CAPITAL IN THE TWENTIETH CENTURY
The day after the government announced the royal commission, Anna Bligh phoned the treasurer’s office and pleaded with Scott Morrison’s staff to limit how far back in time the commission could investigate bad behaviour.
Bligh, a former Queensland Labor premier, also tried to twist the arm of Treasury to ensure the government expanded the terms of reference for the commission to ensure it was not just the misdeeds of the major banks and their various divisions that were going to be aired. She wanted it to investigate misconduct in rival firms, mortgage brokers and unregulated ‘shadow’ banks.
We know this because at 5 p.m. the day after the inquiry was announced, one of the treasurer’s staffers passed on the ABA’s concerns, made through Bligh, to senior Treasury officials. Her wishes were passed on to government mandarins including Treasury Secretary John Fraser and Morrison’s own chief of staff, Phil Gaetjens—who would later replace Fraser to become secretary himself. Bligh’s ‘preference’ was to limit the terms of reference ‘as to how far back’ the commissioner could venture.
In documents unearthed using freedom of information laws, Bligh also wanted to make sure the inquiry had the ability to disregard some scandals thought to be superfluous to the process: ‘i.e. has the discretion not to inquire and can exercise this discretion where cases are too far back/too long ago’, the Treasury official dutifully explained to Morrison.
While the terms never explicitly restricted the time frame able to be investigated, the first order of the inquiry’s business was to demand from the financial companies extensive lists of any possible misconduct going back ten years. A lot can go wrong in a decade—but for some, including Nationals senator John ‘Wacka’ Williams, it didn’t go back far enough.
Whenever Wacka calls you, he has invariably just finished hammering in steel posts on his property, rounding up sheep, cutting firewood, or warning that his reception is about to cut out as he drives through a black spot between two regional towns with unfamiliar names.
This time, the former sheep shearer had just finished mending a fence down the back paddock on his 160-hectare farm, Rob Roy, near Inverell in northern NSW, when he picked up the phone. ‘I just sat down for a cup of tea,’ Wacka told me. ‘I had the iPad out to read the news and I’ve seen your story.’ My article detailing Bligh’s attempts to limit the royal commission had just been published, and Wacka wanted to share his thoughts.
The outspoken senator burst onto the political scene in 2008 and made his name as a fearless critic of white-collar crime and corporate malfeasance, whether dodgy bankers, ruthless liquidators or parasitic financial planners. With the help of Commonwealth Bank whistle-blower Jeff Morris, he helped unearth the multimillion-dollar financial planning scandal that had festered in the nation’s biggest lender for years and was broken to the public by Fairfax reporter Adele Ferguson. Wacka’s ambition to drive hard-hitting investigations through Senate committees had made him a sworn enemy of CBA.
He even had firsthand experience of the damage that could be wrought by unruly financial institutions. The senator had lost a previous property, along with a marriage, after his family fell victim to a bad foreign-exchange loan spruiked to him—and many other farmers—by CBA in the 1980s.
But Wacka didn’t let his own history get in the way of looking to mend fences with the banks. He had maintained a good relationship with the ABA’s previous boss, Steve Münchenberg, and when Bligh was announced as the association’s new chief executive in early 2017 he stuck out his hand across the ideological divide. However, Bligh had never returned Wacka’s phone call or accepted his invitation to have a meeting. So be it, he’d thought.
Now, the idea that Bligh had pressured the government to restrict the royal commission he’d fought hard to establish incensed him.
‘The last time we had a royal commission was in 1936 when the Country Party leader, Sir Earle Page, forced one,’ Wacka said. ‘We haven’t had a royal commission into the banks ever since. As far as I am concerned, it’s a long time from 1936 to now, and I don’t care how far you have to go back to bring out the wrongdoing, clean out the dirty laundry and set us in the right direction.’
At the end of 1935, Prime Minister Joe Lyons was just a year and a bit into leading the country. He was soon forced to announce that the government would hold a royal commission into the behaviour of the banks.
Lyons, the leader of the United Australia Party, had promised such an inquiry as part of a deal to form a coalition government with the Country Party, led by Sir Earle Page, following the 1934 election. Much like in 2018, the majority government party had fiercely resisted the establishment of a banking inquiry, which was forced on it by its minority coalition partner. Lyons didn’t want to upset the financial interests that had backed his rise to leader of the UAP, but after a year of fruitlessly resisting, he buckled. The wide-ranging banking inquiry was established and would leave its mark on the financial system for decades.
