What are banks for?



The Royal Commission into the Banking and Finance Industry has revealed many nefarious practices and activities. They should be condemned. But we should not allow the media, government or broader public discourse to interpret the findings of the royal commission through a moral lens that portrays the practices as the work of corrupt or greedy individuals.

 Cartoon by Chris JohnstonWhile insisting that wrongdoers are held to account, we must resist the tendency to throw them under a bus and be done with it. Those individuals and those practices are symptomatic of much bigger structural problems. The opening of the finance sector to scrutiny provides an opportunity to examine its position in the structure of the contemporary Australian political-economy, and, most importantly, to make the changes necessary to place it at the service of the people, rather than allowing it to continue to prey on us.

Many commentators have expressed surprise at the level of predatory behaviour exhibited by banks. But why should we be surprised? There are numerous structural and systemic reasons why banks and bankers should behave in these ways, mostly to do with the fact that they have too much power within the economic system.

First, although banking services, especially the provision of credit, are essential to the functioning of a modern economy, and to the lives of virtually every individual, to the extent that it is almost impossible to participate in society without using banks, those services are not treated as essential services. The primary driver of banking services and their regulation is private profit, not the need to maintain an essential service for the public good.

Second, because banks have become so big, so powerful and so important to the maintenance of the system of financialised capitalism — as the Global Financial Crisis showed — governments have decided that they are 'too big to fail'. Bank bailouts overseas, and government guarantees on deposits in Australia, fundamentally shifted the risk of bankers' activities to the taxpayer, telling bankers that normal business rules need not apply to them.

Third, banks play an inordinately large role in the Australian economy, as manifested in the proportion of stock market value caught up in bank shares — around 30 per cent of the ASX. This fact has deep causes and ramifications.

It is largely a result of the fact that the Australian economy, as has been the case with much of the rest of the rich world over the last couple of decades, has been driven by credit-spurred consumption growth and real estate price inflation. The ratio of Australian household debt to income is around 150 per cent, close to the highest in the world. Australian banks are almost uniquely exposed to mortgage debt. This makes our banks a systemic risk, but also gives them systemic (including political) power.


"The appalling behaviour of the banks and individual bankers is only symptomatic of a finance sector that no longer performs the role that it should have."


Fourth, and following from three above, the extent to which real estate plays a major economic (and cultural) role in Australia, and the extremely high prices for houses, mean that banks have very many of us over a barrel.

With banks and bankers exercising so much power over the economy and individuals, is it any wonder that they are prone to abuse that power, especially in a system that prioritises profit and returns to shareholders over the public good?

Tackling the bad behaviour of banks will only be meaningful if these structural problems are dealt with. This also means asking some much larger questions, questions that have been given little consideration in Australia up to now. The two most important are these: How is money created in a modern economy? What are banks for?

Most people probably think it is the central bank that 'prints' money, and, as Ann Pettifor (The Production of Money) says, 'most economists treat money as if it were "neutral" or simply a "veil" over economic transactions. They regard bankers as simple intermediaries between savers and borrowers, and the rate of interest as a "natural" rate responding to the demand for, and supply of money.'

None of this is true. Private commercial banks are responsible for the creation of 95 per cent of the money circulating in the economy. They create money every time they respond to a personal or business loan application by depositing money into the applicant's bank account. They do not have — indeed, could never have — the same amount in deposits as they loan.

Some important things flow from this. First, given the importance of money and credit creation to the wellbeing of all modern economies, they have a profound importance for the broad public interest. This means that the public interest must be given primary consideration in the regulation of the banking and finance industry. This is not the case today. Banks are largely regulated in the interests of their shareholders. The Sovereign Money movement even advocates that the ability of private banks to create a nation's money supply be curtailed by giving the central bank the power to create credit.

Second, as Pettifor argues, the fact that bankers are not, in fact, just intermediaries between savers and borrowers, and that, contrary to mainstream economics, money is not a commodity whose price (interest rate) is regulated by scarcity (it is not like gold or silver, for instance), means that 'there is never a shortage of money for society's most important needs'.

We are told that we don't have enough money, for instance, to decarbonise the economy at a rate needed to stop global warming, yet we were, virtually overnight, able to find hundreds and hundreds of billions to shore up the private banking system at the height of the Global Financial Crisis in 2008. It is not a lack of money that is the problem — it is a matter of who controls its creation and distribution.

