Banks raise fees – Arguments for social banking

In Australia the Commonwealth Bank has raised its home loan interest rates 0.1 percent. At the time of writing, Westpac and the National Australia Bank have ‘followed suit’, raising rates on their fixed interest rate home loans. http://www.abc.net.au/news/stories/2009/06/16/2599124.htm

As John Passant has noted in ‘En Passant’: it is hardly as if the banks were ‘strapped for cash’. Passant notes:

“In the first half of this financial year [the Commonwealth Bank] made $2.5 bn profit (an increase of 9 percent over the previous comparison period).”

http://enpassant.com.au/?p=3665

Furthermore: earlier this year [a report from] Fujistu Consulting…found [that] Australian bank fees were 22 per cent higher than those in Britain and 11 per cent more than US banks. http://www.abc.net.au/news/stories/2009/03/06/2509189.htm

Of course, though, it didn’t have to be this way.

It was the Keating Labor Government which moved to privatise the Commonwealth Bank. In this process, the acquisition of the State Bank of Victoria was used as a ‘Trojan Horse’ for Keating’s neo-liberal privatisation agenda.

The course of full privatisation took place between 1991 and 1996 – and the Australian banking sector has never been the same since.

More recently – in response to the ‘credit crunch’ – and out of dire necessity - Rudd Labor has garaunteed “$600-$700 billion deposits in Australian financial institutions. This was in order ”to shore up local confidence and protect the nation's international competitiveness.”

An unintended consequence, though, has been the marginalisation of independent lenders: to the expense of local competition. Australia’s four major private banks – the ‘four pillars’ – have consolidated their position thoroughly. There are conflicting arguments, here, about the significance of competition.

In a personal exchange with the author, prominent Australian economist Steve Keen has noted that:

"a non-profit-oriented [Commonwealth Bank] would not have been driven by competition to achieve market share into dropping its lending standards. The impact of competition was really to drop prudential standards in order to get the largest share possible of the mortgage market. What can arguably lead to efficiency in a product market leads to lemon lending in a financial one."

Steve Keen believes it to be a “moot point”: but the following can be argued:

If Labor was serious about competition in the banking sector, the wholesale privatisation of public banks would never have taken place. The place of a re-socialised CBA in offsetting potential collusion, and maximising product competition - could be critical.

On the other hand, as Keen has pointed out: competition for financial services can lead to a deterioration of lending standards.

Strong prudential supervision is required to resolve this problem. But also: if vulnerable Australians are therefore ‘shut out’ of the home loan market, government (both State and Federal) needs to take immediate and strong action to build up quality public housing stock. As well as providing directly for vulnerable Australians, by increasing supply downwards pressure could also be applied on housing rental rates.

A tightened rental market in Australia has arisen as a critical problem since the Howard conservative government irresponsibly fostered a housing bubble as an artificial means of buoying economic growth.

Continuing in his critique of competition in the financial services sector, Keen argues that

“competition has led to a compression in the loan/deposit rates, but [also, as a consequence] a growth in fees to gouge existing customers. If we hadn't had this competitive orgy, the loan/deposit gap might have remained larger than today, but consequently the need to gouge customers with fees to compensate wouldn't have been there.”

The logic of Keen’s arguments tends to suggest the desirability of sweeping bank nationalisation. But while this is still theoretically defensible – even preferable - the constitutional barriers to such reform in Australia are set.

Keen may be correct – that competition in itself can have undesirable consequences. But given the current impossibility of across-the-board bank nationalisation: the presence of a public bank could provide competition of a more benign form.

The best short-medium term course of action, therefore, is the re-establishment of a public sector bank – which because of its not-for-profit footing swiftly secures a strong foothold in the market. By doing so, even now Australian Labor could potentially make amends for its past errors: following the example of New Zealand Labor.

The benefits of re-establishing of major public sector bank are manyfold.

A resocialised Commonwealth Bank could move to a ‘not for profit’ footing. Low income earners could be provided with ‘no fee’ accounts. Billions in profits could be directed into abolishing fees; and not moving to repossess houses where families are left vulnerable because of the recession. And equal services could be provided for disadvantaged Australians – including provision of services in rural and regional Australia.

