Tuesday, 11 September 2018
Banking and Financial Services
This coming Saturday marks the 10th anniversary of Lehman Brothers filing for bankruptcy. Lehman was one of the world's largest investment banks. It had been around for nearly 150 years and survived the bank crashes of the 1800s and the Great Depression. But Lehman didn't survive modern finance. Like many others, it was overexposed to subprime loans through a complex web of residential mortgage-backed securities. Lehman's collapse is considered the trigger point for the global financial crisis. Ten years on, the GFC is still with us. Despite record low interest rates, despite record low inflation and despite any number of measures to inject liquidity into the banking system, the GFC is still with us.
What started off as a slow recovery has now become the great malaise—a low-growth trap caused by governments failing to address the root causes of the problem. Australia has avoided the worst of this global condition, but we're experiencing many of the symptoms. Wages are stagnant. Underemployment and chronic unemployment are rising. Wealth inequality is growing. One of the root causes is right in front of us. A crisis founded on loose lending standards and a build-up of debt has been responded to, once again, with loose lending standards and a build-up of debt.
Here in Australia we've done it better than most by making housing a national obsession. From levels of around 160 per cent of GDP when the GFC hit, household debt has risen to just shy of 200 per cent of GDP, one of the highest levels in the world. Low interest rates have been a factor, yes. Tax breaks for investors have definitely been a factor, artificially inflating demand and locking a generation out of the housing market. But the banks have played a pivotal role by pumping money into the housing market and pumping up private debt. They have done this through vertically integrated structures whereby mortgage brokers are owned by the very banks whose loans they are recommending and whereby these banks then securitise these mortgages and onsell them through in-house brokers. Not surprisingly, the banks have been very happy to write loans to anyone with a pulse. Just last week we discovered that Westpac had approved 10,500 home loans without bothering to check the lenders' servicing capacity.
This is a financial system obsessed with speculation rather than production. In the mid-1980s, when Paul Keating let loose the animal spirits of the market, lending for business was double that of lending for housing. Now it's the other way around. This is crippling households and it is crippling our economy. Both the private sector and government are forgoing productive investment because land speculation is crowding out everything else. Former Treasury secretary John Fraser—hardly a soft-headed leftie—even drew the link between private debt and low wage rises. Households that are mortgaged up to their eyeballs are simply too scared to agitate for a pay increase for fear of losing their jobs.
Thankfully we have a royal commission that is laying bare the rot at the heart of our financial system. This is the royal commission that the Greens led on. This is a royal commission that wouldn't have happened without the Australian Greens. We saw the need for this very early on. In fact, we saw the need for this nearly five years ago. This is the royal commission that Labor initially mocked as a stunt. This is the royal commission that the coalition said would cause the sky to fall in. First they ignore you, then they laugh at you, then they fight you, then you win. The royal commission is getting to the bottom of the specific ways the banks bend and break the rules to extract as much profit as they can out of unsuspecting customers. The stories coming out of the royal commission are shocking. They are an indictment on the culture of banking in Australia and an indictment on government and the regulators who have failed to step in when clearly the banks were up to no good.
But what is also interesting about the royal commission—and the central point I want to make tonight—is that, while it is a conduct inquiry and while issues of systemic risk were specifically excluded from the terms of reference, the response to the royal commission must include a response to systemic issues and the risk they pose to our economy and to every single one of us. As John Quiggin noted recently, the usual defences of bad apples and rogue advisers have fallen apart as it becomes evident that problems are systemic, driven by relentless pressure from the top to maximise profits at all costs.
The distorting power that the big four have can no longer be ignored. The inherent conflicts created by vertical integration can no longer be defended. Sky-high executive pay and the perverse culture that it creates must be brought to an end. And, as Commissioner Hayne himself put it, we need to ask: how much profit is enough?
The job of government in this parliament is to act. The royal commission is giving us hot iron. We must strike that hot iron. We need to reshape the financial system so that it is a servant to, rather than the master of, our lives.
Many will want to wait for the conclusions of the royal commission before committing to any structural change. While I respect this view, I would say that we cannot afford ourselves that luxury. We must be prepared to act now—as much as anything, because the royal commission is only looking at half the story. We need to look at the big picture.
A good place to start would be to take a look at the Melbourne Economic Forum held last week on banking reform. The list of topics makes for familiar reading, if you've been following what the Greens have had to say about the future of banking. There was Paul Kofman on establishing a new public bank; it sounds a lot like the people's bank that Senator Richard di Natale announced at the National Press Club earlier this year. There was Peter Harris on the merits of mortgage tracker accounts; again, it sounds like a version of what the people's bank would have to offer. There was Nicholas Gruen, former Productivity Commissioner, about removing the barriers between citizens and their central banks—this is the people's bank again, and, as far as I'm aware, Nicholas is the originator of this idea. Alan Fels was talking about powers to force divestiture; it sounds a lot like our policy to break up the banks that the Greens formally announced outside the royal commission just last month in Melbourne. And Jason Nassios spoke on the effects of changing capital adequacy ratios on the banks; it sounds a lot like the questions the Greens have been asking at estimates for the last three years, particularly about what the justification is for the current risk-weighting structure in our banking sector.
I am not laying claim, necessarily, to an endorsement of the Greens' policies from all these people. What I am saying is that we are paying attention as a political party. We have been leading, as a political party, on many of the most important developments in our financial system and in our economy. We're not afraid to right now cut straight to the heart of the matter that confronts us.
Banking caused the GFC, and banking is one of the reasons the GFC is still with us. Financialised capitalism still dominates. It is focused on profit at the expense of consumers. It is focused on market power at the expense of competition. And it is focused on shifting risk onto anyone and everyone. We need to change this, and we can change this. We are in the privileged position of being able to do this.
Scrutiny of financial system regulation and structure has often been obscured by the trope that it is above politics. That's why the government excluded prudential matters from the royal commission's terms of reference. That's why the government balked at the relatively modest recommendation the Murray inquiry had to make to establish the financial regulator assessment board. But nothing is more political than the structure of the financial system. If you want to leave the GFC behind, and if you want to be prepared for the next crisis—and history tells us that surely it will come—this parliament must not be shy of or shy away from substantial reforms to the structure and regulation of the financial system.