It leaves one thinking that corporate boards should perhaps have at least one director with an interest in history. Directors are sought out for their corporate memory of institutions, economic cycles and markets. However, while this knowledge has been built up from decades of following the market in financial institutions, there are far longer cycles of economic and political upheaval, and the ramifications of these slow-moving social cycles are much less understood at the corporate executive level.
The public discontent that had driven the establishment of what was until very recently Australia’s only royal commission into banking was resuscitated eighty years after Lyon’s banking royal commission handed down its report.
The 1936–37 Royal Commission on Monetary and Banking Systems aimed at putting the banks on trial, because they were seen to have played a role in dragging out the Great Depression in the late 1920s and early 30s. The banks, Page’s Country Party argued, had sharpened the pain during the economic downturn by restricting credit and calling in teetering loans.
There may have been some intergenerational antagonism behind the Country Party’s push for the commission. Page’s own father had been bankrupted during the 1893 Australian financial crisis, the deepest and most severe in the country’s history.
While the 1936 royal commission did take a close look at the commercial banks, the hearings ended up being dominated by a focus on the regulatory architecture of the financial system, and whether central banks could have done more to stave off the Depression. The then government-owned Commonwealth Bank, which from the 1920s onward had been given some responsibilities for central banking, had refused to lend with gusto during the economic downturn, in direct conflict with what Treasurer Edward Theodore in the Scullin Labor government had urged them to do.
Many in the Labor government saw this as an act of political betrayal by the ‘people’s bank’, and CBA was accused of succumbing to the financial interests it had been created to counter. Fallout from the dispute between the bank and the Scullin Government would ultimately cause the government to fall, resulting in Labor honing its political message at the next election to call for greater government control over banking and monetary policy.
After calling the commission under pressure from the Country Party, Lyon’s treasurer, Richard Casey, made its terms of reference extremely broad and, unlike the contemporary royal commission, without any input from the banks. He gave a team of six commissioners instructions to ‘inquire into the monetary and banking systems at present in operation in Australia, and to report whether any, and if so what, alterations are desirable in the interests of the people of Australia as a whole, and the manner in which any such alterations should be effected’.
Casey was sceptical as to whether anything would be gained from the exercise. Privately, he told former prime minister Stanley Bruce he was initially ‘horrified’ by the prospect of the commission. Publicly, Casey told a church congregation that the royal commission would be useful, even if it showed only how the present system could be improved.
It did just that. The commission attracted a bevy of pointy-headed experts who wanted to reshape the country’s financial system. Leslie Melville, a renowned Australian economist, took a whole day’s hearing just to read out his statement, while Professor Torleiv Hytten was in the witness stand for five days to answer questions based on his own lengthy submission. The inquiry coincided with the publication of Maynard Keynes’ landmark economic tome, The General Theory of Employment, Interest and Money, which heavily influenced the economists who gave evidence. Their evidence was better informed and thought through than the evidence put forward by the other banking witnesses, especially Commonwealth Bank officials, who gave tepid responses as they were filled with dread about where the royal commission could go.
One of the major causes of the Depression in Australia had been the nation’s unwavering faith in sticking to the ‘gold standard’ of a fixed exchange rate for the currency. The trouble with holding the foreign exchange rate steady when a country’s exports are crashing, as the value of wool did just before the Depression, is that governments need to respond by devaluing the currency. But CBA employees argued that maintaining the country’s exchange rate was paramount.
This was dismissed by the economists giving evidence, who generally agreed that the exchange rate should play second fiddle to ensuring the stability of the domestic economy, meaning that rather than cutting off borrowers and refraining from lending vigorously during a crisis—as CBA was accused of doing during the Depression—the banks needed to sell loans and stimulate the economy. The CBA central bank had managed to stave off inflation during the downturn, but it had done so by crushing the economy.
The 1936–37 royal commission led to a strengthening and clarification of CBA’s powers and recommended decimal coinage, among other proposals. However, it specifically said the government shouldn’t step in and nationalise the private trading banks, as Labor had wanted it to.
Ben Chifley, who was at this point an ambitious junior minister in the Scullin Government still years away from taking the prime ministership, had been appointed as one of the commissioners on the inquiry to appease Labor. In a three-page dissenting addendum to the royal commission, he put forward the case for bank nationalisation. Although he had an interest in economics and banking, he wrote his report without citing any of the evidence presented before the commission while arguing that none of the evidence he had heard convinced him to accept the continuation of private banking.
In his now-infamous dissent, Chifley said there was ‘no possibility of well-ordered progress being made in the community under a system in which there are privately owned trading banks’. ‘Banks differ from any other form of business because any action, good or bad, by a banking system affects almost every phase of national life,’ he said. ‘The effect on the community of the action of most companies is of little moment compared with the effects of the actions of banking companies.’
Chifley proposed limiting profits on the banks at a cap of 5 per cent because of ‘their privileged position of semi-monopolistic public utilities’: ‘In the public interest, there should be some restriction on the profit which they are able to make from the supply of necessary services that the community is unable to obtain from other sources.’
It wasn’t until Chifley, a former train driver with four years’ high school education, actually became PM that he, albeit unsuccessfully, attempted to nationalise the banks, in 1948. But as the collapse of the government-owned State Bank of Victoria in 1990 showed, Australia may consider itself lucky to have missed out on Chifley’s government takeover of commercial lenders. The public antagonism to highly profitable banks and the role the lenders play in the fortunes or demise of the economy is still pervasive today.
Perhaps if we listened more closely to history, it might not have to repeat itself.
Looking at the establishment of the 2018 royal commission is like holding a mirror to the establishment of the banking inquiry launched by Lyons. In both cases, the underlying drivers of disenchantment with the economy and the financial system follow remarkably similar arcs.
Take, for example, the fact that at the start of the Great Depression there were just ten trading banks in Australia following a decade of mergers and takeovers among private lenders. Because of this concentration, the banking system had become far less competitive than in previous generations.
The financial crisis of 1893 had been sparked in part by incredibly loose lending. But over the next few decades, the banks changed their habits and became stiflingly conservative. By the 1920s, banks in Sydney and Melbourne were acting like a cartel, pricing their products at remarkably similar points.
Although no private bank in Australia collapsed during the Depression, the public was not assuaged by the relative stability of the local financial system compared to offshore economies. The financial strength of the sector did nothing to prevent the banks from being used as a political lightning rod for the apparent damage wrought on the Australian economy during the downturn. About a month before the 1934 election, Labor opposition leader James Scullin delivered his policy speech at the Richmond Town Hall, and most of it focused on reforming the financial system.
Lyons, standing under the UAP banner, exhausted his political capital by continuing to defend the private banks. He claimed the conservative lending standards of the banks had saved the country from the brink of collapse during the recession. Meanwhile, Page’s Country Party was still hung up on the tightened availability of credit during the early years of the Depression, which had a huge impact on farmers attempting to get loans.
In the elections of both 1934 and 2016, Australians were suffering a hangover from a global banking crisis, pushed along by a financial system that was seen as not acting in their interests.
The early twentieth century was beset by a marked trend towards higher inequality, one that the Great Depression disrupted because it destroyed the massive amounts of wealth collected by the top echelons of society. But as the accumulated wealth held by the rich was demolished during the Wall Street crash of 1929, which quickly infected Australia’s own wealthy, the country’s broader population acutely felt the sting of the downturn. Unemployment in Australia hit a record-high 20 per cent in 1930, and workers suffered low wages and lost opportunities for economic growth for years afterwards.
Today, the massive amounts of wealth collected among elite circles is yet to be destroyed by a similar crash, but it is also not being filtered back through society by some sort of post-world-war redistribution program, as happened across the developed world following the 1939–45 war. Because of this, inequality across the developed world has now risen to its highest point since just before the Depression.
Shortly after the election of Kevin Rudd’s Labor government in 2007, the largest financial crisis since the Great Depression took the world, in Rudd’s own words, by ‘economic shitstorm’.
Inequality had barely rated a mention in the lead-up to the change in government. Australia was at the end of a decade-long economic boom, and the windfalls were being scattered around the country in the form of massive wage increases, huge spending programs fuelled by healthy tax revenue, and skyrocketing property prices. Neither Rudd nor Opposition treasurer Wayne Swan carved out financial sector reform as a key part of his election platform.
The global financial crisis (GFC) changed everything. Although it was never as severe or prolonged as the Great Depression, it brought with it ramifications that fundamentally altered the way in which the economy enriched different parts of society.
The crisis was essentially triggered by a housing-market crash in the US after banks sold unfathomable numbers of dodgy loans to borrowers who could never have afforded to repay them. Major global financial institutions found themselves at risk of collapse because the financial system had become so intertwined. Huge investment bonds, packed full of ‘subprime’ home loans, were sold to investors and institutions across the world. Overly relaxed regulation played a huge part in the crash, and private financial firms had become blind to the risks they were taking on, all in the pursuit of super-large profits.
The Australian banks were well insulated from the US subprime housing crash, but the Reserve Bank was still forced to dramatically lower interest rates in a bid to rescue the faltering economy. As workers were laid off, and as investment and business activity dried up as the global financial system raced towards the precipice, lowering the RBA’s interest rates was designed to fuel borrowing and lift spending across the economy. Central banks around the world slashed official interest rates in concert, sometimes to zero per cent, in a bid to entice borrowers and businesses to take out loans in the hope they would create jobs and stimulate the economy. In the years after the GFC some central banks, such as the European Central Bank, even lowered their interest rates below zero, into negative territory, where a borrower would essentially be paid to take out a loan.
While it narrowly avoided economic disaster, Australia was still forced to face the end of the mining boom. The economy was spluttering, and unemployment rose from 4 to 6 per cent and stayed there. Underemployment, where workers couldn’t get as many hours as they wanted, shot close to 15 per cent and refused to come down. Businesses were not investing and growing jobs, which made it harder for workers to find better-paying jobs or jump ship to a more lucrative offer.
It all left people feeling ripped off by the system. The animosity was shared across the developed world in the decade after the GFC, and the crisis’s ramifications were still being felt ten years later. Europe had sunk into a rolling sovereign debt crisis, and nearly ten million jobs had been destroyed in the US.
As the smoke began to clear and the public sifted through the rubble at GFC ground zero, the finger of blame, rightly or wrongly, pointed squarely at the greed of the banks that dominated the financial system. People were enraged by the failure of authorities to jail any executives for the misdemeanours that had contributed to the GFC, and the Occupy Wall Street movement was born in 2011.
At first it was just a motley crew of protesters in Manhattan, the heart of global capitalism, angry about the wealth amassed by the top 1 per cent. But the Occupy protests soon turned global. That year, activists turned up on the doorstep of Sydney’s cosmopolitan financial district in Martin Place, just up the road from the head office of the ‘millionaires’ factory’, Macquarie Bank.
Within a fortnight of the protestors setting up ramshackle lodgings outside the RBA office, police had evicted them. Operation Goulding, as the police action was termed, would evict the Occupy Sydney protesters again in February the next year, and a further five times in mid-2013, only for the activists to regroup and re-establish their tent city within hours. It was at first a rallying cry against corporate greed and regulatory failure, but it morphed into a wide-ranging outpouring of grievances on everything from growing inequality to civil liberties and social injustice.
Occupy Sydney, much smaller than its US counterpart, achieved little immediately, and may have achieved nothing substantial at all. By the end it was largely a collection of homeless people looking for a safe place to sleep and regularly being visited by charity workers.
However, the symbolism couldn’t be missed. Scrawled on one of the tarpaulins in the Martin Place tent city was a message: ‘For many, this is what affordable housing in Sydney looks like.’ For the Reserve Bank employees who traipsed past it on their way to work every day, it was a reminder of the lasting damage wrought by the financial crisis and the ultimate result of the RBA’s own response to the downturn.
‘The home is the foundation of sanity and sobriety; it is the indispensable condition of continuity; its health determines the health of society as a whole.’
So said opposition backbencher Robert Menzies in his landmark 1942 speech, ‘The Forgotten People’. For the conservative MP, who would later reclaim the prime ministership after he had been ousted a few years prior to making the speech, home ownership, and increasing the number of people who owned their own home, was the best way to guard against the revolutionary tendencies of a society.
As the spectre of communism and the tentacles of the Soviet Union started to reach into the crevices of the developing world by the end of the Second World War, Menzies believed that if all Australians had a stake in society, they would not seek to overthrow it. Homes—material, human and spiritual—were the foundation of this bulwark against communism, he said: ‘Your advanced socialist may rave against private property even while he acquires it; but one of the best instincts in us is that which induces us to have one little piece of earth with a house and a garden which is ours; to which we can withdraw, in which we can be among our friends, into which no stranger may come against our will.’
After he become PM for a second time, Menzies helped introduce all kinds of federal and state housing schemes to make home ownership more accessible and affordable. In the early 1950s, at the start of his prime ministership, about 50 per cent of Australia’s homes were either owned or being purchased by the people who lived in them. By 1966 that number had risen to almost 75 per cent.
