Pearls and Irritations

The Hayne Royal Commission has, so far, found not just “misconduct”, but a long list of dubious activities over previous money laundering and insider trading cases. Such tactics are common to the largest finance centres, Wall Street and the City of London.

These practices raise many questions: 

1. Why are the top bank managers so arrogant as to be surprised they had to answer questions under oath; so ill-prepared they assumed “plausible deniability” was sufficient, and that (more) “enforceable undertakings” are the likely outcomes?
2. Does this arrogance express far deeper problems in global banking and finance business models? Why do senior bank managements need to use their clients even beyond the grave, when so privileged?
3. Why are terms like a “culture of banking” dominating debate, and calls for greater “competition and choice” among more private players still said to be the cure?
4. Banks are special and licenced by governments. Whether this is understood or not, fractional reserve banking means that for every dollar deposited/borrowed, banks can lend out or advance (that is, deposit) a further $7. Up to the GFC Australian banks borrowed heavily on the wholesale global money markets and when those markets stopped, banks could not meet their liabilities (to all depositors). The ALP Government and the RBA provided one of the better rescues in the world. So, the question is why has the LNP Government been reluctant to look into banks? 

I can only raise specific questions about whether any LNP Government will act against banks (not the related yet complex problems of inequality, disaffection, or mining corporations, say). To start, the RC shows we must dismiss competition as a remedy – one example is ASIC’s report in October 2016 on remediation payments (required for every bank charging “fees for no service”). This report showed that ‘NAB was “in the middle of the pack” among the Big Four banks caught up’ in this scandal, although NAB finally paid “double” than ASIC reported. They were all copying (cf. competition), but some were worse than others and none wanted to “derail the bank’s profit announcement”.

We should also set aside ‘culture’, with the same RC evidence of Mr Hagger (NAB) agreeing his CEO’s email said: “The chief (Mr Thorburn) was keen to ensure Thursday [ASIC’s report above] goes as smoothly as possible”. Mr Hagger said, “From a cultural perspective there were things we hold dear that ASIC didn’t hold dear” whereas to Counsel Assisting Mr Hodge “What ASIC holds dear is if you pay for a service, you should receive a service”. Instead of “culture”, we need to describe line management, its orders and incentives to lower paid staff. Arrogance of the senior bank management is (partly) explained by the neoclassical approach to banking of Treasurer Peter Costello, in outsourcing from the RBA most of its powers of supervision and bank controls. In the late 1980s rules were tightened after collapses and the near collapse of two big private banks. But of Costello’s new bodies, APRA started with some powers, ASIC far less. Also, defunding (Abbott-Hockey notably) worked its magic. In contrast, like all central banks, the RBA is self-financing.

Senior management has treated the judiciary (RC) with “total disregard” then, because banking has little effective supervision. During the LNP leadership fracas the AFR in ‘A “disgrace”: CEOs call for early election’, implied a hypocrites’ chorus had already overtaken contrition (of say, NAB’s CEO). Banks are the largest and most influential businesses in Australia, but Mr Morrison is likely to appease them. Why?

Banking, like all economic life, is highly political. Executives want the easy life: laws and strict supervision hinder simpler, lucrative tactics. Bank portfolios are hardly ‘balanced’: half of their loans are to ‘persons’, far less than a quarter to government and about a third to the commercial sector (albeit some to ‘financial intermediaries’). Much of the speculation on money and assets, and mortgage loans rely on economic activity created elsewhere for debt servicing. Banks long ago reduced economic financing for jobs, decent pay and work security. The NYT has just reported that ‘the biggest [US] companies may be influencing things like inflation and wage growth, possibly at the expense of central bankers’ power to do so.’ It points out that US banks are barely lending to small business (the largest job sector). ‘Banks are generally disinclined to treat intellectual property or other intangible items as collateral against loans’, as well.

Bank lending to government (bonds) is also interesting. Why would democratic governments accept that banks should get the easy life? One answer (not the only one of course) is from my unearthing of financing techniques of World War I. Well known then, few talk openly today about how the more militaristic, the more governments will borrow for war finance from banks (as in WWI). In a democratic country, few willingly pay taxes for the biggest nuclear arsenal in the world. From the 1970s, Wall Street’s global influence grew as did Reagan’s Star Wars, tax cuts and greater inequality. The bond vigilantes (government lenders) favour military but not social or economic programmes. Australia had a fine reputation for peace-keeping defence forces but that has gone, in openly-declared political decisions. No secret, but war finance links are rarely made.  

*Jocelyn Pixley has two books of 2018, her Central Bank, Democratic States and Financial Power, and co-edited Critical Junctures in Mobile Capital (both with CUP); a co-edited collection with Geoff Harcourt Financial crises and the nature of capitalist money (Macmillan), and two editions of her Emotions in Finance (also CUP). 

Share and Enjoy !

SHARE TWEET SHARE COPY EMAIL PRINT