It seems unclear whether the author is criticising competition, or the lack of it; regulation, or the lack of it.

The author seems to assume that the regulators should be policing, and should be policing 'conscionability'. But he doesn't say what that is. Equity already provides remedies for unconscionable conduct, but that is clearly not what the author is referring to. He means unconscionable in an undefined regulatory sense, applying to purchases by banks of other banking businesses. But how is a bank, or anyone, to know whether a purchase is okay, or is 'plunder'? The author doesn't say; and clearly it can be nothing but arbitrary opinion in any case.

While the subject is the desirability of more bank competition, how much competition does the ACCC have? How much competition does the Commonwealth have? Europe's Competition Commission was a monopolly, non? Does anyone voluntarily pay for the service of these monopolists? No. What credibility do they have as regulators of competition?

"Meanwhile, bank incautiousness during the boom has been complemented by bank bastardry during the crisis. They have scrambled to appropriate security over assets of failed companies whose flawed business models they had previously underwritten (Babcock & Brown, Opes Prime)."

No-one has a crystal ball. The prospect of profit and risk of loss is on, and should be on, the entrepreneur, not the bank. It is 'incautious' to continue lend to anyone who may not be able to repay the loan.

Why do you think banks get security? It is entirely appropriate for lenders to use it to cover themselves. You seem to misunderstand the function of banking. Give away your own money.

"They have forced companies to close plants (Pacific Brands) at short notice, and to divest assets at under value (OZMinerals, PaperlinX), to clean up their own fractured balance sheets."

What causes failing companies to close at short notice is their losses, which are caused by the fact that they are making stuff that consumers don't want to buy.

You have not given any reason why banks should not resile from loss-making activities.

"Lenders of money have been held in odium, at all times and among all peoples" Mises. Although the author is an academic in political economy, he offers no exception to the general prejudice of the ignorant, it seems.

Certainly none of what you say is any recommendation of more, rather than less regulation of banking.

What is causing the four banks to be the cozy anti-competitive cartel that they are is government licensing - derrr. There is no reason to abandon the principle of free entreprise in banking. The only necessity is for the general law against fraud to be applied in banking transactions as it is in other businesses.

The government having arrogated to itself the privilege of deciding who can enter the business of banking, then declares it necessary to police mergers and acquisitions to ensure 'competition'. The government having arrogated to itself the power to control the money supply and lower interest rates below the market rate, then declares it necessary to police banks for 'incautious lending' and 'predatory practices'. Government having co-opted the banks into its fractional reserve Ponzi scheme, then declares that it needs to police reserves and compulsorily insure deposits!

Apart from the enforcement of laws of contract, property, equity and fraud, government should no more be in the business of banking, than of pizzas or shoes. Government intervention in banking is a fraud on the people.

Damned usurers the lot of them. How come you godbotherers dont object? Didnt your god say usury was wrong?

Peter Hume,

My observation of Banks from the inside before leaving for academia is, "all the animal's equal but some animals are more equal than others". In the 1990s, in Head Office, I had close contact with senior managers within Commercial Banking who were very concerned with Board validated lending to Western Australian entrepreneurs contravening the conservative guidelinesof Credit Policy and Risk Assessment. Also, while they didn't go under, international major institutional buyers of Australian farm produce essentially ignored their multimillion dollar established limits, based on the huge size of the organisations, rather than the value of security held.

Disclosure is another issue. I once had the task of reconciling aspects of one Bank's General Ledger with its Credi's Division's unproductive loans portfolio. What I found was that the Bank in several instance was not declaring the principal and interest of bad loans, rather splitting the principal to an ordinary account (account type 101) and ninety day overdue interest to account type 104 (unproductive). At the time (c. 1992), the Bank was reporting four billion dollars at risk, the true figure was six billion dollars. Without an audit, no one would pick this up, as statutory reporting was automated and the programme searched for account type 104 (and 102 & 103), not account type 101, for loans at highest risk.

It is also true that instructions, in a pre-merge Bank Rule Book,required local branch managers to refer iffy loan applications up the chain of command, for some classifications of customer, e.g., politicians and judges. That is, a line banch manager couldn't turn a loan application the G-G or the PM if the application looked poor

Thank you Oliver for your inside dope on crucial aspects of banking culture that never make it into the public domain.

Re the PH comments. Life is too short to get involved in an exchange with an Austrian School devoteel, whose indubitable truths are rooted in the soundest of a priori principles. One can sympathise with the Austrians' disgust with the rents appropriated by banks licensed by the state, but let us hone in on the here and now.

