More com­pe­ti­tion or less debt?

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As usual, I’ll be putting an argu­ment that is con­trary to pop­u­lar opin­ion on the need for more com­pe­ti­tion I the bank­ing sec­tor. So to clar­ify the issue, here’s a quick poll: who thinks that Aus­tralia doesn’t have enough debt?

Nobody? OK, now let’s dis­cuss the “need” for more com­pe­ti­tion in the bank­ing sec­tor.

The rag­ing debate is miss­ing the point–Hockey and the Coali­tion are right to go after the banks, but they’ve made a mis­take in sug­gest­ing that the sector’s ills would be cured by more com­pe­ti­tion. In fact, we allowed too much com­pe­ti­tion in the 1980s, and again in the 1990s. The out­come, both times, was too much debt—firstly for busi­nesses, and then for house­holds. That’s the sector’s real prob­lem, and adding a third dose of com­pe­ti­tion won’t fix it.

One of Paul Keating’s mon­u­men­tal ‘achieve­ments’ when he was play­ing the role of the ‘world’s great­est Trea­surer’ was to let vir­tu­ally unlim­ited com­pe­ti­tion into Aus­tralia in the form of for­eign banks. The ini­tial pro­posal was to let four in, but Keating’s ‘tri­umph’ was to suc­cess­fully argue to allow six­teen to set up shop here. I thought nobody would for­get what hap­pened next, but since com­pe­ti­tion is once again being sug­gested as a panacea, maybe every­one has for­got­ten. Cut-throat com­pe­ti­tion for mar­ket share poured money into the hands of Ponzi mer­chants like Alan Bond and Christo­pher Skase. That “Bondy” went bust try­ing to sell beer to Queens­lan­ders just about says it all about the peo­ple will­ing to lend him money.

The end of that era of excess saw most of the for­eign bank­ing capac­ity in Aus­tralia col­lapse, leav­ing the mar­ket pretty much in the hands of the Big Four – not for­get­ting that one of the them, West­pac, came close to mak­ing it the ‘big three’ when it too nearly col­lapsed in 1992 with a then record $1.6 bil­lion loss.

After the col­lapse of Bond Corp, Qin­tex and oth­ers, Aus­tralia had vir­tu­ally noth­ing to show for it beyond a string of expen­sive hotels along our shore­lines and a moun­tain of busi­ness debt—the unwind­ing of which gave us “the reces­sion we had to have”. The Busi­ness sec­tor, which had gone from a debt ratio of 22% to 55% in just over a decade, began to rapidly delever to 40% of GDP by the mid-1990s.

But that is start­ing to look like ancient his­tory. The con­tem­po­rary debate on banks is squarely focused on mort­gage lend­ing which, we are told, is uncom­pet­i­tive.

Give me a break. After the Wal­lis Inquiry in 1996, non-bank lenders were set free by their new abil­ity to raise funds through the secu­ri­ti­sa­tion mar­ket.  Aussie John Symonds and a throng of oth­ers began cut­ting mar­gins on home loans to build vol­ume, start­ing a race to the bot­tom that the banks, to a large extent, were forced to join.

Back when “the reces­sion we had to have” began, mort­gage debt was a mere 17% of GDP. It began to rise right from that time—even though unem­ploy­ment was explod­ing from under 6 to over 11 percent—and kept on ris­ing to its pre-First Home Ven­dors Boost (FHVB) peak of 81% of GDP. Cour­tesy of the FHVB, it rose again to again to 87%, from where it is now falling.

A large rea­son for this blowout was the com­pe­ti­tion for mar­ket share dri­ven by the growth of the non-bank secu­ri­tized lenders like Aussie Home Loans, Wiz­ard, etc.

