After watching the speech by Leader of the Greens Richard Di Natale at the National Press Club yesterday it is clear that the Greens understand the importance of fixing our Australian banking “Problem” and they certainly are heading in the right direction.
However they are making the solution more difficult than it needs to be and in doing so leave themselves open to the typical private banker apologist nonsense that papers like the Australian Financial Review and the Australian specialise in.
The presses will be rolling out yards and yards of “manufactured outrage” on behalf of their banking and finance sector sponsors for weeks and months to come unless the Greens make some important adjustments to their proposals.
What needs to be done is simple
The core of the solution is simple.
We need to put the “privilege” of the private banks back on the leash and then gradually remove it all together.
What is the privilege?
The privilege is that which makes a bank different from any other non-bank financial institution or any other organisation or individual. The privilege is real and well understood and has been covered by the Glass Pyramid in detail. Our big banks did not come to dominate our economy by accident, when the ‘privilege’ was deregulated in the 1980’s and afterwards. They simply started using the privilege to full effect and that made them very very profitable.
In very simple terms the privilege simply means that the ‘credit’ extended by a bank is different to the credit extended by you or I or any other non-bank organisation. The difference is that bank credit is treated at law as if it were effectively credit or money issued by the government. If someone transfers bank credit to you and you go to your bank you can withdraw cash. That is because your bank can buy “cash” from the RBA with the bank credit that was transferred to you.
In other words the privilege granted to the private banks is effectively a franchise to create credit that is very very similar to money issued by the RBA. For most purposes you cannot tell the difference.
Banks have a license from the public to create bank credit that is effectively treated as if it were money.
Pretty unbelievable privilege huh? A license to create “money”!
Yes and that is why Banks are surrounded by armies of regulators (who are not very effective) and why talking about ‘deregulating’ banks and how they create credit is so problematic. How do you deregulate a privilege like that?
It is also why we have a Banking Royal Commission. A privilege like the one the banks have been given is a massive temptation for crooks and spivs. Deregulation, sleepy regulators etc make it very easy for a tale of rottenness, massive bonuses, fat profits, gouging, poor service to emerge. Royal Commissioner Haynes has the job of hitting the mess with a high pressure hose. A bit like a plumber clearing a sewer line of muck.
So the core of the problem is simply this Banker ‘privilege’ and what to do about it.
Carefully re-regulating how, when and why banks create “Bank Credit” is the first step but abolishing the privilege is the most effective and permanent treatment.
The Greens and the RBA
The Greens are right on the nail when they identify the RBA as a core part of the solution but they confuse the issue by talking about the RBA offering mortgages. That is completely unnecessary and will likely mean the good parts of their proposal will be rejected with the bad.
The RBA should immediately offer accounts to any member of the general public or company who would like one. A slow launch to “early adopters” will be an excellent way of developing and polishing the service.
The accounts would be operated via a website (like ING direct, RaboBank, Ubank etc) or across the counter of the Post Offices or other agencies.
The accounts would have a 100% guarantee for their contents.
The accounts will pay interest at the rate of CPI so the balance cannot be eroded by inflation and interest will be paid daily. The RBA will simply create the money required by the interest payments with a few accounting entries. The same way they pay for the bonds they buy from private banks during open market operations. This ‘creation’ of interest is in effect a return to the public sector of some of the power to create money. What better way than to do so in the form of interest that does nothing more than maintain the purchasing power of savings.
This first step will provide a 100% safe and guaranteed option for anyone who wants one.
This slow and modest launch will allow systems and procedures to be developed and fine tuned.
This is the only policy that is required for the next election and will be more than enough to communicate to the electorate and explain.
A public 100% safe saving option.
Removal of the guarantee on private bank deposits
Once the teething issues are sorted out and the RBA and its agencies are up and running and the 100% guaranteed deposit accounts are operating smoothly sometime during the next term of government, the next step is to remove the government guarantee over the deposit accounts at the private banks…or progressively limit the balance that is protected.
There is no rush to do this as it will take some time to get the RBA account system working and develop organically a base of users and general understanding of how it works.
Why should the government offer a guarantee over deposits at a private bank when customers who wish such protection can deposit their savings in a fully guaranteed RBA deposit account?
