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Issue #1651      August 13, 2014

Dictatorship of finance sector

The government’s Financial System Inquiry handed down an interim report on July 15, raising a number of options for public comment. The underlying thread of the report is consistent with calls for the government to butt out and not “interfere”. The measures include further deregulation of the finance sector, removal of barriers to foreign financial institutions, greater integration internationally, removal of government guarantees and protections for customers, the ability to raid their accounts in a crisis.

In the name of “self-regulation” the financial institutions would regulate and monitor their own activities, with little or no accountability to government. The outcome would be even greater domination by the sector and fatter profits at the expense of customers.

The Inquiry is tasked with making recommendations to reduce the “regulatory burden on the financial services sector” which has control over $5 trillion in banking, superannuation, insurance and financial investments – much of it workers’ savings.

It is chaired by former Commonwealth Bank (CBA) CEO David Morrison. The other four panel members have backgrounds covering insurance, superannuation, investment funds and big business. Needless to say, consumer organisations and trade unions are excluded from representation.

On many of the critical issues, it calls for further discussion and holds back from indicating its position. None-the-less its main aims are clear.

Monopoly domination

The report notes that “Most sectors of the Australian financial system are concentrated”, and “this concentration has increased over the past 15 years, in particular in banking since the global financial crisis (GFC).” Banking is dominated by the four Big Banks. “Indeed, market concentration can be a by-product of competition.”

As Lenin pointed out in Imperialism the Highest Stage of Capitalism, “This transformation of competition into monopoly is one of the most important – if not the most important – phenomena of modern capitalist economy …”

“Monopoly” is a term the report avoids! The report also notes that “personal general insurance also has a relatively high degree of market concentration.”

As for the problems of monopoly pricing and domination, the report says the government should “Ensure market participants do not act anti-competitively or build up excessive market power through mergers and acquisitions”.

How? Competition can be increased by deregulation and opening up to foreign banks on the same terms as domestic ones. This is the direction the government is heading in its secret negotiations around the Trade in Services Agreement (TISA). (See Guardian, #1647, 16-07-2014, “Expanding the power of financial institutions”). “As an importer of capital, it is critical that Australia continues to adopt appropriate international standards.”

“Too big to fail”

The GFC saw the Rudd Labor government increase the amount of capital banks were required to hold against loans and the introduction of a scheme to protect retail deposits up to $250,000. The government stimulated spending in the economy with a multi-billion dollar package of handouts and programs (schools, pink bats, etc).

The term “too big to fail” was coined, in reference to the fallout across the economy and globally if one of the big financial institutions went belly up. The global impact of the collapse of the Lehmans, in particular, forced governments to look at strengthening the stability of the financial system.

The report raises the question of further increasing the amount of capital that the big banks are required to hold against loans, a proposal opposed by the Big Four. They were surprised that it came from a former CEO of the CBA. But the Inquiry is clearly expecting more “systemic crises” and fears “the systemic risks posed by large banks.”

It is concerned with the stability of the system but rejects government guarantees and the concept of “to big to fail”. This is in line with the Coalition government’s “market-domination” ideology.

“Investors can rationally surmise that the government is likely to rescue systemically important institutions if no other options exist, as their collapse would cause the most damage to the financial system and broader economy. This leads to a belief that some institutions are too-big-to-fail – that they receive an implicit government guarantee.

“Perceptions of this implicit guarantee have costs. A government may need to rescue a troubled institution in a crisis, putting taxpayer funds at risk. It may also cause ‘moral hazard’. This means it may encourage systemically important institutions to take on more risk than is optimal, since they believe they receive any benefits from the risk taking while the government will bear the cost of failure,” the report warns.

Shifting risk onto people

The report also offers as an option measures to “Increase the ability to impose losses on creditors of a financial institution in the event of its failure.” Translating that into simple English, a bank, or other financial institution could raid the savings or investments of its customers to bail itself out of difficulty. Remember Cyprus!

The Panel is looking at how to dispel a common belief that some banks are “too big to fail”, that their savings are not guaranteed by anyone. At the same time it is encouraging banks to venture into higher risk areas beyond savings and loans.

