the capture of that passive income always leads to escalating inequality, especially since all the money is debt.


    • Fair point – managed by a NEVA mining will be an important part of the Australian economy for decades to come – I will add that in.


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