Mad furore surrounding the so-called “people’s bank”

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13 Jul 05:35am

Filed under: Bank Inquiry, Banking, Economics, Families, Government

A few days ago, I was part of a group of 6 economists who wrote an open letter arguing for a new Inquiry into the financial system—a so-called “Son of Wallis, Daughter of Campbell.”

The Herald-Sun's Mark Knight on the Rudd Bank.

Put simply, so much had changed in our understanding of finance, banking and economics and so much ‘on the fly’ policy had been undertaken, that surely stepping back and reviewing our policies above the political fray would be a good idea.

We had hoped that this might get a little media and perhaps push the government into putting an inquiry onto the agenda. Our letter was a long and not particularly reader-friendly affair. But towards the end we asked the following:

“Should citizens who feel unsure and unqualified to shop wisely in our financial markets be able to access basic savings, payments, and wealth management products that have been vouchsafed by governments as being safe and professionally managed (eg, why can’t Australians invest with the Future Fund)? In this regard, is there a role for a publicly-owned entity, akin to KiwiBank in New Zealand, to offer essential services in Australia’s finance sector that leverage off unique government infrastructure (eg, Australia Post, the tax system, and the government bond market)?”

I should stress the word ‘asked’ because this wasn’t a policy proposal but a policy area that might be evaluated. So it was to my surprise that I opened the newspaper (actually I didn’t have to open it was on the front page) to read “People’s Bank to break Big Four” in the Sydney Morning Herald on Wednesday morning. Thereafter, my five co-authors and I spent the day in the midst of a media frenzy about our ‘proposal.’ It was all about the ‘People’s Bank’ but to my knowledge, none of us had ever used that or any other name. To say this was unexpected is an understatement.

The media and political reaction suggests that this broad idea hit a nerve. While some opposition bordered on the hysterical, across the Tasman where they recently established a government-owned bank, there was a show of support.

But in all of this there has been no statement as to why a government-owned bank might be seriously considered as an option as part of a broader inquiry.

The basic case for this type of institution is actually quite straightforward.

From time-to-time, including significantly, the past year, economic uncertainty rises so much that banks and other financial institutions cannot be sure that loans established will be paid back on commercial terms.

Not surprisingly, they cut back on liquidity and also reduce the interest rates on deposits (as they don’t need the funds to lend out). This is a perfectly reasonable commercial reaction but from an economy-wide point of view, it comes at just the wrong time. During such times, you want an institution who will commit itself not to act on purely commercial terms. That is where a government-owned institution can come in.

Add to this another factor: if we move away from blanket guarantees on deposits to a world where (as we had just a few months ago) we want depositors to form their own judgments as to the soundness of particular financial institutions, then we have to recognise that there is a significant number of citizens who would gladly sacrifice interest payments, glitz and convenience of commercial banks for something safe and secure.

Once again, a government-owned institution, to the extent that, despite potential commercial flaws, could compete for and attract deposits, suggests that there is demand to be satisfied. Providing that option is, therefore, socially valuable and not something any government should shy away from. In New Zealand, KiwiBank attracts 3 percent of deposits in competition with the same major banks we have here.

Think about how many other government services are legitimately provided to similar size segments of the population and the whole notion seems broadly reasonable.

Now I am not suggesting that a ‘People’s Bank’ be established nor what precise form it would take.

What I am saying is that there is enough demonstrable inefficiency in the markets operate to conceive that there are gaps that could be covered by a government-owned and operated institution. However, as even the above basic case suggests, whether this is worthwhile depends on the entire system of regulations. And that is why we need a broad-based inquiry to work all of this out.

- Joshua Gans is an economics professor at Melbourne Business School. He contributes to the economics.com.au blog.

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5 comments

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- YT says:
  
  11:11am | 13/07/09
  
  I for one don’t want them to open a “people’s bank”.
  
  It has been done before, and flogged off before, as any decent tax payer owned asset is, so why bother investing tax dollars now, only to hand it to the private sector once it becomes a cash cow?
  
  Anyone remember the Commonwealth Bank, State Bank of NSW, Qantas, Telstra… They were all much better operators as public institutions - and now we retrospectively look at them and say “let’s do that again”.
  
  For me, there’s credit unions - at least when you are a member you really have a stake in the outcome… Not like being a taxpayer and having a stake in the outcome of, oh say, NSW Lotteries or the NSW electricity retailers.
  
  The private sector doesn’t go to tender for its cash cow businesses - why do Australian governments? Oh, that’s right, because “private enterprise does it better”. Tell that to the rioting Qantas “passengers” trying to get from Perth to Melbourne the other day.
  
  Reply
- Patrick says:
  
  11:35am | 13/07/09
  
  Terry McCrann is hysterical in just about every piece he authors. He is less intent on making rational economic observations then he is on finding some way, ANY way in which he can pepper his articles with cheap shots about evil lefties. He isn’t an economist, he’s just a wing nut, I wouldn’t pay too much attention to anything he says, ever.
  
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- Mark B says:
  
  11:57am | 13/07/09
  
  Firstly, I agree with the writer that it is time for a fresh look at the financial systems. Australia’s banks run an oligopoly. They funded non-Bank lenders to keep real competiton at bay during the boom times, and then pulled the plug when things got tough. They charge fees that are the envy of the international banking industry. Unlike their overseas counterparts, they didn’t need to join the high risk club in the search for better yields, they already had the highest in the world. The fact that they have been caught by CDO’s, etc., or more correctly got their customers caught with them, says more about their incompetence than anything else. The experiment with selling Government owned enterprises, has not established the case for the argument. The State Bank of SA collapsed because the government put a merchant banker in charge of the place, one that ultimately bore responsibility. I am of the view that governments should have a stronger regulatory role in socially critical industries, such a banking, and there is an argument that they should have a limited commercial role in them as well. I believe a version of Kiwi Bank is both desirable and inevitable as the only effective means of regulating the market, from within, and that’s why the writer and his colleagues will be attacked if they say so, by those who resist government intervention in markets even when it is demonstrably needed.
  
  Reply
- MikeM says:
  
  12:08pm | 13/07/09
  
  As YT alluded to, the Commonwealth used to have a People’s bank; so did the states of NSW, Victoria, South Australia and Western Australia.
  
  Two of them collapsed, a third almost did and after privatisation and float, the Commonwealth Bank ended up eventually swallowing the other two.
  
  The triggering argument in NZ for Kiwibank has relatively little to do with state versus private ownership of banks; it is mainly due to the fact that all the other major banks are Australian-owned and there may be times when they put their Australian interests ahead of those of their NZ business.
  
  As a matter of logistics it made sense to use the existing post office branch network for Kiwibank - the NZ Post Office used to run a savings bank after all (until a previous government flogged off Postbank to ANZ), so it has some history in the business.
  
  Reply
- Ben Payne says:
  
  01:43pm | 13/07/09
  
  Banking is the most influential and least understood industry in society today – we all take money for granted, but few realise how it is controlled and its fundamental principals. Our entire free market, incentivised, profit driven corporate system is completely screwed. Humans are now second class citizens, while the corporations hold all the power and influence.
  
  Competition and regulation obviously doesn’t work, or there would be no need for a “people’s bank”. I might suggest that the entire banking industry be nationalised and government run, but I would trust the 2 major parties even less than the self serving CEOs that currently have us bent over the table – at least their greed is obvious and transparent.
  
  Reply