Our banking system is overwhelmingly banker powered, placing the citizens at their mercy. Not very satisfactory nor encouraging.
This article outlines the issues. The need for an overhaul is real, but requires the government to bite the bullet and represent citizens instead of the bankers.
- Treasury is responding to requests for Glass-Steagall, even from MPs, with three-year-old form letters;
- Such disdain reflects the banker influence in Treasury, and resistance to democratic accountability;
- A three-year-old response does not take into account the developments in the financial system since then, nor the increase in political support for Glass-Steagall around the world, as demonstrated in the 2016 US presidential election;
- Their arguments against Glass-Steagall are not just old, they are false: Australia doesn’t have a “high degree of structural separation”; commercial bank losses in other countries were not due to normal commercial banking, but property bubbles inflated by commercial banks doing securitisation/derivatives deals with investment banks.
Unaccountable bureaucrats in the Treasury department are fobbing off Members of Parliament who have passed on to the Treasurer their constituents’ requests for the government to look at a Glass-Steagall separation of Australia’s banks.
Treasury staff have drafted reply letters for Treasurer Scott Morrison to send to MPs that are copied and pasted from a letter written by a Treasury official in 2014 when bankers’ boy Joe Hockey was Treasurer. The 2014 letter was written in reply to CEC members.
This is not the first time Treasury officials have copied and pasted a reply letter on Glass-Steagall for Scott Morrison: a 28 April 2016 letter from Morrison to then Member for Longman Wyatt Roy was also identical to the 2014 letter.
Is Morrison aware he is putting his name to copy-and-paste jobs that are intended to fob off his colleagues’ inquiries?
Revolving door to banks
Treasury is heavily influenced by bankers, the profession that almost universally hates Glass-Steagall because bankers do not want to lose their ability to use the public’s deposits to leverage their profits. In fact, there is a revolving door between Treasury and the banks. Under Morrison’s predecessor Joe Hockey, who was Treasurer when the original letter was written in 2014, influential bankers included his wife Melissa Babbage, a superstar international financial trader with Deutsche Bank; his chief of staff Grant Lovett, from the giant Swiss multinational investment bank UBS; and his chief economist Tony Pearson, the former chief economist at the National Australia Bank, and now a director of the Australian Bankers’ Association. Pearson once pretended to a CEC delegation which included the former deputy director of Japan’s Ministry of Finance, Daisuke Kotegawa, that an airline ticket was no different to a derivative, the toxic financial gambling instruments that blew up the global financial system in 2008. He is currently authorising TV ads attacking the government of South Australia for having the temerity to impose a levy on the banks.
In 2014, Joe Hockey appointed another UBS honcho, Chairman and CEO of UBS Global Asset Management John Fraser, as Secretary to the Treasury, in which position Fraser has continued under Morrison. Fraser epitomises the revolving door: he started his career as a Treasury official before joining UBS in 1993 and 20 years later was back at Treasury.
Treasury is notorious for its resistance to democratic accountability. Invariably, it is Treasury that informs incoming governments that they cannot fulfil the promises that got them elected, due to the budget deficit or some related excuse. It is no surprise then that Treasury officials do not appreciate having to write letters explaining their policy positions for the benefit of members of the public. The aforementioned Tony Pearson expressed particular indignation to the CEC that he had to spend time writing replies about Glass-Steagall and the policy of “bail-in”.
Even assuming the Treasury’s reply was sincere when originally penned in 2014—a generous assumption—recycling it three years later for a new Treasurer deliberately ignores the financial and political developments since then.
Financially, 2016 witnessed a sharp increase in concerns about a new and probably worse financial crash than 2008. Those concerned included the International Monetary Fund, which expressed alarm at the potential for global contagion from a collapse of Joe Hockey’s wife’s old employer Deutsche Bank, the world’s biggest derivatives trader. Analysts and experienced observers have become especially concerned about Australia, which is (wrongfully) thought to have dodged the 2008 crisis, but is now poised for what former Turnbull government adviser John Adams called in early 2017 “economic Armageddon”. Concerns about Australia centre on its wobbling real estate bubble, and the extreme exposure of Australia’s biggest banks to over-inflated housing, which accounts for more than 60 per cent of their loans. It is now undeniable that a collapse of the housing bubble will trigger a major banking crisis—whatever the banks say.
Politically, Glass-Steagall has also become a much bigger issue globally than in 2014. The issue dominated the 2016 US presidential election, to the point that both the Republican and Democratic parties adopted it in their campaign platforms. Both Bernie Sanders and eventual winner Donald Trump campaigned for Glass-Steagall, and the White House has since twice reiterated Trump’s support for the policy. Trump’s election victory on a platform that included Glass-Steagall was noted in the UK Parliament, which has also debated Glass-Steagall, and indeed 445 MPs and Lords voted for the policy in 2013, on an amendment that only narrowly lost. It is extremely unlikely that, if the USA restored the Glass-Steagall separation of commercial and investment banking that kept its banking system secure for 66 years from 1993 to 1999, the UK and Australia and the rest of the world wouldn’t follow suit, especially as Glass-Steagall is already law in the world’s other big economy China, which is Australia’s biggest trading partner.
For Treasury to ignore these developments by resorting to a three-year-old form letter is the height of ignorance.
The letter claims Australia’s banking system has a “high degree of structural separation”. This is the kind of lie an adult might tell to a child he assumes wouldn’t know better. Eighty per cent of Australia’s banking system is just four Too-Big-To-Fail (TBTF) banks, and they are financial Frankenstein’s monsters of so-called “vertical integration” a.k.a. universal banking. Although commercial banking with deposits is the biggest division of each of them, their many other divisions combined, such as investment banking, wealth management, insurance, and stock broking, are now almost half of their businesses. The banks have an edge over businesses that compete with these non-commercial divisions, because they share the capital of the whole bank, which is underpinned by their massive deposits. This arrangement exposes those deposits to the risks of those non-commercial divisions. Glass-Steagall mandates a strict separation to ensure deposits aren’t exposed to any risk. In the UK Parliamentary debates on Glass-Steagall, a former banker in the House of Lords, Lord Forsyth of Drumlean, warned that the separation must be strict because “bankers are extremely adept at getting between the wallpaper and the wall”.
The letter’s other main claim is that “risks to financial stability as a result of poor practices in retail and commercial banking can be just as large, if not larger, as those posed by investment banking. Many of the bank failures in Ireland, Spain and the UK during the financial crisis resulted from losses on retail and commercial banking assets rather than from trading activities”. This is a misrepresentation. The large failures of commercial banks in Ireland, Spain and the UK were due to housing bubbles, so yes, they were commercial banking assets, but grossly inflated beyond what they should have been. The commercial banks did not create this housing bubble themselves; it was a product of their dealings with investment banks, which securitised and derivatised their mortgages. This enabled far greater volumes of money to pour into the housing market. The commercial banks should never have been allowed to have these dealings with investment banks, and it would be forbidden under Glass-Steagall.
What you can do
It is an outrage that Treasury can fob off the inquiries of elected MPs about a policy that was the most successful banking regulation in history, while planning legislation to give banking “crisis management” powers to APRA—the secretive, unaccountable agency that has permitted the banks to engage in reckless and criminal practices that have ruined thousands of Australians and placed the entire economy at risk.
Don’t let them! Do three things: