NICHOLAS GRUEN. Some real banking competition – central banking for all.

As the great economic journalist Martin Wolf puts it, there’s a “giant hole” at the centre of modern economies. Although the money in our economy is a classic public good, like the air we breathe or the radio spectrum over which we communicate, almost all of it is privately created – by commercial banks like NAB and Westpac when they advance loans. (The physical money in our wallets represents a tad over 3 percent of the money supply.)

These arrangements not only hogtie our federal government to underwriting banks if they get into trouble – as it did when it guaranteed over a hundred billion dollars of bank borrowing one panicked weekend in late 2008 – even as the bank executives continued making out like bandits. It means that a central tool of macroeconomic policy – changing short term interest rates – functions through its influence on the appetite to borrow. But that’s notoriously fickle. So it’s always threatening to amplify the economic cycle economic managers are trying to moderate.

It also locks economic managers into blowing debt bubbles to moderate sluggish growth as we’ve done recently. That can store up rising risks of debt deflation for the future. Will those risks be realised? No one knows. Are you feeling lucky?

You wouldn’t guess from the tame discussion in Australia, but we can go a considerable way to fixing all these problems. Doing so would represent the mother of all micro-economic reforms.

The Productivity Commission (PC) is conducting a review of competition in finance right now, but this fearless architect of disruptive reform for Broadmeadows and Elizabeth can’t quite stir itself to even consider serious reform at the big end of town.

If governments created the money supply, as Milton Friedman always advocated, it would bring them a vast torrent of revenue. Martin Wolf, recently calculated – I think very conservatively – that it would generate government revenue of around 4 per cent of GDP. That’s around $70 billion for Australia.

Bank of England researchers recently modelled something much less dramatic nevertheless would involve the central bank issuing around 30 percent of the money supply as its own ”bitcoin” style cryptocurrency. They concluded that it would grow the economy by 3 per cent – more than the PC’s estimated gains from national competition policy throughout the 1990s.

I’ve proposed a similar plan based on nothing more than the vanilla flavoured economic reform principle of ”competitive neutrality”. The Reserve Bank goes banker to the banks. If they get those services from the central bank why can’t we? Just as Amazon competes with book retailers, where it provides better, lower cost services, our RBA should restructure banking by providing citizens with analogous services to those they supply the banks.

Meeting the basic costs of running the system by paying low account keeping fees, we could all deposit money with the Reserve, receive interest at the overnight cash rate and make payments between our accounts as the banks can. We could borrow at the same rate providing we provide impeccable security. I’ve suggested the RBA should only lend up to 60 percent of your house’s value.

This would involve you paying at least two percent lower interest rates then you do now on most of your home loan (with a higher rate on any lending above 60% of the value of your property) with a tax cut of around $1,000 per person?

Chock full of economists, the RBA wants to intensify competition throughout our economy – even, perhaps in banking – but not by embracing competitive neutrality and giving us all access to the kinds of services it provides the banks. The RBA Governor dismissed these ideas not by exploring their costs and benefits and concluding that the latter outweighed the former, but for the uncomfortable possibilities they raised.

This is standard fare for established organisations – like the Tax Office which objected to administering HECS and the Child Support Agency when they were introduced in the 1980s. Not invented here.

Meanwhile the Productivity Commission, had received a formal reference from the Treasurer to consider ways of intensifying competition and innovation in Australian finance whilst having an eye for financial stability.

It’s just released its draft report which records my submission but offers no response whatever to it or to the Bank of England researchers’ idea of a central bank cryptocurrency. You can watch the video of my attendance at the public hearings last month but still be as mystified as I am as to why Milton Friedman, Martin Wolf, senior Bank of England researchers and I are such obviously misguided cranks that we’re unworthy of a response from the government’s premier economic reform advisor.

Nicholas Gruen is CEO of Lateral Economics and Chairman of the Australian Centre for Social Innovation

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5 Responses to NICHOLAS GRUEN. Some real banking competition – central banking for all.

  1. Nicholas, I have watched the video of your too-brief appearance and it reminded me why I have previously compared the Productivity Commission to the House Committee on un-American Activities and the Grand Inquisitor of Castile. I sat through the Suncorp testimony so I was hoping for more time with you. I thought you might be getting somewhere when the subject of cost/benefit analysis arose. Isn’t that what the Commission is supposed to do?

  2. Robert Fox says:

    Reserve Bank-produced money supply is such a sensible idea that ignoring it must be wilful. The reason is pretty obvious: a major loss of revenue and influence for the private banks and financial sector. As always, wealth looks after its own.

  3. Abul Rizvi says:

    Nick. If the Government doesn’t like your idea of giving the RBA a role in retail banking, would it be more palatable for Australia Post to take on such a role? I note in NZ, they have established ‘Kiwi Bank’ which operates out of NZ Post Offices. Is that model worth looking at?

  4. Jocelyn Pixley says:

    The problem with 100% reserves for private banks is that it ignores the huge problem of near money. Friedman was not that clever about bank money to want to understand that all money is debt: but not all debt is money – IOUs can be created at will, but they are not always negotiable. This is Joseph Schumpeter’s great lesson about the deposit-creating loan. Simon’s idea, picked up then quietly dropped by his student Friedman, was not a new one, but defunct as Schumpeter rightly said.

  5. Colin Cook says:

    Nicholas is ‘Competitive Neutrality really a ‘vanilla flavoured economic reform principle’?

    According to the website of the Productivity Commission:
    “Competitive neutrality policies aim to promote efficient competition between public and private businesses. Specifically they seek to ensure that Government businesses do not enjoy competitive advantages over their private sector competitors simply by virtue of their public sector ownership.”
    The second sentence here would seem to indicate that for the RBA to offer risk free accounts to all citizens would be quite contrary to the PC’s understanding of CN – and policing ‘Competitive Neutrality’ is listed on the website as one of the ‘core functions’ of the Productivity Commission.
    Could the RBA offer accounts as you suggest without triggering some ‘police activity’ from the PC?

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