Kenneth Hayne

On 30 January of this year, I submitted the following submission to the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. It was published on the Commission’s website as PWF.0001.0001.0129, even though it wasn’t strictly in accordance with the Commission’s Terms of Reference #5 which stated that The Commission is not required to inquire into, and may not make recommendations in relation to macro-prudential policy, regulation or oversight.

The likely reason for this restriction is that if this aspect of banking were to be investigated it may have answered the question of the ages, or even led to the truth about land prices. [!]



Australia’s national income (Y) is distributed between production factors, natural resources (R), labour (L) and capital (K) as factor incomes rent (r), wages (w) and interest (i) for a given time period (t), viz:-

Yt = rRt + wLt + iKt

As natural resources (land, the electromagnetic  spectrum, &c.) have no cost of production, rent (r) is an ‘unearned income’, or, as economists have it, a surplus or ‘economic rent’. It is therefore not the property of companies nor of any individual.

The private capitalization of land rent generates Australia’s land prices. Theoretically, were all land rent to be captured publicly, land prices must reduce to zero, as there is nothing left to capitalise. Since the early 1970s, we’ve chosen to capture less and less of the economic rent of our land via rates and land tax, and land prices have exploded exponentially – as per Table 61 of Australian Bureau of Statistics Catalogue 5204.0.

The great beneficiaries of this explosion in land prices (from circa 25% of house prices in 1970 to 75% in 2017), have been Australia’s banks which generate mortgages based upon the security of a combination of the gently increasing value of dwellings and this incredible escalation in land prices.

In fact, whereas prudent bank lending was once taken to be one-third of the main income-earner’s wage, we have seen this escalate towards ten times the combined wages of husbands and wives. As banking risk management (against the possibility of a decline in land prices) has declined, competition between banks to generate mortgages at any cost has increased, thereby acting further to inflate land price and, of course, irrational profits. (I outlined this process in “Unlocking the Riches of Oz – a case study of the social and economic costs of real estate bubbles 1972 to 2006“.)

It cannot be denied that the declining standards of risk management in banking– rising at times to control fraud (of which other submissions will provide examples)– have engendered the greatest land price bubble in Australia’s history.

Our qualms have been ‘assured’ though by two fairy tales invoked by our banks:-

(1) that record private debt is not a threat to financial stability, as bank debt is simply a matter of one group of Australians ‘lending’ to others, and

(2) there is no bubble in Australian land prices. (The latter seems always to be the narrative – at least until the bubble bursts. Following the previous bubble-burst, the ANZ Bank’s Don Mercer assured us banks would never permit this to occur again.[!]) 

I submit that should this swindle in generating land price bubbles not be held (at the very least) to instance a continuing culture of failed bank risk management, then nothing ever will.

1. An end to banks generating mortgages against bubble-inflated land prices, because banks generate ‘super profits’ against these, then expect government guarantees and bailouts when the bubble eventually bursts.

2. A return to more circumspect lending criteria, so that such bubbles are not permitted to generate.

3. A recommendation for far greater public capture of economic rent (and less taxation of wages and profits), as recommended by “Australia’s Future Tax System”, so that banks and speculators are unable to rent-seek to the extent they have.

I trust the Commission will make recommendations that delimit the socio-economic financial damage wrought by excessive bank rent-seeking behaviours as exhibited by land price bubble peaks in: 1973 (followed by the 1974-75 recession); 1981 (followed by the 1982-83 recession); 1988-89 (followed by the 1991 recession); from 1996 – current (followed by the 20xx economic depression).


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