Welcome to Quadrant Online | Login/ Register Cart (0) $0 View Cart
Menu
December 03rd 2017 print

Peter Smith

A Costly Quest to Bare the Obvious

Give untalented individuals lots of money for doing not much and you will get people who need to act like pompous thugs to avoid scrutiny and bolster their self-esteem. There, no need for a royal commission! I've just identified the banking system's key fault and folly

money drainExercises in futility are part and parcel of government. And so, the royal commission into banking and whatnot will not be out of step. Like Baldrick, I have a cunning plan. Why not put in place regular royal commissions, say every five or ten years or so, to investigate and report on the extent of sin and what should be done about it. That should cover the field and provide victims with an ever-present outlet to vent their grievances.

This royal commission, forced on Malcolm Turnbull, largely because numbers of National Party MPs want one, is a particularly futile exercise. According to the draft terms of reference, it is to look into the nature and extent of misconduct in the financial services industry and, if such misconduct is found, to assess whether cultural practices are complicit and, if they are, what the government or regulators should do about them. I think that’s about right in a nutshell.

Ignore the “ifs”. Of course, the commission will find misconduct and attribute it to cultural practices of one kind or another and will, of course, propose remedies. What royal commission worth its salt inquiring into anything would do less?

The commission could save a lot of time and money by just calling me to the stand. I worked seven years for a large bank and another nineteen years for organisations with close connections to banks and other financial institutions. I’ve got the inside story.

A first thing to remember is the nature of banking. It has grown more complex over the years around the edges but its core business remains exactly as it was hundreds of years’ ago. Banks take in money at one rate of interest and lend it at a higher rate. My granny, God bless her soul, could have done it well enough. After all, she was able to bake apple pie while tending to her seven children.

When I was being made redundant as my bank collapsed (chose wrong bank; might have been rich now) a senior colleague also being made redundant confided in me that his father had advised him, in view of his intellectual shortcomings (“you’re not so bright, son”), to join a bank. And why not? It is an easy business. What this means is that it provides safe haven for incompetents; as, say, carpentry or piloting or brain surgery doesn’t. At this point I should claim ‘present writer excepted’.

It is also the case that everyone needs banks to live their lives and one bank is like another. Ergo, competition between banks, all offering exactly the same services at, more or less, exactly the same prices, is perforce muted. In turn, this makes banking very profitable. In turn again, this allows bank boards to tick-off paying their executives enormous salaries, mostly, quite at odds with their talent and responsibilities. Now I need to turn to amateur psychology.

Give untalented people lots of money for doing bugger all to justify it and you likely get a lot of people who need to act like pompous thugs to avoid scrutiny and to bolster their self-esteem. And, in my experience, that is exactly what you get. Empathy is a casualty. Thus, providing people with dodgy advice at the cost of their savings; encouraging people to take out loans they can’t afford; and charging unconscionable fees, are all symptoms of self-serving behaviour at the cost of others.

I now want to turn full circle. Egregious behaviour should be punished as it occurs and is discovered. But, sharks are sharks and you can’t make them into carp. Banking is vital to the success of capitalism – the least worst of all economic systems.

We can’t do without banks. And we can’t make banks into Christian charities. They are what they are and always will be. We have to put up with them. No Royal Commission will change them. Ergo it is a waste of time and money to try.

It’s worth looking at a lot of the literature after the GFC, otherwise called the Great Recession. “Greedy bankers,” was a recurring theme and explanation for the financial and economic collapse. What a complete and utter joke.

If it all it took was greedy bankers we would be in permanent recession. ‘Ungreedy bankers’ is a contradiction in terms. Before ending I want to go back to the start and the National MPs keen on the Commission.

Alongside greedy bankers there are farmers who think that banks owe them a living. Now I support farmers and think they contribute positive externalities by maintaining vibrant regional centres. We surely don’t want to be a nation only of capital cities infested with green voters. I therefore think that government support, particularly in hard times, is well justified. But that isn’t the job of banks.

Somehow, I get the impression from National MPs that they believe banks should go on lending money, and not foreclose, when the chances of a farm business becoming viable has become close to zero. Bankers might not be the brightest kids on the block but they understand that they are not in the business of giving their shareholders’ money away. As a bank shareholder, albeit of extremely modest proportions, I appreciate that. I don’t appreciate paying the cost of Sisyphean efforts to ‘cure’ banking.

Peter Smith, a frequent Quadrant Online contributor, is the author of Bad Economics

Comments [19]

  1. Ian MacDougall says:

    As a bank shareholder, albeit of extremely modest proportions…

    Read ‘in spite of all the above, I’m still putting my money where my mouth isn’t.’
    Well done Sir! Instead of helping start a run on bank shares, we could have the start of a banking bubble like the almighty one in the Sydney property market.
    Yesterday, I thought of selling my modest portfolio of bank shares. But, having read this article by Peter Smith, I think I’ll hang onto them a bit longer.
    Other financial commentators far wiser than me might refer to this modest contribution of mine in their TV spots, and it might just tip the balance and save the Aussie banks, Royal Commission and all, which might in turn save the whole Western World from the next inevitable disaster; though probably condemning it to go through the one coming after.

  2. Keith Kennelly says:

    I don’t think banks do as they’ve always done, anymore.

    I’ll wait to see if the terms of reference are acceptable to those who have forced the hands of Turnbull and Morrison.

    I’ll assess the effectiveness after evidence that is turned up in the commission, before I jump to any conclusions.

    There is a great deal of public opinion invested in this enquiry and really ask yourself has Turnbull ever don’t anything that hasn’t ended up as bloody dire politics for the Libs?

    I’ll wait and see.

