JOCELYN PIXLEY. The Coalition’s Terms on Hayne’s Commission

Apr 26, 2019

When Morrison says, ‘Labor cannot manage money’, he must deny banks’ large-scale 2007-2011 crises – GFC – an outcome of Liberals’ mismanagement of money. Incoming Labor reversed looming depression in a brilliant world-first. The myth, john-menadue-the-myth-that-the-liberals-are-better-economic-managers/ P&I, relies on crucial coverups. Some are illustrated in the Financial Sector Royal Commission that Liberals restricted before it started.  

 Foot-dragging was nothing to Turnbull’s limits against the FSRC inquiring into banks’ revived recklessness. Liberals will not permit a national ICAC’s scrutiny of its government’s problems and similarly, Commissioner Hayne’s Terms were gifts to banks regardless misconduct and law-breaking. 

A month before Turnbull and the G-G signed the Terms of Reference (ToR) for Hayne in December 2017, former CEO of ANZ Mike Smith declared “when you want to get mob interest, you turn on the banks. Hitler did it.”

What explains banking’s self-pity and exaggerated self-regard – Smith’s Hitler card – so like Coalition governments, against public criticism? Hayne’s Final Report slammed the banks for urging ‘caution’ – meaning ‘Do Not Enter’ their abode or suggest ‘costly’ (un-costed) changes to banking.

Yet Liberals’ Terms (close to the main banks’ draft to Morrison) gave the FSRC limited entry. Turnbull’s preamble claims Australia has one of the ‘most stable’ financial ‘industries’, ‘systemically strong’ banks and ‘the world’s best prudential regulation and oversight’. Hayne was to investigate the ‘governance and corporate culture’ of financial services; the Terms restricted inquiry to entities’ misconduct towards the ‘consumer’.

Hayne had to use ‘customer’- not the correct, disallowed term, bank client – to distinguish from ‘consumer lending’ for say a car. Turnbull’s ToR did not define ‘consumer’; it defined ‘entity’ as one that undertakes ‘liability’ (to pay) of the ‘general insurer’ or ‘life insurance’; banks were not defined by liability, only licence holders. Hayne was ‘not required’ to inquire into macro-prudential ‘matters’; but to ‘have regard’ for the ‘economy’ and consumer costs. Finance entities had simplistic definitions, the ‘consumer’ none.

Evidence of appalling personal tragedies created by self-governing banks prompted Hayne to ease abusive ‘misconduct’. While proposed rules are necessary, they cannot touch the core, the typically corrosive power of bank money.

This core was banished in Turnbull’s ToR, namely panics to depressions created by bank money – the central fact of social life. Bank balance sheets show their liabilities to depositors – to make these available at all times or ‘at call’. Bank assets are deposited loans to borrowers, whose own liability to service loans was the FSRC’s focus because bank liability to borrowers-depositors was disallowed. By 2007-08, banks violated their liabilities via Costello’s ‘market discipline’: meaning bank-runs. Economic and social activity faced total collapse were it not for Labor.

If we compare the ToR’s disregard of banks’ liabilities to depositors with its task to explore governance and corporate culture, the Turnbull hobbling is clear. Whether Treasury et al understood or not, Hayne’s focus was on the borrower: the FSRC found unconscionable demands on borrower liabilities: savage treatment of defaults like foreclosures, of inability to meet interest payments; breaking of existing laws and unmet obligations of ‘credit licensees’ to inquire if the loan is ‘unsuitable for the consumer’. Hayne urged that ‘obligation’ be clarified and all laws be enforced. Turnbull’s alleged ‘world’s best’, ASIC and APRA, did no enforcement.

Any debate on banking’s imprudence on their side of the balance sheet was lost. Central banks used to scrutinise these. Hayne, stuck with woolly terms, still mentions earlier deregulations, removal of ‘liability structures’ and CLERPs on ‘disclosure’ 1997 (dear to defunct efficient market claims, in Costello’s ASIC). Hayne cites a G30 2018 on “Banking Culture and Conduct: a permanent mindset change”. Mindset! Causes of the Great Financial Crisis – banks licensed to create money assumed state bail-outs for reneging on their (swollen) liabilities (promises to pay at call), and future ‘macro-prudential’ bank-runs that easily eventuate – never had consideration.

As with Morrison’s election claims, Turnbull’s Terms refuse the GFC – and the FSRC duly followed. Of course, like most of us, Hayne knew, citing a RBA submission in 2014 (for PM Abbott’s ‘inquiry’) that discussed Australian banks’ heavy ‘exposure’ and ‘cross-border runs’ in dangerous global assets under Costello’s watch.

Given Labor’s sterling record, the funny part (one could die laughing) is Costello thought it a great idea to close the government bond markets to improve credit ratings, having screeched about Labor’s constructive spending. Bond traders were horrified. If Treasury refused to issue debt, the financial-state ‘deal’ would collapse since sovereign bonds guarantee private money creation, short-term leverage and bond trading. The state that spends in its currency cannot default, unless it will not tax the top end or is falling apart. Costello’s wealth-fare profligacy is still with us.

The term ‘customer’ was a farce too. Hayne says service provision was relegated beneath sales – those dealing ‘with customers became sellers.’ No word of how banks devised shadowy financial ‘products’, which are mutual promises too, not a service like a haircut or a product like a table. Consumer Law covers all potentially unfair contracts (taking bad haircuts off individuals) but not how banks can destroy everyone, even the wealthy.

The FSRC could not investigate executive and board scheming before Gillard’s government repairing of GFC sins. Abbott’s government did its best to water down her FoFA of 2012, succeeding implicitly: “curb your sense of justice” CEO orders (allegedly) to now CBA’s CEO Matt Comyn, or when CBA breached money laundering and terrorismfinancing laws. In June 2018 CBA only paid $700 million in fines, when Austrac had set fines high enough that the state could renationalise it for free.

 A state-owned bank gives strong competition, compared to more, same-old private competitors, but only if it’s intelligently-run. Monetary history reveals private banks’ control over the money issue created Australia’s 1890s Panic-Depression, then the worst (globally). It was hardly a controversy that the new Commonwealth would take over the currency – legislated by Labor’s PM Andrew Fisher, and found the Commonwealth Bank of Australia (1912). But after the 1920s ‘tory’ parties neutered it, CBA became a major cause of Australia’s Great Depression (as a 1934 RC showed); Labor PM John Curtin later rebuilt it. Nugget Coombs as CBA Governor gave the reasons why a state-owned bank acting as an arm with the central bank arm was so nationally constructive: see

Coombs’s fear postwar was to prevent deflation but not to produce all kinds of inflations. Government too must reduce its money creation when pork barrelling or warfare became inflationary. From 1949, Menzies and private banks destroyed all that, not before Menzies nearly lost office in 1960’s bank-money crisis for rejecting Coombs’s advice. From Korea to Vietnam, Menzies refused to curb private banks’ inflationary consumer lending. With the 1970s rise of Wall Street, came mobile capital recalcitrance: Labor PM Hawke was the best-informed to salvage a poor situation.

Hayne coped with limited Terms. We remain bereft of evidence on banks’ liabilities, while their deposit guarantee fosters cheap interest on short-term IOUs. Tricks return as mismanagement in government and banking is denied. Labor is historically the most competent in office but to Liberals and friends, history is abolished. The culture ofcapitalism must not be tempered no matter the social degradation.

Jocelyn Pixley is an Honorary Professor in Sociology, Macquarie University.

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