I made a sub­mis­sion to the Wal­lis Com­mit­tee in 1996, and walked away stunned when they told me that one of their key rec­om­men­da­tions would be to allow secu­ri­tized lenders into the Aus­tralian mar­ket. Shocked at how blithely the Com­mit­tee was con­sid­er­ing this, I wrote a sup­ple­men­tary let­ter to it the next day (July 12 1996), which in part stated that:

The secu­ri­ti­sa­tion of debt doc­u­ments such as res­i­den­tial mort­gages does not alter the key issue, which is the abil­ity of bor­row­ers to com­mit them­selves to debt on the basis of “euphoric” expec­ta­tions dur­ing an asset price boom. The abil­ity of such bor­row­ers to repay their debt is depen­dent upon the main­te­nance of the boom…

Should a sub­stan­tial pro­por­tion of eli­gi­ble assets (e.g., res­i­den­tial houses dur­ing a real estate boom like that of 87–89) be financed by secu­ri­tised instru­ments, the inabil­ity of bor­row­ers to pay their debts on a large scale… will be felt by those who pur­chased the secu­ri­ties, or by insur­ance firms who under­wrote the repay­ment…

there would obvi­ously be a col­lapse in the trade­able price, and, poten­tially, the bank­rupt­ing of many of the investors…

Of course, my warn­ings were ignored in the gen­eral eupho­ria for “more com­pe­ti­tion”, and the rest is his­tory: lend­ing stan­dards dropped as the old and new com­peti­tors fought it out for mar­ket share, debt to house­holds bal­looned, the bust in lend­ing arrived, the secu­ri­tiz­ers failed and these new com­peti­tors were taken over by the big Four once more.

Yet here we are again with peo­ple argu­ing that more com­pe­ti­tion will improve things. The num­bers from the past decade and a half tell a com­pletely dif­fer­ent story. Even if you accept the gen­eral eco­nom­ics mantra that more com­pe­ti­tion is always good thing in prod­uct mar­kets—which I don’t—the usual basis for that is the belief that more com­pe­ti­tion will mean higher out­put at lower prices. But the out­put of the bank­ing sec­tor is debt-based money: we may want debt to have a lower price, but do we really want more debt?

Be care­ful also about want­ing a lower price—in terms of the mar­gin between the RBA’s base rate and the vari­able mort­gage rate. One way price can be dri­ven down in com­pe­ti­tion is by offer­ing a lower qual­ity prod­uct, and that’s cer­tainly what hap­pened as com­pe­ti­tion in the post-Wal­lis Com­mit­tee era. Lenders replaced care­ful val­u­a­tions with drive-by checks to see that there was a build­ing on the block, and care­ful assess­ment of capac­ity to pay with “liar loans” and 30-minute online loan appli­ca­tions (see page 34 of this report by the Home loan lend­ing prac­tices and processes House of Rep­re­sen­ta­tives hear­ing back in 2007):

CHAIR—We will ask Mr Warner for a com­ment on that. Also we would be inter­ested in know­ing is there an issue with the val­u­a­tions of prop­er­ties.

Mr WARNER: … We do not have val­uers going out doing asset tests on all loans that are under­taken by finan­cial insti­tu­tions. Some banks get their own either ex-man­agers to drive by to see if the actual house exists or we have a lower form of val­u­a­tion being under­taken.

These days it is get­ting to the point where you actu­ally have the val­uer who would not actu­ally even see if the house or asset existed in the first place. You have a drive-by which is at best a cur­sory glance to see if there is a prop­erty on the lot that has been pur­chased.

With lower qual­ity val­u­a­tions and many other cost cut­ting mea­sures like this, the inter­est rate mar­gin dropped. RBA fig­ures show that head­line vari­able mort­gage rates which in the 1980s had been 400 basis points over the RBA cash rate, came down to less than 200bps through the period 2000 to 2008.

So the big para­dox for the dom­i­nant “we need more com­pe­ti­tion” argu­ment in the cur­rent debate is why, if the banks have lent on much tighter mar­gins, are they so prof­itable? The answer is to be found the ris­ing vol­umes of credit extended from the mid-1990s to the present.