Encouraging young people to lock themselves into affordable 25-year mortgages meant that they were more likely to go to work, work harder, pay their bills and vote the conservative government back into power. In this way, the middle class would keep the fundamental structures of society in place.
But the movement was far from permanent, and as the threat of revolution subsided, so too did home ownership. By 2011 it had fallen to its lowest level in half a century, at 67 per cent. Five years later it had tumbled again, to 65 per cent, and by 2016, one in every two loans sold by the banks was being sold to a landlord, not an owner-occupier. Young Australians were most affected by the slide in ownership. In 1981, more than 60 per cent of 25- to 34-year-olds owned their home. That number had fallen to 45 per cent by 2016, and the drop had been particularly steep in the immediate past decade. Only one demographic increased its levels of home ownership over the same period—baby boomers aged over sixty-five.
When the socialist Labour leader Jeremy Corbyn almost trounced the British Conservatives in the 2017 UK election, he was aided by a strong protest vote from young voters and those who didn’t own their home. Voter turnout for those who were renting private properties jumped 10 per cent, while public housing tenant turnout increased by 6 per cent. Almost all of these voters, who had decided not to vote in the previous election in 2015, voted for Labour in 2017 when they were given the chance to vote for someone who wanted to dramatically reshape society. Among renters who voted in both elections, the Tories lost a staggering 29 per cent of their 2015 vote, with about three-quarters of it switching to Labour.
The UK election came against a backdrop of home ownership rates across the UK falling to their lowest point in thirty years. In London, house prices had soared from costing five times the median income to more than sixteen times that income over two decades. The driver of the surging house prices, which had locked large slices of the public out of affording their own home, was in large part the response of central banks to the GFC.
While the Australian experience of the GFC was different from that of other developed countries, the Reserve Bank’s actions were largely the same as those of offshore central banks: slashing official interest rates rapidly and significantly. In 2008, the official cash rate in Australia was 7.25 per cent. A decade later, the rate had plummeted to—and was stuck at—a record low of 1.5 per cent.
One of the reasons the RBA had to keep lowering rates over the decade following the crisis was because it took so long for the economy to recover from the GFC. After the initial fright, there was a lingering reluctance for people to spend or invest out of fear the global economy could tip over again at any point. In cutting interest rates as low as possible, RBA governor Glenn Stevens was attempting to lure borrowers off the sidelines to drive the housing construction boom in place of the dwindling mining boom, which by 2015 had turned into a mining bust.
However, lower interest rates—the only policy tool at the RBA’s disposal—were a Faustian pact. Lowering interest rates triggers near-identical declines in the interest rates paid on term deposits and government bonds. These are considered the safest form of investment because it is unlikely a sovereign country will collapse without paying back your money.
In search of better investment returns, the massive pools of money sloshing around the globe had to be funnelled into riskier investments with better investment yields. Thus, the global ‘search for yield’ was born. This search for yield resulted in money managers pumping up the price of riskier assets, such as stock prices on the share market, which was great if you had your wealth tied up in the stock market, but for most people living pay cheque to pay cheque, it was a bull market they weren’t a part of. It delivered little in the way of investment in the ‘real’ economy outside of financial markets.
House prices were also dramatically inflated by the low interest rates. With the commercial banks cutting mortgage rates in the wake of the RBA rate cuts, borrowers were able to gain approval for larger loans than ever before. Property buyers no longer had to prove to a bank that they could afford to repay monthly mortgage bills for supersized loans, like they’d had to when the official interest rate was 7.25 per cent. With the RBA cash rate at 1.5 per cent, borrowers could hit up the bank for more and more cash as they’d be able to afford larger monthly repayments.
All this did was arm prospective home buyers and property investors with more ammunition to throw at auctions, bidding up the prices of properties to sky-high levels.
When the RBA cash rate was 7.25 per cent, the median house price in Sydney was a touch above $400,000. By early 2018, when the cash rate had been stuck at 1.5 per cent for nearly two years, median house prices had surged to $1 million. This was great if you owned a house, but for many people in the large capital cities, home ownership rates were falling. Those renting and dependent on wage rises for better living standards were missing out on the so-called ‘wealth effect’ of these surging asset prices. Since the mid-1970s, real earnings for the top 10 per cent of wealthy Australians had risen by 60 per cent, but for the bottom 10 per cent, earnings rose by just 15 per cent.