Alternatively, even were such a bank to maintain a ‘profit-footing’, at the least such dividends could be ploughed bank into crucial welfare and public services.

As the recession bites, progressive ideas are needed now more than ever. Hopefully these kind of arguments will gain exposure in the public sphere. Despite the prevailing neo-liberal ideology, there is a sense that the ‘tide could be turning’. The task of building a ‘democratic mixed economy’ is before us. Let us pursue this task with hope and determination.

Tristan Ewins, June 2009-06-17

The author would like to thank Steve Keen for his advice in research for this article.

Political Economy and the Economic Crisis Part I

Political Economy and the Economic Crisis Part I

by Lev Lafayette


What Is This Economic Crisis?

A crisis is something to be taken seriously. The word is often used haphazardly, and that denigrates its importance. So, by means of introduction, I will use the classic multi-disciplinary definition expressed by Jurgen Habermas in the opening pages of "Legitimation Crisis".

"In medicine it represents a point where, regardless of individual will, the physiological system of an individual is tested to capacity in its ability to heal. In literature, it is the point of the narrative where the protagonist either successfully confronts their antagonist, be that
the setting, circumstances or another character or, in the case of tragedy, their own weaknesses. In the environment, or social systems, it is also sensible to speak of crises, points in time and place where the capacity of the system is faced with a "life or death" test in its
abilities to continue."

An economic crisis is one of several potential crises in a social system. Typically they are described as a variety of financial crises; a sudden rush of withdrawals from depositors, leading to a run on the banks., a stock bubble, where the price far exceeds the present value of future income., or when a government is forced to massively devalue its currency due to speculative attack, or it fails to able to pay back its own bonds; the latter two often result in a capital flight. Such financial crises often result in an economic recession, usually defined when a country's Gross Domestic Product shrinks for two successive quarters. By way of example, in the third quarter of 2008, the U.S. economy shrank by 0.5%, (although that was after a 2.8% increase in the second), the economy of the UK by 0.6% in the same period, Germany by 0.5%, and Japan also by 0.5%. Of those major economies, only Japan technically fitted the description of currently being in recession at that time.

Such a decline doesn't sound like much; a drop of half a percent, or even a few percent, of a country's GDP isn't what one would consider terminal case, especially from such a high base. But there are some other considerations here. Firstly, this is truly an international problem, rather than one of localised examples; even the countries which are not in recession have very slight levels of growth. Secondly, there will be other major economies which are expected to fall into recession, such as Russia and Canada, and whilst the Chinese economy is expected to
grow, albeit at a slower rate, their manufacturing sector has just had three consecutive months of negative growth. Thirdly, this problem is expected to be lasting, probably at least until 2010, due to extremely low consumer confidence and falls in private consumption. Most importantly however, the reason why using the term 'crisis' is not hyperbole, is due to the systematic cause.

What Happened

The start of the current economic problems first became evident as far back as the end of 2005. That is when there was a sudden halt to the rampant increases in prices in the US housing market. Throughout 2006, as prices remained flat, however the share market did not reflect this. In 2006 the Dow Jones Index actually increased approximately a quarter. In 2007 real-estate prices faced significant declines and foreclosure activity increased by 79%. Twenty-five subprime mortgage estate lenders went bankrupt, including the largest lenders such as New Century Financial, American Home Mortgage and Ameriquest. The largest U.S. mortgage lender Countrywide Financial narrowly avoided bankruptcy by borrowing $11 billion from other banks, the Internet banking pioneer NetBank (not to be confused with the Commonwealth Bank of Australia service of the same name) went broke, whereas across the big pond, there was a run on the Northern Rock bank, which was eventually put into public ownership in 2008.

Amazingly, the stock speculators seemed to remain ignorant of the old adage of a collapse in share prices following a downtown in the real estate market, even though the financial collapse in South and East Asia in 1997 should have been in recent memory. Instead, the Dow Jones Index increased even further, from 12,643 in January to 14,093 at the end of October; although for most of this time the price of natural commodities, especially oil and food prices, had been increasing significantly. The price per barrel of crude oil increased from just over $40USD at the beginning of 2007 to over $130USD in the middle of 2008 (it now below $40). Between the start of 2006 and 2008, the average world price for rice rose by 217%, wheat by 136%, maize by 125% and soybeans by 107% - all of which had a dramatic effect on the poor of development countries.