Lend­ing vol­umes are now 400 per cent of what they were in 1992. That would make sense if the econ­omy and pop­u­la­tion had increased in equal mea­sure, but they have not. The banks kept lend­ing through the GFC, and Aus­tralian home­buy­ers kept up their frenzy of bor­row­ing until March of this year, when the mort­gage debt to GDP ratio peaked at 87 per cent. That fig­ure is now com­ing down as house­hold­ers delever­age.

You might think that the banks should turn next to busi­ness lend­ing, where there have been valid com­plaints that money for work­ing cap­i­tal needs is too hard to obtain. How­ever this is add odds with the aggre­gate lend­ing data for busi­ness – it peaked at 63 per cent of GDP in 2008, and has been com­ing down quicker than home­lend­ing.

This is why Joe Hockey’s attack on the lack of com­pe­ti­tion is flawed—what we need is not more lend­ing but less, and not a lower price but a higher qual­ity. This is where both the oppo­si­tion and gov­ern­ment should be look­ing. Instead, Trea­surer Wayne Swan is try­ing to kick along more lend­ing by buy­ing up RMBS issues, thereby play­ing the game both the banks and the non-banks want – to keep vol­umes grow­ing.

Fur­ther cut throat com­ple­tion to grow vol­umes would be madness—we are sat­u­rated with hous­ing debt and the long delayed delever­ag­ing cycle will go on, what­ever Wayne Swan does to give it a boost.

What we need are meth­ods to reg­u­late the vol­umes of debt offered by the banks to stop this hap­pen­ing again, with­out putting upward pres­sure on the cost of house­holds have to pay for it. That may sound like an eco­nomic impos­si­bil­ity, and it would be if “free com­pe­ti­tion” between banks were expanded.

In fact there is noth­ing ‘free mar­ket’ about bank­ing in the first place. Our big four banks are rais­ing cov­er­ing their short­fall between loans and deposits by bor­row­ing vast sums abroad—equivalent to 40 per cent of mort­gages in Australia—exposing the econ­omy to future credit shocks, and all on the back of actual, and implied deposit guar­an­tees pro­vided will­ingly by the gov­ern­ment.

That is mas­sive reg­u­la­tion of a pos­i­tive kind for banks. It’s time to bal­ance that with some less pos­i­tive regulation—policies that reg­u­late and con­trol the vol­umes these state-under­writ­ten enti­ties can lend.

About Steve Keen

I am Professor of Economics and Head of Economics, History and Politics at Kingston University London, and a long time critic of conventional economic thought. As well as attacking mainstream thought in Debunking Economics, I am also developing an alternative dynamic approach to economic modelling. The key issue I am tackling here is the prospect for a debt-deflation on the back of the enormous private debts accumulated globally, and our very low rate of inflation.
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  • scep­ti­cus

    inci­den­tally, a goose pay­ing 0% nom­i­nal is not a golden goose, its a bar­ren goose.

  • I can sym­pa­thise with your anger at the stu­pid­ity of the RBA and the politi­cos in all this. But I think you should go over the text to clean it up.


  • soho44

    Just saw an old clip of Van Jones online. He was Obama’s “green czar” until he got sacked.

    His point was spend­ing more to develop the envi­ro­men­tal sec­tor will pay off in var­i­ous ways (jobs, cre­ate new com­pe­ti­tion in many sec­tors, it’s the right thing to do and so on).

    But in a 30 minute speech not once did he talk about national debt. How is all of this pos­si­ble with unchecked reck­less bor­row­ing? Just say­ing the obvi­ous “Obama sucks” isn’t exactly in-depth analy­sis.

