Bryan Kavanagh | THE DEPRESSION

Finance, insurance and real estate [Michael Hudson’s ‘FIRE sector’]

I watched several sessions of the Royal Commission live.

I found I had to laugh.

You’ve got to laugh. Otherwise, you’d keep absorbing the wretched responses to searching questions from counsel assisting Commissioner Kenneth M Hayne AC QC, Ms Rowena Orr QC and Mr Michael Hodge QC, and your built-up anger would end up driving you troppo.

The FIRE sector not only provides services to its clients but more often than not, in a terrible game of mates, clearly sets out to use customers to their own disadvantage.

Wondering whether I may have mistakenly exaggerated this situation because of the case mounted on this website, I set out to read two new books about the Royal Commission. Both relentlessly confirmed my view.

Michael Roddan’s The People vs The Banks notes this is only the second such inquiry, the first being the 1936-37 Royal Commission on Monetary and Banking Systems.

Roddan’s is an inestimably comprehensive and hard-nosed account of the proceedings of the Royal Commission.

“Given the opportunity, it seemed large swathes of the industry would take as much as possible, whether you were living or dead, until there was nothing left.”

“After twenty-seven years of unbroken economic growth fuelled by the world’s longest housing boom, the country found itself sitting on a $7 trillion powder keg that was threatening to explode.”

“When Glenn Stevens stepped down as head of the Reserve Bank, he hopped across the road at Macquarie Place to Macquarie Bank, on whose board also sits former Productivity Commission chairman Gary Banks. ANZ employed former RBA boss Ian Macfarlane as a board director. Former ASIC senior executives and APRA members sit on numerous financial company boards.”

“It was refreshing, two days after the release of Hayne’s report, when RBA governor Philip Lowe questioned the profitability of the banks. …… ‘At the moment the Australian Banks are earning roughly 13 per cent return on equity,’ Lowe said. ‘When I talk to overseas bankers and ask them what return on equity they’re targeting, a number around 10 is common. The Australian banks still have higher returns on equity than many international banks. I don’t know how long that’s sustainable ….'”

Dan Ziffer also sat through the Royal Commission’s hearings, together with Roddan and a handful of patient and persistent journalists. His A Wunch Of Bankers: A Year in the Hayne Royal Commission, is a more ironic personal view of the industry’s personages and failings – as the title suggests.

“Holy shitballs. The supposedly final report had been received on Friday 6 October 2017. It was now Wednesday, and the chair wanted changes. AMP’s lawyer Mr Salter emailed Mr Mavrakis with phrases that would cripple Brenner’s career:

I spoke to Catherine earlier today and she had a number of comments which she would like incorporated into the copy of the report to be handed to ASIC on Monday … Include a statement to the effect that Craig Meller was unaware of the practices or their illegality.

“Mr Salter’s email ended with an instruction to Mr Mavrakis: ‘Please give some thought about whether you have other recommendations regarding how we should approach ASIC to minimise the regulatory consequences.'”

“And as we would find out in grim and gross detail, sometimes when people are alone in the dark with your money, you are the furthest thing from their minds.”

Ziffer has amusing asides:

“I’m starting to wonder if Dr Henry knows that all of this is being broadcast. He’s not just aggressively questioning a brief that’s been brought to him by a junior-burger underling at Treasury or in the boardroom. Tap the mic: this thing’s on right?”

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I admit to personally feeling concerned for Ken Henry the moment he transitioned from Treasury to the NAB. Moving into a bank during Australia’s greatest-ever real estate boom was always going to be ‘no-win’.

I was amazed that Macquarie Bank got out of the RC so lightly. In Unlocking the Riches of Oz: A case study of the social and economic costs of real estate bubbles 1972 to 2006, I noted:

We witness instead the private plunder of vast slabs of community resource rents, whether by Russian oligarchs or Nigerian oil crooks abroad, or to a lesser extent by Macquarie Bank and leveraged buyouts of our natural resources at home. The cost to everybody but the proponents of these insidious rent-seeking techniques is an increasingly pernicious tax system, higher and higher land prices and declining levels of social welfare.

But then I suppose we should note that the banks had precluded at Item (l) such overarching macroeconomic considerations from the Royal Commission’s brief when they drew it up with Prime Minister Malcolm Turnbull:

AND We further declare that you are not required by these Our Letters Patent to inquire, or continue to inquire, into a particular matter to the extent that the matter relates to macro-prudential policy and regulation.

What! Not inquire into bank rent-seeking via easy credit: the inflation of real estate bubbles for super-profit purposes – a point unfortunately not picked up by either one of these otherwise most engaging books.

OK, so the finance minister Mathias Cormann admits Australia is facing “global headwinds”. That’s a start.

But are they global or local headwinds, Mathias? I suppose they may be seen as global insofar as it’s part of the general problem: the world has been sinking too much private debt into land price bubbles. And, by definition, bubbles have a habit of bursting.

But if land has no cost of production, how can it possibly be so expensive? Neocon economists tell us it’s simply a lack of supply. But, real estate valuers might cut to the chase to explain high land prices are indicative of insufficient public capture of land rent. That is to say, to the extent we permit the private capture of land rent, so will land rents be capitalised into higher and higher land prices; especially if the Reserve Bank of Australia looks the other way as the banks shovel easy credit into the bubble in land prices we’ve experienced since 1996. That’s right: since 1996.

Now I see the RBA governor, Philip Lowe, says he can’t fix our local economic mess all by himself by tweaking the cash rate. He needs the government to engage in fiscal reform.

That’s quite right, Philip. I tried to tell Glenn Stevens that back in 2014.