Cranks in the ranks: Central banking for all and the gatekeepers of micro-economic reform

Herewith a newspaper column on central banking for all, published in the Age and SMH today. Note: the bit in the brackets in the first paragraph is as submitted but Fairfax edited it out. They also headed the piece “One way to deal with the banks: cut them out of the equation entirely” which is a little extreme. As was the case after the introduction of central bank notes for wide circulation in 1844, there remain plenty of things banks can and should do, just not supply commodity services at massive mark-ups.

Central banking for all: the column

Image result for greedy banksHow would you like to bank with the government, pay interest two percent lower than now on most of your home loan (with a higher rate on any lending over 60% of the value of your property) with a tax cut of around $1,000 per person?

It’s possible, but only if we have the guts to dramatically intensify competition – not just for manufacturers and other cosseted sectors which have been through economic reform – but also for our still cosseted banks. The Productivity Commission (PC) is conducting a review of competition in finance right now, but this fearless architect of disruptive reform for some can’t quite stir itself to even consider serious reform at the big end of town.

In 2010 when Mervyn King was Governor of the Bank of England (Britain’s equivalent of our Reserve Bank), he said this. “Of all the ways of organising banking, the worst is the one we have today.” Banking’s fatal flaw is this: 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.

That flaw not only hogties our Federal Government to underwriting banks if they get into trouble – as 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 also means that one of the central tools of macroeconomic policy functions through its influence on the appetite to borrow – something which is notoriously fickle and so amplifies the economic cycle economic managers are trying to moderate.

It also locks economic managers into blowing debt bubbles to moderate sluggish growth as has occurred in recent years. That can store up rising risks of debt deflation for the future. Will those risks be realised? No one knows. Are you feeling lucky?

And here’s the big secret: if wildly profitable private banks creating money out of thin air sounds a bit dodgy, it is! In other areas like radio spectrum, where public goods were once allocated to the powerful few, much of it is now auctioned, generating free money for nothing for governments (instead of corporations) and so, reducing taxes elsewhere.

If governments created the money supply, it would bring them a vast torrent of revenue. Free market evangelist Milton Friedman always supported this idea, and Britain’s best economic journalist, Martin Wolf, recently calculated – very conservatively – that it would generate government revenue of around 4% of GDP. That’s around $70 billion for Australia.

Bank of England researchers recently modelled issuing their own ‘bitcoin’ style cryptocurrency concluding that it would grow the economy by 3 percent – 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?

Meeting the basic costs of running the system with low 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% of your house’s value.

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 to the banks. Chock full of economists, the RBA wants to intensify competition throughout our economy – even, perhaps in banking – but not by competing itself.

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, as the RBA dismissed these ideas for the uncomfortable possibilities they raised, the Productivity Commission was hard at work responding to the Treasurer’s request to propose ways of intensifying competition in banking.

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 crypto-currency. You can watch the video of my attendance at the public hearings last week 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.

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14 Responses to Cranks in the ranks: Central banking for all and the gatekeepers of micro-economic reform

  1. David says:

    I agree with your proposal, but let’s list the problems.

    Overton window: Most people don’t understand money or banking and their bullshit detectors go off when they hear an economist telling them there’s an easy way to pay less tax and get the same basket of services.

    Vested interests: Given how hard the mining companies went at the MRRT, I can imagine the banks would go even harder to muddy the waters. I’m sure they’d turn this proposal into a threat to every mum and dad investor in the country.

    However, I imagine the hardest group to convince may be all those who’ve done an undergraduate degree in economics and were taught the money multiplier.

  2. paul frijters says:

    good of you to keep pushing this Nick. As David notes, you are up against big beasts here who make over a billion every month they manage to delay this. That buys a lot of advertising, and the recent Tasmanian elections have shown how effective that is.

    Nice to see you are finding new supporters in the literature. I didn’t know Milton Friedman saw sense on this issue.

    You know why the government’s chief economic adviser is not debating this idea. The Whitehall days of fearless advice are long past.

  3. Nicholas Gruen says:

    I freely concede that of all the proposals I’ve put forward, this would have the most money out against it. So generally, I’m comfortable with the idea that the way things are now it won’t be implemented any time soon. But unlike some other reforms, it’s quite a good one for not wasting a crisis on. That is, once one got it in, voters would be happy with it. Unlike say tariff or often tax reform.

    Imagine a government getting in and needing to balance the books. There would be lots of money out after them in advertising, but the reform would lead to unemployment in banking and otherwise cheaper mortgages and a war chest with which to bribe the electorate. Of course, the Opposition would muddy the waters, but at the right time with a government prepared to have a crack (and under pressure to ‘do something’) it’s not impossible.