    What are the eco­nomic fac­tors drag­ging the States down?:
    Two ille­gal and immoral wars that the major­ity of the pop­u­la­tion don’t sup­port.
    Let­ting infra­struc­ture totally fall apart.
    25 states are almost in receiver­ship.
    Still no national health care (the biggest fac­tor that killed the car indus­try)

    Now, from a purely investor per­spec­tive, why would you con­sider buy­ing State­side debt?:

    The govt. is wreck­less
    The poten­tial yield is essen­tially o%
    Key cor­po­ra­tions, their CEO’s and the busi­ness MSM con­tinue to ignore real­ity

    There are only two things. Either (1) it’s a place to dump your dol­lars while they’re still worth some­thing. Or (2)it’s a way to cut the arro­gant Amer­i­cans down to size.

    Are there lim­its on how much for­eign­ers can buy in Aus­tralian bonds?

  • ak

    if they try and raise rates they will fail as the econ­omy goes south”
    so they will try again — even harder — as There Is No Alter­na­tive in their minds.

  • Dan­ny­b2b

    Yeah its increased at triple or dou­ble the GDP growth rate.

  • @ soho44 says: Novem­ber 11, 2010 at 11:12 am

    What are the eco­nomic fac­tors drag­ging the States down?”

    Sim­ply put and imo:

    It is the nec­es­sary ‘socio-eco­nomic’ fun­da­men­tals that are the main fac­tors that are bring­ing the US down; those which are entrenched in the respect for the Law of the Land (lex ter­rae) and framed as Con­sti­tu­tional Tenets.

    It is fact that Con­tract Law, Pri­vate Prop­erty Rights, and expressed Jus­tice, grants the essen­tial struc­ture for math­e­mat­i­cally valid but over­ly­ing “eco­nom­ics” and its com­puted integri­ties, within the cap­i­tal­ism mod­els in West­ern Nations, which includes the USA. And, where Reg­u­la­tions within Acts of Law, include pro­ce­dural manda­tory doc­u­men­ta­tion and wit­ness of Title trans­fer.

    Home Own­er­ship* has essen­tially become a Right^, then it has also become a util­ity, which includes then and now, its integrity under lex ter­rae. IOW, a clear and dis­tinct fun­da­men­tal of the under­ly­ing socio-eco­nomic foun­da­tion upon which ‘eco­nom­ics’ at play rests depen­dently. I posit that there is a nec­es­sary sep­a­ra­tion between “eco­nom­ics” in prac­tice, and “socio-eco­nom­ics” where the for­mer is a depen­dent sub-set of the lat­ter, and the lat­ter must, a pri­ori, take Con­sti­tu­tional pri­or­ity, and not the other way around as is the case today in the USA, and else­where, includ­ing Aus­tralia.

    There­fore Home Own­er­ship Rights should be dealt with accord­ingly, and Con­sti­tu­tion­ally, under Law and Jus­tice. How­ever, this Right, ie Home Own­er­ship, by being allowed to become an essen­tial and major part of the over­lay­ing “eco­nom­ics” at play, a sub-set of a Con­sti­tu­tion­ally founded Repub­lic, has brought Casus Belli to the Law of the Land, in order to meet the, a pri­ori, math­e­mat­i­cal require­ments of those “eco­nom­ics” in play. As a direct result, in the USA, the whole Con­sti­tu­tion­ally framed socio-eco­nomic fun­da­men­tal fab­ric has been torn asun­der in order to give all avail­able resources to the “eco­nom­ics” du jour, in the frame­work of priv­i­leged pri­or­ity.

    It is herein ana­log­i­cally described in biol­ogy terms, by state when the patients own organs and cells begin to feed endoge­nously and car­niv­o­rously, which may be iden­ti­fied in the pre­lim­i­nary diag­no­sis as merely the work of retro­viruses, but it can be clearly seen, indu­bitably, that the con­di­tion is the well known dis­ease known as can­cer, and its accom­pa­ny­ing not-so-early stage of ‘extremis’, which results in all moral and eth­i­cal restraints being breeched in the ongo­ing and final processes.

    * Home Own­er­ship as expressed here does not include spec­u­la­tion in hous­ing in what­ever form and which would be more cor­rectly referred to as house own­er­ship.