PH appears to have an other-worldly picture of the bank-customer relationship.
1. Unconscionability? s.51 (especially s.51AC, business to business unconscionability) and s.52 (misleading representation) of the Trade Practices Act. The ASIC Amendment ACt 2001 moved unconscionability re financial products to ASIC, and s.12 of the ASIC Act effectively replicates the comparable sections of the Trade Practices Act. ASIC refuses to acknowledge its responsibilities under s.12 of its Act, and tells complainants to buggar off (as did the ACCC when it had responsibility before March 2002).
2. A contract is a contract is a contract. Not quite. some contracts are innately unconscionable. The most fundamental facility in banking, the overdraft, is in many cases innately unconscionable (NAB: 'the Bank may cancel the facility at any time whether or not you are in breach of this agreement'!). Moreover, banks will break a contract at will, a phenomenon rooted in the unequal bargaining power between lender and small business or retail borrower. More fundamentally, there is typically an open-ended character to lender-borrower relationships, for which the term 'incomplete contract' provides insight into the relationship's character. The term was devised by legal academics to describe the franchisor-franchisee relationship, but it is applicable to most small business relationships with corporates on the other side of the 'market'. Of course the greatest manifestation of the incomplete contract is in the employer-employee relationship, which is precisely why a separate legal apparatus has arisen (and separate tribunals) in that domain. Powerless bank retail customers have an elaborate system of regulation to offset the unequal relationship. Small business, alas, does not. Hence the impasse. To be continued.

Continued from previous.

3. Security. of course banks take security over borrower assets. Indeed, re small business, banks will perennially take security (especially over the family home) because doing the hard yards into borrower proposal prospects is just too much hard work, requiring real skills, skills which banks have jettisoned in the age of deregulation. But the instances that I describe in my piece above refer to lending for which the banks took inadequate or no security (perennial when lending to larger customers because they want the business, or are too lazy to do the paper work). The banks then steal security when the business is going belly-up, ripping off other creditor priorities over assets. And this just after the Bell Resources decision damning precisely this practice was handed down after 20 years deliberation.
4. equity and fraud? both furphies. The Equity courts are not available to bank victims, period. The legal profession treats equity like a bad smell. Fraud is a criminal offfense, and the police won't touch bank criminality. back to civil jurisdiction, as in point 1 above. in short, banks are above the law (save for the marginal issue of disability unconscionability, following Amadio.)

And so on, ad infinitum. But this whole unsavoury area of bank malpractice and legal and judicial complicity requires another article or three.

It seems to me that if we join the dots, our taxation system
has as much to do with the present structure of our banking system,
as anything.

Australians don't generally regard bank deposits as a great way
of saving, for by the time inflation has taken half of real returns
and marginal taxation the other half, not much is left. So rather
then leave money unproductively in bank deposits, the average
punter will prefer to buy another house etc, or spend it.

The real effect of this is that banks need to borrow roughly
half of their money from overseas. That is the half that is lent
to SME, at higher interest rates.

Now a small, less profitable bank is going to struggle to borrow
from international markets. As we have seen during the GFC, there
was a flight to quality and many small lenders simply could not
compete. A number of overseas banks pulled the plug on Australia
and left. So our large and profitable banks are thriving.

To secure better funding for SME, what we need is more domestic
saving. That won't happen whilst savers are being robbed by
the tax office, which refuses to allow for inflation losses
on deposits invested. Punters are not silly. Indexing interest
returns to allow for inflation, could easily fix it.

The banks, along with all big business, have been shown the door to guaranteed wealth beyond the dreams of kings and potentates, simply by becoming 'too big to be allowed to fail'.
Without regulation, the big four would very quickly become the big one.
The essential problem with unregulated competition (like any race) is that it inevitably results in one winner, and an almost infinite number of losers.

All the arguments for intervention display a double standard.

Grim wants to police banking because it might become a monopoly – but government already is a monopoly.

Yabby is right that the reason for the flight of savings into real estate is because of taxation and the sneak tax of inflation. Without these depredations, people could provide for their retirement by savings.

Thus governments have caused the GFC firstly by taxing and sneak-taxing savings; secondly by creating banking cartels; thirdly by enabling and protecting the fractional reserve Ponzi scheme; fourthly by the Ponzi scheme of fiat money; fifthly by credit expansion; sixthly by insuring deposits; seventhly by socializing losses; eighthly by directing it into home ownership…..

And then the interventionists look on the resulting unfair uneconomical mess and blame unregulated capitalism, and say we need more price-rigging!

Thus this belief system is irrational because it is unfalsifiable – all evidence and reason against it is taken as showing that there is a need for more.

