While most Australians have been shocked by the dodgy, crooked and corrupt practices that have been revealed by the Banking Royal Commission, there is a widespread view that after a bit of “tough talk” and window dressing by the “Banker Buddies” in the Turnbull government, nothing much will change and we still have an economy dominated by private banks and their minions, eager to stuff as much debt as possible into every household across the nation using whatever means they can get away with.

After all, Scott Morrison, Malcolm Turnbull, Kelly O’Dwyer etc made it perfectly clear for over 2 years that they thought having a Royal Commission into the banks was a complete waste of time.

According to them, everything was fine and their tough ‘cops on the beat’ – APRA, ASIC and the RBA were doing a super job and keeping the banking industry as white as the driven snow.

Plus we know that it has been Liberal Party policy for over 20 years to drive the Australian economy on constantly expanding levels of household debt.   The graph below shows that almost all of the growth in household debt as a percentage of GDP since the early 1980s, took place under the Liberal governments of John Howard, Tony Abbott and Malcolm Turnbull.

No wonder they are all close buddies with private bankers as exploding levels of household debt has meant exploding profits for private banks.

Letting the private banks stuff Australian households with debt as though they are foie gras geese (see video below) is what John Howard, Peter Costello, Malcolm Turnbull and Scott Morrison call ‘responsible economic management’.

To make matters worse the ALP has been,  until recently, largely missing in action and has failed to alert the Australian public to the long term damage the Liberal Party have been doing to the Australian economy.

Is there an alternative?

How do we fix something that is this broken and corrupt?

How do we move back to a national economic model that relies on productive economic activity rather than debt driven speculation on increases in the prices of existing housing assets?

Can we detox an economy that has become so hopelessly addicted to household debt and residential housing asset price speculation that every arm of government policy has been bent and corrupted to keeping the ‘addict’ hooked?

• Pressure the regulators to do nothing – have ‘cops on the beat’ in a coma
• Insufficiently fund regulators
• Encourage regulators to go with ‘soft’ options rather than a ‘big stick’
• Appoint people to the regulators that ‘support’ out of control credit creation (“..let the free market decide..”) and be expected to do very little, very slowly to chase shonks and crooks.
• Deregulate how and when private bank credit can be created by the private banks
• Cut the taxes on capital gains on assets prices pumped up on a torrent of debt
• Encourage and support rising housing prices with mass immigration
• Encourage and support rising housing prices by allowing foreign and temporary residents to buy existing housing assets
• Encourage and support rising housing prices with first home grants and other incentives for households to take on massive debt and join the ‘bubble’.
• Allow the banks to use effect taxpayer guarantees to source the cheapest possible capital from around the globe to support their credit creation operations
• Make it clear that there is an implicit taxpayer guarantee for the private banks credit creation operations

Yes, we can and the solution is much easier than most realise.

One of the ploys of the Banking industry and their compliant minions throughout politics, the press and economic commentators is to run scare campaigns that make the idea of any change sound impossible.

Essentially they are trying to hold the Australian people hostage.    Their argument is that if we try to take away their profits and privileges they will pull the economy down around our ears and make all of us suffer.

What is the alternative

The alternative is straight forward and simply  a combination of (a) replacing private bank credit as public money in the economy and (b) adopting policies that encourage productive investment and economic activity and discourage unproductive speculation or #FakeInvestment.

(a) Replacing the role of private bank credit as money in the economy

Click here for a more detailed discussion of how we replace private bank credit as public money in the economy.   Private Bank credit as public money is a relic of 19th century economics that it is long past its use by date.     Relying on private bank credit as public money is the reason we have a massive bubble in household debt and residential house prices in Australia.    Fixing both of those problems requires dealing with the dysfunction inherent in relying on private bank credit as an effective form of public money.

(b) Encouraging productive investment and economic activity

This is simply a matter of encouraging the allocation of economic resources including human labour towards industries that are productive and involve an expansion in economic capacity.