    ^ Adver­tis­ing alone, directly and indi­rectly, per­va­sively expressed and funded in terms of many bil­lions of dol­lars, has been asso­ci­ated with the sale of “Homes” has been the main socially ubiq­ui­tous dri­ver of the now socially accepted par­a­digm of Home Own­er­ship as a Right. (I have even heard peo­ple who pre­fer, or can only afford, to rent a house, being referred to as “renter scum” on pub­lic talk radio.

  • This is rel­e­vant.
    “The bank­ing indus­try is also a pol­lu­tant. Sys­temic risk is a nox­ious by-prod­uct. Bank­ing
    ben­e­fits those pro­duc­ing and con­sum­ing finan­cial ser­vices – the pri­vate ben­e­fits for bank
    employ­ees, depos­i­tors, bor­row­ers and investors. But it also risks endan­ger­ing inno­cent
    bystanders within the wider econ­omy – the social costs to the gen­eral pub­lic from bank­ing crises.” Andrew G Hal­dane Bank of Eng­land

  • bret­t123

    I’m not sure how you cal­cu­lated that but that would mean Steve’s graphs are wrong (which ‘could’ hap­pen!)

  • soho44

    A key part of improv­ing the sys­tem to have bet­ter com­pe­ti­tion? Improve the flow of infor­ma­tion in the process.

    9 com­pa­nies con­trol what’s seen/heard/read in the States. This lit­er­ally means that almost all of the pre­sen­ters on these news out­lets are push­ing the board of director’s mes­sage. Even when they’re con­fronted with actual evi­dence of mas­sive prob­lems, they deny it’s there (and try to keep a straight face while doing it). 

    Why do they do it? Because they’re paid extrmely well. Because they’re under “so much pres­sure from man­age­ment”. Yet, not one of them ever says that hang on a minute. Maybe I’m actu­ally part of the prob­lem as well?

    Using Steve’s idea of more account­abil­ity in com­pe­ti­tion, that ended years ago in State­side media. In the old Wood­ward and Bern­stein days, there was a Fair­ness Doc­trine. You actu­ally had to be account­ble and allow both sides to be heard. Then Clin­ton signed the Telecom­mu­ni­ca­tions DeReg­u­la­tion Act which essen­tially ended that. It then became the media ver­sion of what hap­pened with the banks.

    Now, there is no free press. There is no actual debate any­more. Instead, in the busi­ness sec­tor it’s everyone’s bliss­fully ignor­ing real­ity. If you have your own busi­ness and con­sis­tently dis­tort infor­ma­tion, you could risk los­ing a lot of your clients. Yet, at the top level, that doesn’t seem to apply. One rea­son is the unchecked money and power. The media cor­po­ra­tions that have it. And the rich and pow­er­ful that use it to use the MSM. Either you play by our rules or we’ll cut you off.

    To have more effec­tive com­pe­ti­tion in the bank­ing sec­tor, you need to look at all aspects of the prob­lem. But for some rea­son nobody’s will­ing to do that.

  • Dan­ny­b2b

    Doesnt make sense but this is what the RBA is say­ing.

  • bret­t123

    What is your read­ing of that link to the ABS though? Is it say­ing “Over the year to Sep­tem­ber, total credit rose by 3.3 per cent.”.

    If so GDP also increased by 3.3 per­cent.

    But happy to be cor­rect as there are a lot of fig­ures in that link you pro­vided.


  • bret­t123

    Sorry — what’s your read­ing of the RBA link (not the ABS!)

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  • Brian Macker


    The empir­i­cal fact that banks expand the money sup­ply first and that cen­tral banks come in later to back fill with a fiat cur­rency is not con­tra­dic­tory to Aus­trian the­ory.