  4. Bukharin says:

    Perhaps the reason the PC won’t consider this proposal is that were it ever implemented the banks would file a big, fat competitive neutrality complaint and it is the PC that adjudicates competitive neutrality complaints.

    And what’s more it is likely that that the PC would find that the RBA running a retail operation would be a breach of competitive neutrality, since as the government-owned bank that prints its own money and can never go broke the RBA would have a huge competitive advantage over the private banks. (Just for starters, the RBA would have no need to hold any capital against its loans.) But then, this seems to be point of the proposal.

    Of course the government could always jettison competitive neutrality as a policy principle.

    But why stop at banking? Why not have a government airline (surely the government could buy fuel more cheaply than private airlines)? Or a government-owned telephone company? (It’s all about spectrum these days, and a government-owned phone company would surely buy spectrum more cheaply, especially since it would it be buying from the government.) That nice Mr Menzies would surely approve.

    • Quite so.
      Really can’t see the point of all these retro policy ideas.

    • Nicholas Gruen says:

      Thx Bukharin

      My whole argument is couched in terms of the NEED for competitive neutrality. If you’d like to read and try to understand it, I’d be happy to discuss.

      You can check it out here.

      • Bukharin says:

        Let’s put aside competitive neutrality for a moment.

        Your premise is that banking services of the type RBA-would provide are a commodity, and if they’re not they should be.

        Presumably you think this means that all the add-ons that banks provide with home loans, things like offset accounts, mixes of fixed and variable interest rates, home equity loans for other investments, and bundling with other banking services like credit cards and transaction accounts are an inefficient waste, and everyone would be better off with a Henry Ford ‘you can any colour you like as long it is black’ no frills loan, as decided by your one and only bank manager, Phil Lowe. Banks do compete with each other on providing this combination. You can argue that competition is not as effective as it should be, but competition is the idea. Have you run your idea past consumer organisations? They might have contrary views to yours on what consumers actually want.

        An indication of what consumers actually want comes from the web site of Peach Home Loans, the mortgage broker that was started by, and for all I know still owned by – you! It offers the usual array of home lending products. No ‘basics only’ for Peach customers.

        Now, some numbers. The RBA has ~$180 billion in assets. The residential mortgage portfolio of Australian banks is ~$1.6 trillion. Let’s say $400 billion is super-collateralised. Do you really think that tripling the size of the RBA’s balance sheet is a good idea? And do you really think that taking all the good risks from the commercial banks, leaving them with the duds, is a good idea?

        Remind me to sell my CBA shares if your idea ever looks like it is going to happen.

        • Nicholas Gruen says:

          Thanks Bukharin,

          As you know, here at Club Pony, we focus on trying to understand ideas before we critique them.

          Happy to respond to your arguments on the merits, but you need to show some interest in assessing the ideas and their strengths. At that point, it becomes relevant to conduct a bona fide investigation of weaknesses, problems and other issues.

    • derrida derider says:

      Of course, Bukharin, it was that nice Mr Menzies who DISAPPROVED last time around – see my comment below.

      Banking performs a very different function in a capitalist economy than airlines or phones – it’s not just another market. It is about making money in more than one sense.

      • Bukharin says:

        Menzies had no problems though with the existence of the government-owned Commonwealth Bank. And until the RBA was carved out of it in 1958, the CBA was both a commercial bank and the central bank.

  5. derrida derider says:

    So 1948 wants its debate back.

    I once read up on the 1948-9 events. The Chifley government’s nationalisation plans seemed to be driven by a fairly clear understanding of the seignorage rents we hand over to the banks, and the instability that ensues, when we let them do the money creation. It was not really, contra their opponents’ assertions, simple malice left over from the Depression (well earned as that malice might have been).

    I agree with you and with Mervyn King that it is economically sensible, but I also agree with David above that it is a political impossibility. Possibly a legal impossibility too – the High Court could make the same inconvenient interpretation of Section 51 as the 1948 court did.

    • Bukharin says:

      It was the nice Mr Keating who thought that competition would eliminate rents in banking. That turned out to be more difficult than he envisaged. But it’s hard to argue that out banking system has been unstable or a source of instability in the economy, even during cases of institutional failures (SBV and SBSA) and near failures (Westpac and ANZ) in the early 90s.

  6. Chris Lloyd says:

    Not sure if you saw the conversation piece below Nick. These guys deny that banks create money at all.

    https://theconversation.com/explainer-the-real-role-of-banks-in-money-creation-43480

  7. Alan says:

    Jefferson wanted a system of what he called subtreasuries that sounds suspiciously like central banking for all.

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