“Currently, the share of Australian banks’ balance sheets used for investment banking activities, and the extent of proprietary trading, is lower than in many other jurisdictions. Among other things, this could reflect a lack of retail competition that makes ‘plain vanilla’ banking profitable without the need to take on riskier business, or relative returns to investment banking in Australia being low.”

This is an extremely dangerous proposal. Investment and retail banking should be kept quite separate, with banks limited to banking.

The Panel clearly recognises the increased risks involved and suggests legislation to “ring-fence” retail savings and other lower risk activities so that “banks may move into riskier investment bank activities searching for higher returns, as increased competition or other factors make safer lending less profitable.

“Consumer outcomes can be enhanced by a variety of methods, including competition, innovation by industry and effective regulatory regimes (including self-regulation).” Self-regulation looks to be a possibility down the track. Another extremely dangerous idea which will lead to even higher costs, more scandal and bigger collapses.

Deregulation

“Governments have a role in both preventing the build-up of systemic risk and creating a framework in which financial failure is managed in an orderly and cost-effective manner,” the report says.

“Wherever possible, the financial system should be subject and responsive to market forces. It should not be politicised to the extent that the government sets prices, or mandates non-commercial financial decisions to resolve government fiscal problems such as requiring banks to hold government debt. Market discipline, through competition or self-regulation, is generally preferred to government intervention.

“It is also the Inquiry’s view that financial system regulators need sufficient powers, independence and resourcing, but they should also be subject to rigorous accountability mechanisms.”

It rejects government intervention and raises alternatives to government guarantees in the financial system.

Conflict of interest

Labor’s Future of Financial Advice (FOFA) laws required financial advisers to act in the “best interests” of their clients, and not put their own interests (and those of their employer) first to receive bonuses, commissions, etc, such as by using their employers’ products when there may have been a better product from another company.

The legislation had its weaknesses but even that was too much for the banking sector. If you walk into the ANZ bank or the Commonwealth Bank, they expect to sell you the products of their subsidiaries. The Coalition government did not wait for the Morrison Inquiry to report before gutting Labor’s minimal measures to protect people’s savings and make it legal not to act in a client’s best interests.

Private banks and investment houses will always have a conflict of interest when advising on investments such as retirement savings, annuities, and other savings. Profit is the driving motive. There are layers of profit built in at each level from fees, commissions, administrative charges, etc. With superannuation funds, entry and exit fees are visible, but there is at least one other layer of fees when the money is invested in different products.

The only way these layers of profit can be removed and independent decisions made on how the savings are invested is through a national public bank – a People’s Bank – that puts the interests of people, small business and family farmers first. With a strong social charter, higher interest rates on savings, lower rates on mortgages and reduction or abolition of fees, such a bank not only protects the interests of people but assists economic development.

A government-guaranteed national superannuation scheme which offers defined benefits (an indexed fortnightly pension) on retirement and invests in public infrastructure, public housing and development of renewable energy, would provide security in retirement, create jobs and be of benefit to the whole community. The CPA is proposing such a fund be set up and workers could transfer to it on a voluntary basis.

Wider agenda

The Abbott government has embarked on a massive overhaul of the role of government and structure of the economy. Treasurer Joe Hockey’s first budget gave an indication of where the government is headed in relation to social security, education, health, military and other government spending. So too the corporate tax cuts and gutting of the public sector and privatisation of remaining government assets. Trade unions, workers’ wages and working conditions are also in the firing line.

There are around 50 government reviews and inquiries being carried out by representatives of the largest corporations. The National Audit Commission, chaired by the former head of the Business Council of Australia, was one of the first to report. Taxation, the renewable energy target, communications and media, Fair Work Act, superannuation, social security, trade union governance, industry, health, education, community services and the financial sector are amongst the other areas facing a radical overhaul.

These are not minor reforms but fundamental changes to the fabric and structure of the economy and society’s values and the role of government. There are common threads of deregulation, privatisation and the removal of protective measures running through these changes and the handing over of state responsibilities to the corporate sector – what is known as the corporate state.

Next article – An interview with Lex Wotton – social justice warrior

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