A Productive Banking system? A job for RBA and APRA.

Macrobusiness ran a post today about a suggestion that Central Banks like The Reserve Bank of Australia should target nominal GDP growth.  The article was critical of the proposal and identified the central failing of the Australian economy over the few decades as too little productive investment.

As regular readers of The Glass Pyramid would know, this is a topic close to the furry heart of TGP Head of Research.

The failure to distinguish between productive investment and unproductive #FakeInvestment is the core weakness of the Australian economic model yet it is ignored by most of the great and mighty mainstream economic chatterers.

Head of Research

Ross, Jessica, Michael, David, George etc ….yes we are talking about you!

And of central importance to the distinction between productive investment and #FakeInvestment is the performance of the private banks and how they exercise their privilege with regard to credit creation.

Private bank credit creation is very very different to credit extended by any other private individual or organisation.  It is what makes a bank a bank in our monetary system.

It is of massive economic importance and if it is misused its consequences for the long term health of the economy are profound.

Ensuring productive credit creation by the banks is the issue.

Unless an economy makes substantial investments to create new and renew existing productive capacity its future economic prospects are dismal.

It is certainly possible to delay the day of reckoning and maintain a standard of living by selling off assets or claims on your future income (borrowing) but this strategy – the current Australian economic model – simply increases the pain when the unavoidable reality beckons.  Without ongoing productive investment the ability to change course becomes harder and harder.

Since the mid 1980’s, as our banking system was deregulated, the banks have increasingly directed their credit creation privileges to pumping up one existing asset bubble after another.

Now we are in the situation where the private bank balance sheets are largely built on credit extended to speculators in existing asset prices, households are buried in debt as they try to secure a home for their families and potential productive investors find Australia no place to invest due to weak ‘income drained’ consumer markets and an AUD bloated on capital inflows to our private banks who use the capital flows to pump the asset bubbles even larger.

Targeting nominal GDP growth

Having the RBA target GDP would be even more of a disaster than the current state of affairs where they try to run the economy on the fumes of a debt driven asset prices ponzi scheme.

Asset prices Ponzi schemes are great for GDP.

Amend the RBA and APRA Charters now.

What the RBA and APRA must immediately do is demand that the government amend their governing legislation to insert a requirement that the encouragement of PRODUCTIVE credit creation by the private banks is their top priority.

This is not difficult as it simply requires APRA to direct the banks to restrict new credit where the security is an existing asset rather than a new asset.

Ultimately our current debt driven Ponzi economy is the expected consequence of deregulated private bank credit creation being allowed to be squandered on unproductive speculative purposes.

  • Easy cheap credit for existing asset price speculators.
  • Harder to get and more expensive credit for new productive investment.
  • While the hundreds of billions of dollars of external liabilities clocked up by our banking system when gorging on offshore predatory ZIRP/NIRP capital flows driving our AUD up and our local industries out of business.

A higher than it should be AUD AND higher priced and less available credit creation for productive purposes

Technically this state of affairs is known as the Dinkum Double Crap Sandwich.

Note; This is not a Dinkum Double Crap Sandwich

At least the Irish made a buck out of their neoliberal gourmet creation – Double Irish with a Dutch Sandwich.

So what if the RBA and APRA refuse or are unable to force the banks to massively reduce unproductive credit creation?

Remove the private bank credit creation privilege completely.   Removing the privilege will turn our banks into what most people think they already are…..mere intermediaries between savers and borrowers.

Large tax cuts on low income earners directly monetised by the RBA, by buying 0% bonds from Treasury, combined with strict restrictions on unproductive capital inflows will fix the problem.

Sure existing asset prices will soften and sag as they lose the benefit of the out of control private bank credit creation inflation that is bloating them and the AUD will soften as the capital inflows to the private banks slow but all of this is EXACTLY what needs to happen.

An economy dependent on the sugar hit of #FakeInvestment is heading for the rocks.

Categories: Macrobusiness

1 reply »

  1. Wholeheartedly agree! I think this issue is worthy of a royal commission as I have no faith true reform can be achieved via these corrupt institutions (RBA & APRA). Should we not simply disband APRA and get the Treasury to pick up the slack? Also, doesn’t the RBA get its marching orders primarily from the Bank of International Settlements?

    Liked by 1 person

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s