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.”
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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