    The public’s anger toward the banks won’t be soothed with bs typical of. Turnbull and the managerial elites!

  3. Keith Kennelly says:

    The gfc was about forcing banks to lend to people who couldn’t repay the loans and the scrapping of the Glass Steggal act which prevented banks from trading in securities, insurance and other financial services.

    Greedy bankers and stupid politicians contrived (connived) to create the conditions that resulted in the gfc.

  4. Bill Martin says:

    Banking wasn’t always as it is nowadays and has been for centuries. Originally it was providing a useful, honest service to society. The rot set in and engulfed banking as soon as the goldsmith bankers realised that they could charge a fee (interest) on non-existent money. In other words, collect “real” money on loans of “pretend” money. Those who might find that confusing or ridiculous should check out this link. http://www.honest-money.com/03_misrepresentation.htm

  5. Doubting Thomas says:

    If it’s true that the superannuation industry is to be included in the terms of reference (which I’ll believe when I see ii) then, depending on who is appointed as Royal Commissioner, something useful might be achieved. In my opinion, the Industry Super Funds as presently constituted are among the most shameful rorts this country has ever seen.

    • RealWorld says:

      I’m not sure that ” farmers think banks owe them a living” but when your paying at least 6-7% on your mortgage – more for an over- draft regardless of equity, it does make you a bit miffed – especially when reserve rates are 1.5, and every international competitor is paying half the interest we are. Why are our bank interest rates so much more? And where is the comp

    • Jody says:

      I manage our Super Fund and it’s a veritable pain in the whats-it, but at least I have control. I bought up BIG during the GFC – the banks, that is. Macquarie went down to $15 and though I didn’t buy that low I certainly bought cheap MQG. They’ve recently gone over $100. I bought all the other banks and Wesfarmers cheap as chips during the GST but I’ve still managed to make losses on other investments in equities – some big time – over the years. We’re talking in six figures. Same with real estate. These days much more cautious and I’m leery of bank enquiries because of no of no good outcomes on anything once government gets involved. I anticipate the government terms of reference will make the landing smoother for the banks and consumers will end up with endless reams of paperwork for the tiniest transaction. I’m serious; absolutely endless, as well as those motherhood statements we see now to a sick-making extent because the vast majority of consumers are obviously incredibly stupid. Whatever happened to “caveat emptor”? Banks should charge higher rates to farmers because it’s a hugely big risk and many farmers operate lifestyles rather than businesses and expect the bank to wait around until the good times improve. Ah, I don’t think so.

  6. Ian MacDougall says:

    I am now having second thoughts. I think I might sell all those bank shares and plunge the proceeds into bitcoins.
    How could I possibly lose?

    • Jody says:

      Let me count the ways….

      • Ian MacDougall says:

        Jody:
        After the sorry story of the privatisation of the AWB, with executives awarding themselves millions in ‘performance bonuses’, I made a vow never to ever buy shares in anything that was being flogged off by a government. The former bureaucrats stay on, just rebadge themselves as ‘executives’, and proceed to rob the individual shareholders blind.
        Boards are no help, as they are dominated by the big institutional investors and the super funds, whose executives are all into the same rort. The individual investors, even as a group, have no voice on anything; except perhaps how to cop it sweet over whatever crumbs are left for them.
        As someone once truly said: “The stock market only knows two emotions: greed and fear.”

        • Jody says:

          Oh dear; in spite of all this my asset worth has increased steadily over the years. I can bleed about it or I can buy another Mercedes when this one claps out.

  7. David Archibald says:

    The Commonwealth Bank was created in 1911 so that people didn’t have to use the usurious ones. Then it was privatised by Howard and it adopted the mores of its competitors. I think the low point for that bank was when they had in-branch advertising on TVs and one ad recommended that if you didn’t have enough money for a deposit on a housing loan you should get your relatives to go guarantor, with each party getting their own legal advice. So the Commonwealth Bank was quite happy to rend families asunder in search of the last buck.

    The solution to our banking problem is obvious. Just create another version of the original Commonwealth Bank. And create more if necessary.

    • Jody says:

      Uh, no. Privatized by Paul Keating. And the CBA owned by the government didn’t thrive nearly to the extent it did when listed. Your call for the government to establish another ‘version of the original CBA’ is socialism. Why not nationalize everything so nanny can provide for you?

      • Ian MacDougall says:

        My understanding is a bit different. The original Commonwealth Bank operated out of post offices, and the latter were everywhere. Posting letters was the only mass means of private communication, long before people generally had telephones. Making the local PO double up as the local branch of the one Federal bank, meant that people could travel without fear of being caught cashless. An easy remedy was there, wherever there was a PO.
        I fondly remember a family holiday, some time around 1950, to my mother’s birthplace, Lightning Ridge, NSW. We stayed in a glorified tin shed called ‘The Imperial Hotel’, which was in the main and only street of the town, with the town’s only shop, including PO, right opposite. It’s proud owner would open up in the morning, clear the town dogs off the verandah, sweep it down, and then announce to the world: “the Commonwealth Bank is open for business!”

  8. Keith Kennelly says:

    The real intellectuals would have read the Austrian school of economic thought … about banking and banks, before exposing the weaknesses in their pronouncements.

  9. MOAB says:

    The banks exist solely on the lease given to them by the governments. Please remember that they are a non value-add business, and their profits eclipse any business that actually creates something. In this situation, if the government allows them to fleece the people (there is no free market in the banking industry), shouldn’t the government watch the banks closely and protect the people who hired the government? Of course, there is no substitute for a truly open market in banking and finance… I would prefer the government not to dictate what means we use for exchange of goods and services.