One doesn't have to believe in the full nationalisation of the banking system, or in the ideas of the Sovereign Money movement, to believe that the control of our monetary system by an overly-powerful and under-regulated finance sector is bad for our economy and our society. The massive credit (i.e. debt) bubble that has been blown by our big four banks, with the encouragement of successive governments, is a real and present danger.

The appalling behaviour of the banks and individual bankers is only symptomatic of a finance sector that no longer performs the role that it should have — providing access to credit and money to ensure a functioning economy that serves the needs of the society in which that economy is embedded. It is high time that we had a discussion about that.



Colin LongColin Long is a Victorian trade union activist.

Topic tags: Colin Long, banks, financial services royal commission



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Existing comments

The really depressing thing about this essay is that it says nothing that hasn't been said a hundred times before over decades. The swindle perpetrated by the imposition of a fee for the use of money created out of thin air has been understood and condemned for decades; equally understood and warned against are levels of national debt impossible to discharge, a time bomb waiting to blow up in our faces. And while we await this destruction we tolerate a political system utterly incapable of dealing with it. Depressing is too mild a word.

Paul | 21 January 2019  

Thank you Collin; this is a very good analysis of a maturity that is usually absent in much of what one reads. As always this is a complex set of issues: at basic fault is the political class but they are forced into bad and in the long term counter-productive policy by populist public demands for easy short term solutions. And then there are "rent seekers" (such a bankers and much of the finance industry) who are are ready to rip-off the rest of us when given any chance. But easy money, low interest and high borrowing by itself and everyone else has been core government policy to tide us over the loss of mining investment and the results of the GFC. At one level it has been highly successful, but there is now the inevitable hangover from the binge with huge public and private debt and housing inflation. The rich have got richer, CEOs and boards have paid themselves huge amounts of money, and even the rest of us by and large have done quite well through high employment rates and high public spending. There are exceptions but in fact the wealth gap is a bit of a myth and we are all (just about) complicit in this mess together. But we know what needs to be done: as a country we need to face up to the situation and take the pain. This needs to include big tax reform (including tax on wealth such as our homes), less government spending way beyond our means, with some overall increase in tax but done in an economy-friendly high-efficiency way (less company tax on profits and less tax on most salaries), better energy policy (probably some variant of Turbull`s NEG with the best balance achievable between lowering pollution, but also minimising as much as possible costs to individuals and the community/economy), and major focus on industrial productivity increases. However, for the most part we are going in the opposite direction, and we cannot any longer really blame the bankers! Presumably we will have to wait for the crash, and do some of these things at the worse possible time with huge public trauma of recession and austerity. Why would anyone this year want to be in government?!

Eugene | 21 January 2019  

All this angst about a system instigated by two saints of the Labor movement, Hawke and Keating, supported by the unions.

john frawley | 22 January 2019  

Banks started out in late medieval times as warehouses for gold. You plonked your sack of gold with the bank, you pocketed a receipt and you paid a small sum for the security of your deposit. IE, the "interest" rate was negative! You could recover your deposit at any time. But banks started lending out from these deposits, hoping that not all depositors would call on their gold at the same time. This was the beginning of fractional reserve. Since the stated claims on the receipts issued amounted to more than was actually deposited in the bank, this was just a new species of fraud. Governments, who are supposed to defend society against fraud and force, readily approved, since they were leading beneficiaries of the practice. And so it goes. The state by its refusal to denounce this fraud - nay, by its huge support of same - is the cause of the corruption that is the banking system. At least in the old days, rival banks and other whistleblowers called out banks that lent outrageously over their deposits. Now the state has control, it guarantees banks against insolvency ... by roping in the taxpayer or the hapless victim of inflationary fiat money printing, to bail them out, a la the global financial crash of 2007-8. It's "crony capitalism" - a total disgrace, and totally at odds with free market capitalism. See Murray N Rothbard's "What Has Government Done To Our Money?" (google for a free online pdf) for a searing analysis.

HH | 23 January 2019  

I hope you were paying attention john frawley. As HH has pointed out in his/her inimitable style, the angst inducing system was set in place long, long before Bob Hawke and Paul Keating were even the proverbial gleam in someone's eye. Heartfelt thanks to HH for coming to the defence of Hawke, Keating and the unions.

Paul | 23 January 2019  

Well said Colin. Not many have this level of understanding of a deliberately opaque system, made worse by economists who totally misunderstand it. Readers can learn a bit more here: http://betternaturebooks.net.au/index.php/my-books/little-green/ and in related writing.

Geoff Davies | 27 January 2019  

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