The 2008 new year started jittery with all share market gains of the previous year being wiped out. A series of arrests for fraud shook the mortgage industry in the middle of year. The Bear Stearns Companies, which had been one of the largest global investment banks, was caught in
this operation and it's stock value went from a high of $133.20 to a low of $10 per share when it was purchased by JPMorgan Chase. When added to a massive reliance of the mortgage lenders to Credit Default Swaps, which insure debt holders against default, investor confidence was rather suddenly wiped out. The U.S. government was required to nationalise the Federal National Mortgage Association ("Fannie Mae"), and the Federal Home Loan Mortgage Corporation ("Freddie Mac") in September. Combined, they owned or guaranteed about half of the U.S.'s $12 trillion mortgage market. Soon afterwards, the financial services company Lehman Brothers filed for bankruptcy, despite holding assets approaching $700 billion dollars. Merrill-Lynch despite having a trillion dollars in assets, had such a poor revenue stream (negative $60 billion in 2007), that it was purchased by the Bank of America for a mere $50 billion. Goldman Sachs and Morgan Stanley survived, in a manner of speaking, by converting their status from an investment bank to bank holding company.

As the U.S. government struggled to raise support bailout, the Benelux Fortis bank required half nationalisation to the tune of €11.2 billion (US$16.3 billion). The French-Belgian bank Dexia required a government loan of €9 billion. Eventually the U.S. Congress passed its bailout
plan, which included a guarantee to bank deposits to $250,000 and included $100 billion in tax breaks. Bank deposit guarantees were also put in place by the governments of most European countries, such as Germany, Ireland, and the U.K. Wachovia, which had been the fourth
largest bank holding company in the U.S., was acquired by Wells Fargo. Russia was twice forced to suspend its trading exchanges in October, due to dramatic falls. The UK government made £25 billion available to major British banks as preference share capital, or permanent interest bearing securities, as form of partial nationalisation; in December it was revealed that the Royal Bank of Scotland and HBOS (Halifax and Bank of Scotland) had been "only hours away from being unable to open for business". By November 20, the Dow Jones had fallen to 7,507 - that is, approximately half of its value from October 2007. Ford, General Motors and Chrysler were provided an estimated short-term $15 billion bail-out. Although not a major economic player on a world scale, the Iceland the stock exchanged fell by more than 90% and with banks there holding 80% of their €50 billion foreign debt during 2008, all of Iceland's major banks were put under public administration; the estimated cost to the Icelandic economy of the financial collapse has been put at 75% of the country's entire GDP for the previous year.

The crisis, so named, is obviously on-going - on Friday the Bank of America shared price slumped 20% and Citigroup 18% - and the preceding material provides some idea of the scale of events. There have been three main strategies to deal with the problem, which I can be described as the Bush administration approach, the European approach, and a proposed Obama administration approach. The first, constituting roughly $1 trillion for a $14 trillion economy, was a set of deposit guarantees, stock purchases, tax breaks and direct aid. However when Associated Press contacted 21 major banks which received the bailout, none of them could give specific answers on how much has been spent? What it had been spent on? How much was being held in savings and what's the plan for the rest? Thomas Kelly, a spokesperson for JPMorgan Chase, which received $25 billion in emergency bailout money. "We have not disclosed that [information] to the public. We're declining to."

In contrast the European and Obama approach is, in different guises, forms of Keynesian government intervention as social liberalism or social democracy. It involves re-regulation of the financial sector, the purchase of preferential shares or outright nationalisation on one hand
and one the other, as expressed by President-elect Barak Obama, a massive government expenditure in public works and infrastructure, on electrical grids, on public transport, on dams and investment in alternative fuels, expected to be valued at another $1 trillion dollars,
although the US Federal Reserve chair, Ben Bernanke, has warned Obama that this may not be enough. Nevertheless after several years of significant neglect in this area the intervention will undoubtedly assist those most dependent on improvements in public goods and thus provide positive externalities to the US economy as a whole. Comparison with Franklin Delano Rooselvelt's "New Deal" program have, of course, already been made.

nb: 'Part Two' will follow soon.