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
How 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.