Thomas Piketty, who carried out a study of long-running inequality in his home country of France, found that those who already had wealth were likely to experience greater growth in their riches than someone who was dependent on wages and economic growth. In his book Capital in the Twenty-first Century, Piketty found that if the rise in the value of capital—the value of all land, houses, vehicles, jewellery and so on—owned by a person was greater than the rate of economic growth, then the gap between rich and poor would increase. He argued that if wealth accumulates faster than output and wages, the ‘entrepreneur inevitably tends to become a rentier, more and more dominant over those who own nothing but their labour’.
According to Labor MP Andrew Leigh, who ran Piketty’s theory over the Australian experience, the data matched the hypothesis only from 1980 onwards. Over this period, the wealth of the top 1 per cent of Australians doubled, and as asset prices and household wealth rose, wages for the lower end of workers stalled.
The jitters of the financial crash were hovering over the shoulders of businesspeople. They pulled investments and scrapped plans for expansion that would have fed through to wage gains for workers. Instead of spending on expanding their operations, many of Australia’s largest companies followed a global movement to spend significant amounts of their cash buying shares in their own groups, in a financial move known as ‘stock buybacks’.
Over the past decade, the 500 largest companies listed on the US stock markets have bought back US$4.4 trillion of their own shares. This money could have been used for investment in research and development, wage rises for workers, or creating newer or better products. Rather than having an impact on the real economy or growing the revenue or profit of a business, stock buybacks were simply being used to help keep share prices high and shareholders happy. Buybacks also helped executives hit their earnings-per-share targets, which in a roundabout way trigger long-term incentive payments for bonuses.
Meanwhile, corporate Australia was arguing for Malcolm Turnbull to slash the corporate tax rate for the country’s biggest companies, which would see $65 billion lost from budget revenue. At the same time, the local business community was on a spending strike. They had bucketloads of cash: they just didn’t want to spend it. Cash holdings for the 200 biggest Australian companies—money that was sitting idly in accounts owned by a corporation—had reached $110 billion by the end of 2016, but rather than investing this money into the economy, corporate Australia was sitting on its hands.
As the calls were growing louder to launch a royal commission into the financial sector in early 2017, Australia’s largest wealth management company, AMP, and largest insurance group, QBE, announced that they would be buying back a collective $1.5 billion of their own shares. They chose to do this rather than make their products cheaper for customers or reward their employees with salary increases. In fact, tens of billions were being spent each year by Australia’s largest corporations across all sectors in purchasing back their own shares.
At an industry lunch in early 2017 hosted by the Financial Services Council (FSC)—the lobby group that represents the biggest banks and wealth managers—Westpac’s chief economist, Bill Evans, gave a firm warning to the executives gathered. Sitting on a panel with FSC chief executive Sally Loane, he was asked to speak about the most pressing political, regulatory and economic issues facing the financial services industry.
‘One of the issues with cutting the corporate tax rate is that it really only helps the economy if improved cash flow gets invested and used for employment,’ Evans told the luncheon. ‘If it just gets accumulated in cash or goes out the back in dividends or the buyback of shares, it doesn’t really help the economy. We need a policy stance that provides people with an expectation that growth is going to be lifting.’
His warning fell on deaf ears.
As with the Great Depression, Australia’s banks survived the GFC relatively unscathed. According to the banks, this was because of their prudent management, diligent executives and robust financial strength. Following the GFC, it was a claim repeated ad nauseam by the sector as reason enough to leave them alone. They were already regulated enough, they said.
Overseas, the experience was markedly different, and authorities clamped down on their respective financial systems with vigour. In Britain, chairman of the Financial Services Authority Lord Adair Turner pinned the crisis on overly complex investment products that were sold irresponsibly after a huge binge on debt. UK authorities responded to the GFC by launching a massive bank levy, putting badly behaved executives on a register, and increasing powers for watchdogs. ‘We failed to constrain the financial system’s creation of private credit and money,’ Turner said.
In the US, Lehman Brothers collapsed after it took too many bad punts on subprime mortgage bonds, which triggered a widespread credit crunch. The Dodd-Frank bill passed by Congress overhauled the country’s financial regulation architecture, while the Volcker Rule banned retail banks from using the financial system like a casino.
