Macrobusiness turned a bright illuminating spotlight on APRA this morning in an article that raised a series of very important questions about the regulation of the Australian Banking and monetary system and the roles of the RBA and APRA.

The roles of APRA and the RBA would make another excellent paragraph in the Terms of Reference for the forthcoming Banking Royal Commission that Malcolm Turnbull (former banker) and Scott Morrison (former FIRE sector executive) are so desperate to avoid.

A Glass Pyramid operative added their own government issued 2 cents in the comments (sightly modified here) to the article

“Excellent HnH

This is a very important debate and there is no better time than the election as the responses of the candidates to the issues raised are highly relevant to assessing their fitness for government.

APRA has sufficient powers but it is ham strung by the widely held ideological obsession – that the government should leave lending decisions to the banks and therefore APRA should not seek to regulate credit in any meaningful manner.  

As you have noted the RBA has been a prime offender in promoting the idea there is no real role for credit regulation  – aka Macroprudential – by APRA. But then RBA has plenty of support in this view from the neoliberal peanut gallery which constitutes our mainstream commentary. Most of them are so self-unaware they don’t even know they are promoting a very specific and radical economic agenda.

A preference for a limited role for government in the regulation of credit is not a problem – there is certainly no role for govt loan review officers checking who gets loans – but it IS a problem in a system where bank lending decisions effectively creates public money and banks make handsome profits when they do.

If banks were merely intermediating real public money they might be allowed to make all the dumb loans they want because those decisions would not involve the creation and destruction of an effective equivalent to public money.

But they are not mere intermediaries and thus their credit creation is highly economically significant – as well as very profitable – and that is why we must have APRA.  That APRA has been bullied into a hands off approach is a problem.

So all those small govt types (looking at you IPA, CIS, Liberal democrats etc) that reckon APRA should limit its interventions in the lending decision of banks, need to argue for less private fiat creation and more public fiat creation as there will be less need to regulate bank lending if they are only lending purely private money (CBA golden Kanga’s) or indestructible (indestructible by banks anyway) purely public fiat money.     If you want less monetary madness and a pathway to your smaller government nirvana you need to clearly separate private bank IOUs from the public money supply.

And all those who seek a larger role for government should also support reform because a truly public money supply is more democratic and will work with whatever the preferences are of the government that wins the support of the public.  

Big government or small government are best served by a public money supply that is not infected with the dodgy IOUs of private bankers.

An excellent read on the issue of the dynamics between controlling the target rate and controlling credit creation is “Princes of the Yen” by Werner especially the bit which covers the early 90s when the BOJ was fighting for power with the Ministry of Finance.

At that time the Ministry controlled the target rate and BOJ controlled the shadowy world of credit creation (ironically a bit like APRA). A couple times when the ministry cut the target rate the BOJ screwed down credit control to neutralise the effect of the cut. Eventually BOJ won the war and took control of the target rate and built a moat of “independence” around its power.

Sound familiar?

Arguably we have a different problem with a compliant or RBA captured APRA turbo charging RBA target rate cuts by letting the banks go nuts borrowing off shore.

What is prudential about letting the banks go nuts borrowing from offshore banks?

A blank cheque swap line from the Fed may be the reason why APRA seemed to stop caring about the external liabilities of our banking sector.   When exactly was parliament and the Australian public involved in the decision to put the economic future of the country in the hands of Federal Reserve Board mood swings and US politics.     With Mr Trump or Mrs Clinton bearing down on the White House how smart will that decision prove to be?

RBA dismissal of MP and credit regulation is in a sense a dismissal of APRAs powers.

Institutional power struggles may also be a factor. Giving the RBA APRAs powers when it is in the grip of neoliberal obsessions and worse – banking myths – might be a disaster.

Best approach would be to

• roll APRA back into govt,
• reduce Pseudo fiat creation by private banks (turn banks into real intermediaries between savers and borrowers),
• narrow greatly the charter of the RBA to
  • advising the govt on the fiscal deficit/surplus required to avoid deflation and inflation and
  • buying and selling 0% bonds to and from the govt treasury to achieve the required deficit or surplus…”