Yet if it is true that government has this super-competence, why not abolish private ownership of the means of production? Well, we all know the answer to that, don’t we?

There is no reason to think that government has the knowledge, the competence, or the disinterestedness to manage the economy as a whole. That being so, what is it about the existence of the private sector that is supposed to confer on government a greater competence to manage what it did not have the power to do even with total power?

All government interventions are intended to override the market price and substitute a different price. The rationale is that government represents society. But where do people think the market prices are coming from? They come from the voluntary elections of all the people in society, repeated every day, in buying and selling, or abstaining from buying and selling. These voluntary interactions are far more representative of society than government ever has been or ever could be.

All government can bring is a legal monopoly on the use of weaponry and prisons; (cont.)

(cont.) voting once every three years and under compulsion; no law against politicians lying to get in; no way to distinguish offers you accept from those you reject; no way to withhold payment; an ethic that forced taking is right; no requirement to account to the taxpayer for money taken or services provided; many hidden taxes and charges; the routine ability for vested interests to get benefits paid for with money confiscated from someone else; two major parties with no significant difference on almost all areas of policy, and bureaucracies guided by rules and regulations.

It is a myth in the true sense of the word, without basis in evidence or reason, that government is more representative of society and the greater good, than society’s voluntary interactions that produce all the wealth that government confiscates.

Evan, your call for more regulation does not distinguish three distinct classes of problem:
1. Problems caused by government regulation in the first place;
2. Problems that government is justified in regulating, eg fraud; but fails to provide a practical remedy for;
3. Problems that government is not justified in regulating in the first place – so-called ‘unequal bargaining power’.

Power means being able to force the other party to do what you want, even if they don’t agree, in the final analysis using weapons or threats of weapons. It has no application to market transactions in which force and fraud are illegal; but characterizes all government – a double standard.

Secondly, if you buy milk for a dollar, that means you value the milk more than the dollar, and the milkman the dollar more than the milk. People’s unequal valuation of the same thing underlies all voluntary transactions, and therefore all economic activity, and therefore human society itself. There is no reason whatsoever why policy should try to make bargaining power ‘equal’. It is not just meaningless in theory and impossible in practice. It directs scarce capital into purposes the specific criterion of which is that it would be loss-making, and therefore satisfy human wants less rather than more.

I have worked in a couple of banks over the last few years.
They are essentially daycare for adults, very little productive work is done by staff; mostly paper shuffling. Most banks have at least 18 levels of mis-management, computers do most of the real "banking" and "accounting". The people side of things is generally "un-accounting"...or how to hide things in the figures.
Having been insulated from real competition, profits are obscene and essentially unlimited. Even in a year where they are bailed out they are allowed to profit and pay bonuses.
If a farm were to sell off it's tractors, harvesters, etc and instead hire 5 expensive accountants...would it survive long?
We have sold off many productive industries and finance is now 30% of our GDP. This "useless paper shuffle" tax on economy is having an impact now...hence the changes to foreign ownership of houses (stripped away with no public notice), the extreme migrant intake and the frantic property spruiking.
We need to restrict lending to actual savings and put a tariff on imported money.
I wonder which party will be blamed for the next "recession we had to have"...the current crop of leaders are clearly in denial.

Say again, Ozandy?

>>We need to restrict lending to actual savings...<<

How is that supposed to help anything, pray tell?

If I have savings, I don't need to borrow, do I? And if you need to borrow some of my savings - boy, are you going to pay for the privilege!

It's a scarcity thing, really.

For a start, consider for a moment exactly how many Australian families actually are debt-free, right now. Then subtract from that number those who live from pay-day to pay-day, with a balance that approaches zero each period, just before it is topped up again.

Then look at the corporate sector, extract their borrowings from their balance sheet, and see what you are left with

That is your potential pool of funds to lend.

Are you really going to allow your feckless fellow-countryman to dip into this pool for less than an arm and a leg? Consider the risk, of lending to someone who doesn't have the smarts to save?

Nup. Won't work.

Unless I'm missing something, that is always a possiblity. In which case you can explain to me the magic ingredient that I have overlooked.

>>...and put a tariff on imported money.<<

Errr... does that include payments for goods I export to other countries, in order to help our balance of payments?

Or are you simply suggesting some kind of fortress Australia, where we pretend that the outside world doesn't exist?

In which case, you'd better be prepared to take a massive hit in your standard of living, and explain to your grandchildren why you felt justified in living the good life yourself, but forbidding them to do the same.

We live in the world as it is, not as you think might have been better, if only...