Australian banks were largely missing from the global regulatory reform movement. Local banks were not invested in toxic products, such as subprime mortgage bonds, but only because they had been prevented from doing so by the banking regulator. If APRA hadn’t had its eye on the ball, who can say whether or not Australia’s banks would have ended up in the same implosion.
For all the banks’ posturing over their success in the downturn, the sector gave little credit to the regulators and the government that steered them through the GFC.
In July 2007, just as investors lost faith in the value of US subprime mortgages, APRA started making emergency calls to the treasury departments of the major Australian banks. They wanted clear daily updates on the funding position of the country’s biggest financial institutions. The Reserve Bank joined in: almost every day for the next fifteen months they would call the big four banks to see how they were faring.
The concerns culminated in Prime Minister Kevin Rudd, fearing a widespread run on the banks in October 2008, announcing that the government would guarantee all customer deposits and would step in and fund the banks if they couldn’t source funds from overseas.
It was a massive intervention, and the major banks still reject the notion that they needed it. Rudd needed to calm the nerves of not just the customers of the big banks, but particularly the customers of smaller regional banks, who would have caused dramatic problems if there had been a bank run on less resilient lenders.
Amid the crisis, these more vulnerable lenders were encouraged to be swallowed up by the major banks. Westpac took over a shaky St George, which was then the country’s fifth pillar, and CBA was tapped on the shoulder to buy Bankwest after its British owner sailed into distress.
By September 2008, ASIC was having to intervene in financial markets to ban traders from short-selling the shares of the banks. In this way, financial markets couldn’t bet against the companies and encourage their stock prices to fall further. The short-selling ban was put in place as Macquarie Group stared into the abyss, with its shares heading towards zero after they had been heavily targeted during the crunch.
A few days after the ban, the government announced it would step in and start buying residential mortgage-backed bonds, as all the other lenders had stepped away and funding markets had frozen. Then, a month later, Rudd was forced to launch the first stage of the government’s economic stimulus package, shelling out $10 billion to households before Christmas in order to keep the economy moving. Early the next year, in 2009, the government spent another $3 billion to support the commercial property industry, which was at risk of crashing. Rudd then announced a further $42 billion stimulus plan, which ended up aiding the economic recovery but put the government under severe political pressure amid accusations of profligate spending levelled by the Liberal Opposition.
The major banks took serious advantage of the government funding guarantee. They sourced more than $150 billion of funding through the plan and paid back only around $5 billion in interest for the free kick, with little in the way of thanks. After narrowly avoiding catastrophe, Macquarie Group went on to use the taxpayer-backed funding to plough billions of dollars into high-earning but risky corporate debt across the globe. Macquarie’s so-called Corporate and Asset Finance Division, which houses these risky junk bonds, tripled its profit in the year after the taxpayer guarantee was introduced. It appeared that reforms designed to protect the financial giants from collapse were being used to make questionable investments, all on the taxpayer dime.
But the hubris would leave the banks exposed. By cruising through the GFC, all the while arguing down the role the government had played in saving the financial system, the banks were soon stung by their own arrogance.
‘In the aftermath, some of these bankers started to believe it was due to their genius, they should take the rewards, and they took the eye off the ball, which was the customer,’ former treasurer Peter Costello told a lunch a decade after the crisis. ‘I think in 2008 the financial system performed beautifully under stress. Financial systems are designed to make sure that our institutions are strong in a time of stress, and they were. Many of the things you are now seeing are the consequence really of bankers becoming complacent. They thought that sharing in the benefits of a system that had performed well was more important than keeping customers first. Whoever was in charge of keeping an eye on reputational risk on these boards did not do a very good job.’
Following the crisis, the bank chief executives were clouded by their own egos, ignorant of the growing economic and social discontent pulsing through society. It had been brewing for some time. Indeed, NAB chairman Ken Henry, who had been the treasury secretary under the Rudd Government during the GFC, had a more intimate knowledge of the economic landscape than any other bank executive.
Australian society had been drifting towards a more unequal footing since the 1980s. Although the banks were not the cause of the GFC in Australia, they still had to be backstopped by the taxpayer.
The public got little in return for guaranteeing the sector’s survival. As wages and incomes stalled during the years after the downturn, financial executives seemed immune from the hardship. Bonuses and multimillion-dollar salaries continued to flow, while at the same time the number and severity of financial scandals began to mount.
Then the banks had the temerity to demand a $65 billion corporate tax cut. The public were no longer buying it, and they certainly weren’t going to pay for it. They demanded that the banks pay.