Bankster Inc.

Almost fifty years ago I submitted my master's thesis on the development of oligopoly theory. This was a time when most economists took seriously the notion and reality of market failure; and the greatest failure of all was seen to be the concentration of market power among one or a few large firms that dominated a particular industry or sector of the economy. 'Competition among the few', as a prominent textbook had it, was everywhere; steel, automobiles, supermarket chains, department stores, telecommunications, railroads, oil, cigarettes, beer, domestic airlines. Students of industrial organisation had proposed a useful three-part analysis: market structure -- market conduct -- market performance. The underlying idea was that the more concentrated an industry's structure, the more ability of its firms to jack up prices and the more power to collectively prevent new competitors from entering, leading to higher profits for existing firms, thus representing a transfer of resources from consumers to the owners of the firms. This flew in the face of economics' professed claim that capitalism (though this term was rarely used) was designed for competition to ensure that consumers' welfare is maximised. But competition was a frail vessel. As Adam Smith was widely quoted: "People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices".

Not only were new firms prevented from challenging the existing giants, but the largest, most aggressive and best resourced among them had a strong incentive to devour their competitors, so making the industry even more concentrated and increasing the power of the victors to screw consumers and suppliers and workers even more intensively. These considerations, well established in the nineteenth century, spilled over into public policy. In 1890 the first Sherman anti-trust act was introduced in America. Stronger legislation followed in the years before World War I and in other advanced industrial capitalist societies thereafter, including in Australia and Britain. Prominent in US arguments was the fear that large concentrations of economic power would lead to undue political influence, threatening democracy itself, a fear also held by Adam Smith and, of course, Karl Marx. As we look today at policy debates around issues like climate change and energy policy, it doesn't take much imagination to hear the ghosts of long dead economists rocking their coffins.

What about Australia's banks? At the end of World War II, there was, if memory serves, a sector comprising seven private and one Commonwealth government commercial bank, along with several state savings banks. These commercial banks had both savings and trading arms, taking deposits, and lending to households, businesses and governments. The Commonwealth Bank also played the role of central bank, until 1960 when the Reserve Bank of Australia was split off under the redoubtable Nugget Coombs. Fairly strict banking laws had emerged out of the chaos of the Great Depression. However, the new Labor Prime Minister, Ben Chifley, was especially suspicious of the banks and their power over the rest of the economy; Labor feared what its supporters referred to as 'the money power'. He unsuccessfully tried to nationalise the big seven private banks, fighting and losing a federal election on the issue in 1949, thus ushering in a twenty-three-year spell in opposition. Energised by their near-death experience, the magnificent seven engaged in a long term campaign to educate the public as to the benefits of free enterprise, especially when it came to banking. Once television came, I was perpetually hounded through childhood by ads celebrating my good fortune in living in a society where I could choose where to bank. Without asking, I and my classmates were given money boxes in the image of a bank's headquarters and savings book in which to accumulate my pennies. By the 1980s, a series of mergers had reduced the mag seven to the fab four. Without Keating's four pillar policy we would presumably now be 'choosing' between the terrific two, though one of them may still have been in government hands.

During the last fifty years, a complete reversal of views has prevailed, in the economics discipline and in the public policy arena. Anti-trust policy has morphed into competition policy - a much more positive sounding label. The structure-conduct-performance triad is so last century. The counter-revolution started with the work of Chicago University economists and legal scholars in the 1950s, gathered pace though the 1960s and came to fruition around the time I was writing my thesis. Aaron Director, Milton Friedman and Richard Posner were prominent on the barricades, but the key insurgent was Friedman's colleague George Stigler, author of one of the textbooks I used as an undergraduate. Stigler argued that size didn't matter, that large firms did not collude in keeping prices high. Competition was robust and assured, especially from foreign sources and the fire held to the feet of the complacent by entrepreneurs pushing new technologies and other innovations. Large firms were bound to be more efficient than minnows, able to invest in research and development, to continually reduce costs; thus, large profits were justified because they resulted from greater efficiency rather than higher prices to consumers. (Moreover, Stigler claimed in a paper that helped him to a Nobel Prize, government attempts to regulate large corporations were doomed to fail; Indeed, relations between regulator and regulated would become so cosy that the former would be 'captured' by the latter. Regulation was either useless or dangerous.) In this best of all worlds, everyone gained, even workers, whose productivity was enhanced by capital investment leading to higher wages. Gradually, the US legal system was taken over by the mantra that efficiency should be the only criterion determining anti-trust cases brought before the courts; and efficiency was assumed to positively correlate with size. The best policy for government was to step back, deregulate, leave it to market forces. Intervention was only required in the most egregious cases of anti-competitive behaviour, with the onus of proof on those claiming foul. Stigler held that when in doubt favour the market.