People who like a bit of risk and the higher returns on offer will of course be free to leave their money on deposit at a private bank.
The broad principle is straight forward.
Use your RBA account to preserve the value of your savings and keep them 100% safe.
If you want a higher return invest some of your savings and accept the risk that goes with the higher return.
Social Security transfers and Tax refunds
The next step is straight forward and involves requiring anyone who is receiving a regular payment from the government to receive it in a RBA account. They will of course be free to transfer it from that account if they wish to seek higher returns and the risk that goes with it.
This step could take place before the guarantee over deposits at private banks is removed and could be managed in tranches. Jobstart recipients first, then pensioners, then family payments…etc. A simple way of expanding the number of account holders and stress testing systems.
Using the RBA deposit accounts is simply a matter of government prudence. The account used for any payment by the government to an individual should be a 100% publicly guaranteed one. What the recipients does after that is a matter for them.
Prohibit private banks “At Call” deposit accounts
The final step in the process is to prohibit banks from the fraud of offering “At Call” deposit accounts. These types of accounts, which are the typical saving accounts banks currently offer, are essentially frauds as they claim they will pay a depositor their account balance if called to do so but banks know full well that if they are called to do so by more than a fraction of their account holders they will be unable to do so
Why? Because banks use account balances to fund their operations and that means that if everyone wanted their money back “At call” they cannot get it. In more common language this is called a run on the bank. Offering an “At Call” product when you know you cannot do so if more than a fraction request you to is a fraud.
The solution is simple.
Banks will be restricted to offering Term Deposits and other investments options where the customer has no entitlement to withdraw their money “At call”. The banks will then be free to invest and use the money invested with them in a manner consistent with the terms of the deposit. They know that at the end of the term they will be required to have the money available.
This is no different to people buying shares in companies or bonds. They invest their money and obtain a return. If they want their investment back the terms as to when and how are limited. If you own shares you have to find someone to buy them from you. Rarely can you go to the company any time you feel like it and ask them to buy them back.
There it is and it is that simple.
A few simple reforms and within a short time we will have
- A national system of 100% guaranteed deposit accounts at the RBA
- Private banks who have lost their effective “money creation” privileges
- Private banks that are much much simpler to regulate as a result
- Private banks that offer term deposits and other investments that involve risk
- No need for a public guarantee over the operations of private banks just to protect small depositors
So why the problem with the RBA offering mortgages
Mortgages involve risk and that means some people don’t pay back their loans.
Why would we want the RBA to get involved in that business?
Let people who wish to make a higher return than CPI transfer their money in their RBA account to an investment company that lends money to people buying their first home.
If they stuff up and lend the money to people who cannot repay their loan the people who invested with the investment company lose their investment.
If the government thinks it would be a good thing to make loans for housing available on easier terms or to people who cannot get a loan from an investment company all it needs to do is to use some tax money and set up a home lending investment company for that purpose. If it does a good job and turns a profit it may find private people want to invest in that business as well.
Alternatively, the government could simply build the housing that is required and sell it into the market and in doing so put downward pressure on prices. Or it could build housing and rent it out to tenants directly.
There is of course a real risk that a government wandering into the business of offering mortgages will stuff it up and lose money or simply do a lesser job than private investors.
There may be a need for the government to intervene in the housing market but it can do so directly and make its policies and reasons part of its election platform
There is NO rationale for involving the RBA in the business of home mortgages.
The RBA will be doing more than enough managing the nationwide system of 100% guaranteed deposit accounts.
There is no reason to have it competing with the private sector in the business of lending those deposits to home buyers.
It is quite frankly a crazy idea and the sooner the Greens drop it the better. They will be flogged up hill and down dale by the AFR and the Australian and a herd of Think Tanks and private bank apologists complaining about the RBA competing with investment companies, exposing the tax payer to risk ,yadda yadda yadda.
Establishing a nationwide system of 100% guaranteed deposit accounts administered by the RBA and extinguishing the much misused and abused privilege of private banks is more than enough for the next election.
If the ALP and other parties are quick they can pinch the above before the Greens fix their proposal with some Liquid Paper.