As the productive parts of the economy are encouraged and expand, their demand for resources will result in a natural withering of the unproductive and speculative parts of the economy.   The speculative and unproductive parts of the economy will simply dry and die on the vine as they are crowded out by healthy economic activity.

This does not require any complicated  policies or having public servants ‘picking winners’.

For the most part it simply involves reducing and eventually eradicating all of the subsidies, lurks and perks that have encouraged the tumour like expansion of the speculative and unproductive parts of the economy.

Sadly one of the worst features of economic policy over the last 30-40 years was the growing flow of subsidies, tax benefits and other encouragements offered to activities that were little more than clever speculations on the prices of existing assets.

The following are some examples of how to encourage productive ‘real’ investment and discourage unproductive speculation or #FakeInvestment.

The Tariff on Australian production due to unproductive capital inflows

The first and most important action is to remove the effective tariff on Australian production that arises when our trade partners use unproductive capital flows to drive the Australian dollar above what it should be having regard to our trade performance.

Our trade partners have been manipulating exchange rates on a massive scale since the GFC by the adoption of zero interest rate policies.  Zero rate interest rate policies have the effect of driving capital from their economies into the economies of their trading partners and in doing so driving up the exchange rates of their trade partners. They have been using their domestic monetary policy to effectively impose a tariff on Australian production.

Defending Australia against these predatory trade policies is not difficult but it does involve regulating capital inflows that are clearly unproductive. Or to put it another way – regulating capital inflows that cannot clearly demonstrate that they are productive.   For a detailed discussion of unproductive capital inflows and how to regulate them click here 

Removing this massive effective tariff on Australian production is essential and would represent a massive encouragement of productive investment and economic activity and discouragement of speculation aka #FakeInvestment.

It is disappointing that Ross Gittins writing in the Sydney Morning Herald yesterday spent a whole column arguing against trade tariffs but completely ignored the effective tariff on Australian production that our trade partners are imposing through unproductive capital inflows to Australia.

Restricting tax deductions and benefits to real productive investment

One of the worst examples of a public policy that encourages speculation and #FakeInvestment rather than productive investment is the extension of a capital gains tax discount regime to speculation on the price of existing residential housing assets.

While there may be a good case for encouraging investment in new housing stock by offering those who invest in new housing stock additional tax benefits or discounts on capital gains, there is no justification for offering these benefits to people who merely acquire title to existing housing assets.

They have created no new economic capacity so why offer them any tax benefit or encouragement at all?   If they did not acquire the existing housing asset someone else would own it and either rent it out or live in it themselves.

At the very least there should be a significant distinction drawn in all tax laws between investment in productive new economic capacity and mere acquisition of title to assets and speculation in a rise in their price.

Considering that much of this unproductive speculation and #FakeInvestment in residential asset price values has been enabled by unproductive capital inflows secured by our private banks with a taxpayer guarantee, there is clear connection between the massive misallocation of resources involved in creating a massive landlord class with foreign debt and external liabilities of our banking sector  and an inflated exchange rate that penalises local productive economic activity.

Encourage productive economic activity by reducing the subsidies, tax benefits and support for unproductive speculation and #FakeInvestment

Fixing the stuff that the Royal Commission has identified as fundamentally corrupted and broken is not difficult even though the banking industry and their political buddies will claim it is an impossible task.

It simply requires identifying the distinction between real productive investment and unproductive speculation and offering no encouragement or advantage to unproductive speculation and preferably regulation to actively discourage it.

While in some areas there may be a case for some proactive policy encouragement for real productive investment it is likely that once the policy support for unproductive speculation or #FakeInvestment is removed there will be plenty of economic resources (including some our most capable and talented young people) available for much more productive economic activity than we currently think possible.

We simply cannot afford to continue to divert the nature wealth of Australia to unproductive speculation and #FakeInvesment.

The sooner the Liberal Party abandon this ideology of dissolution and decay the better we will all be.

The sooner the ALP, Greens, National Party and Independents take a firm stand against it and unrelentingly draw it to the attention of the public to it the sooner they will find themselves in government and leading the nation forwards.