As deregulation swept through the economies of the West, finance was at the forefront. The big American, European and Japanese banks and investment banks led the process of Globalisation. The big banks moved from the basic role of intermediary between borrowers and lenders to becoming active participants in 'growing' new product markets; credit cards, consumer finance, education loans, insurance, brokerage, structured finance, financial advice. In the sleepy world of home mortgages, the banks borrowed short in secondary debt markets and lent long to homeowners. They also became prime movers in the exotic world of debt derivatives with near-catastrophic consequences for everyone. Australia's big four were not exempt. Along with their overseas comrades they were bailed out by national taxpayers, reinforcing the belief that they could privatise their profits and socialise their losses, a textbook example of 'moral hazard'. The bailout here came not in the form of direct dollars but by drawing on the AAA credit rating of the Australian government, backed by the taxpayer and on the massive stimulus package delivered to stave off domestic recession in the face of the global 'Great Recession'.  In the decade since, our big banks have become embroiled in a rolling menu of scandals, resulting in a much-resisted national Royal Commission. The long saga was played out in the media as one senior bank executive and director after another came, saw and was eviscerated by a sardonic retired judge and a dynamic duo of barristers-assisting. The reputational damage to the big four was immense and the hit to their bottom lines, by way of restitution to ripped-off customers, considerable though not of a scale to threaten their viability or, one fears, even dissuade them from acting similarly when they think the heat has died down.

The Royal Commission's findings, in spite of its narrow terms of reference and tight timetable, could not be ignored. From dragging their heels like dead drunk revellers removed from the premises by security staff, the Morrison government has recently embarked on a surprising bank bashing exercise that is hard to take seriously. What are they belting the banks over the head with? Why, their failure to pass on in full recent cuts in the Reserve Bank official interest rate. This is a side show. What the government should be doing is actively overseeing a much more stringent regulatory system and an enforcement regime that would actually get the banks moving on properly and quickly compensating the tens of thousands of past victims, while posing a credible threat to severely punish any such future transgressions.

The banks are supremely comfortable with attention focused on mortgage lending rates. They have a well-honed answer: we can't pass on everything because our cost of funds is too high. This esoteric response, meaningless to the masses, decodes as -- we borrow not just from domestic savers (retirees and the like) but also from global wholesale debt markets that are highly volatile. Our lending rates to mortgage and other borrowers have to cover the average cost of the funds we borrow, and still have adequate equity to cover unexpected contingencies. In the latter context might be included the compensation payouts to victims, a case of good depositors paying for the bad deeds of the banks. That leads to the second line of defence. We have to 'balance' the interests of three stakeholders; depositors, borrowers and shareholders to keep our business viable over the long run. There is some truth here. But there are really six stakeholders here. The three missing from the banks' response are:

1. the people who work in the banks. Bank staff have borne the brunt of management practices that have introduced a climate of fear and insecurity through 'incentivised' cross-selling of bank products to customers, while facing the threat and reality of largescale job cuts. Increasingly, the remuneration of lower level staff has depended on spruiking within an organisational structure that resembles an internalised franchise arrangement.

2. senior managers and directors who are extracting profits in the form of historically unprecedented salaries and bonuses. (I don't have space to explain the misplaced theory of incentives and the market for managerial expertise by which these quasi-rents are justified. Suffice it to say that the theory is highly congenial to senior managers everywhere in the corporate world.)

3. the humble taxpayer who stands ever ready to bail out struggling, greedy or unethical banks.

It's clear from recent evidence that the interests of those with large shareholdings in super funds and senior managers have benefitted most, and customers, workers, depositors and taxpayers least from the long-standing practices uncovered by the Royal Commission. The banks and their lobbyists, inside and outside the government, have managed to redirect public anger and attention away from the main game. Thrashing banks with the failure to pass on rate cuts in full plays well to the electorate but makes no impact on the teflon hide of the big banks. Their advertising has not missed a beat, continuing to offer up images of green pastures, attractive young families and soothing background music.

It will happen again, because nothing has changed. And nothing will change unless and until fines for misbehaviour and criminal activity are imposed in the tens of billions of dollars and several bank CEOs go to gaol. The corporate wail that this will stifle innovation and risk taking is best met by meekly agreeing and suggesting that returning finance to its traditional servant role of bringing borrowers and lenders together to oil the wheels of commerce, rather than creating fictitious values and appropriating exorbitant rents, is a blessing to be earnestly hoped for.

PS Two books on the Australian royal Commission have recently been published. Their message is pretty clearly signalled in the titles:  Banking Bad (by Adele Ferguson) and A Wunch of Bankers (by Daniel Ziffer). Reading these accounts raises in one's mind the seditious thought -- why not renationalise 'that bank', to keep the bastards honest, as a long dead politician once said in a different sphere of public life.