    I hope that you under­stand that Aus­trian Econ­omy The­ory already con­tained the idea that the legal­iza­tion of frac­tional reserve bank­ing allows pri­vate firms (banks) to expand the money sup­ply via an increase in credit gen­er­ated by low­er­ing reserve per­cents. They con­sider this a bad thing. So they have a prob­lem with it whether or not there is a cen­tral bank. This occurs whether or not the money is com­mod­ity based or not, and it doesn’t require a cen­tral bank.

    Their objec­tion to the Fed (and cen­tral banks in gen­eral) because they allow the banks to coor­di­nate their efforts at lever­age. Thus with cen­tral bank­ing the indi­vid­ual banks can lever­age even fur­ther (seek­ing reserves from other banks when they have overex­tended them­selves).

    Cen­tral banks with a fiat cur­rency com­pound this prob­lem even fur­ther. Not only does it allow even more lever­age (because the cen­tral bank can just print up more reserves), but the new base money will even­tu­ally cause the banks to con­tinue their infla­tion­ary poli­cies inde­fi­nately which is not pos­si­ble with­out the fiat bank.

    Accord­ing to the Aus­trian model, as I under­stand it, with­out a fiat cur­rency one would also find that empir­i­cally the pri­vate bank­ing indus­try would be the ini­tial source of mon­e­tary destruc­tion. It’s fail­ing banks and called in loans that lower the mon­e­tary base. 

    Not only would you find that this is the case but accord­ing to the Aus­trian model it would even­tu­ally have to occur, which I could explain but won’t for the sake of brevity. So that with increased pro­duc­tiv­ity over time their would be a gen­eral defla­tion in prices on aver­age, and it has noth­ing to do with what the cen­tral bank wants or doesn’t want to hap­pen.

    So you can­not use this par­tic­u­lar fact to rule out Aus­trian the­ory against other the­ory such as Cir­cuit The­ory. The Aus­tri­ans were right all along.

    In the past I have got­ten the impres­sion that you were unin­formed in this regard. Both Mises and Roth­bard cov­ered this in their eco­nomic mod­els. I think the prob­lem is that you are not read­ing the orig­i­nal source mate­ri­als and are rely­ing on oth­ers to explain things to you. I’ve found that even peo­ple who claim to lean or be Aus­trian tend to stress cer­tain expla­na­tions which would lead to a mis­un­der­stand­ing of the the­ory.

    The rea­son why the dol­lar has lost 93% of its value over the last cen­tury is because we have a fiat cur­rency. With­out a fiat cur­rency we would have had a cycle of pri­vate banks cre­at­ing money dur­ing the booms and then destroy­ing cur­rency dur­ing the busts of the busi­ness cycle.

  • sj

    Mr Keen
    Well done you have not been influ­ence by the mas­sive herd in big debt.
    Pop­u­lar rhetoric of more com­pe­ti­tion and lower inter­est rates is just the weak masses in big undis­c­pline debt.
    Cash­flow is king and savers are the win­ners in the long term.
    Abus­ing bank tellers and extreme bank bash­ing is not the answer, every indi­vid­ual must even­tu­ally go back to our grand­par­ents wis­dom buy stuff in cash and have very lit­tle debt.

  • Jack Spax

    Inter­est­ing arti­cle refer­ing to com­pe­ti­tion within the bank­ing indus­try

  • Brian Macker

    Don’t fool your­self the press is no bet­ter in Europe or Aus­tralia. Look up Philippe Karsenty re. the Al Dur­rah Inci­dent for an exam­ple. I don’t think the press is the major prob­lem in the first place. Politi­cians and spe­cial inter­ests are always going to fun­nel money to econ­o­mists who tell them that gov­ern­ment action (redis­tri­b­u­tion of wealth) is the solu­tion because that way they get a piece of the pie being redis­trib­uted whether it is wel­fare, bailouts, or price con­trols that hyper-pad profit mar­gins. The minute a econ­o­mist starts telling them no is when he is not going to be able to find a job, or gets his fund­ing reduced.

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