Attention conspiracy theorists: see if you can detect a pattern in this.
Tony Abbott wants to review the renewable energy target, so he appoints
self-professed climate change "sceptic" Dick Warburton, who feels
qualified to explain to the scientists where they're going wrong.
Abbott
wants to review the financial system, so he appoints a former boss of a
big four bank, David Murray, who feels qualified to explain to
economists where they're going wrong.
So, which industry sector stands the better chance of getting what it wants from its review?
Can
you imagine how many proposals Murray's committee will receive aimed at
making the financial system bigger and better - and all in return for
just a little more help from taxpayers?
I read that the Australian
Bankers Association's submission proposes abolition of interest
withholding tax, so as to support offshore fund-raising by local banks
and to encourage overseas banks to lend more in Australia. It also calls
for the removal of "tax disincentives" on bank deposits. All to
increase this financial sector's contribution to economic growth and
jobs, naturally.
The government's terms of reference say "the
inquiry is charged with examining how the financial system could be
positioned to best meet Australia's evolving needs and support
Australia's economic growth".
Fine. But if it's to be more than just an
industry sales pitch, the inquiry needs rigorously to examine the
industry's convenient assumption that the bigger it gets the more it
benefits the rest of us.
In a brief submission that deserves more
attention than it's likely to get, Professor Ron Bird and Dr Jack Gray,
of the Paul Woolley centre at the University of Technology, Sydney,
summarise the growing evidence that the developed economies' much
expanded financial systems have been a bad investment from the
perspective of the wider economy. (Both are former fund managers.)
The growth in America's financial sector has been amazing, with its share of gross domestic product rising from less than 3
per cent in 1950 to about 5 per cent in 1980 and more than 8 per cent
in 2006. Its share of total corporate profits grew from 14 per cent in
1980 to almost 40 per cent by 2003.
Salaries in US financial
services were similar to other industries until 1980, but are now on
average 70 per cent higher than those elsewhere. This remarkable growth
is referred to as the "financialisation" of the economy. One test of the
inquiry's thoroughness will be whether it works out comparable figures for Oz.
The
first warning that this growth might be making economies more risky
came from Professor Raghuram Rajan, of the University of Chicago, at a
central bankers' conference in 2005. They told him not to worry. He has
since argued that the financial system's big rewards for risk-taking
(with other people's money) result in the economy proceeding from bubble
to bubble.
Since the mid-2000s, an increasing amount of analysis
has questioned whether the growth of the financial system has worked to
the betterment of anybody other than those working in the industry, Bird
and Gray say.
One study for the Bank for International
Settlements concludes that "big and fast-growing financial sectors can
be very costly for the rest of the economy ... drawing essential
resources in a way that is detrimental to growth at the aggregate
level". A British minister has said: "We need more real engineers and
fewer financial engineers."
Other research has found that real
(physical) investment is being crowded out by the increasing size and
profitability of financial investment. Even our Reserve Bank governor,
Glenn Stevens, has questioned "whether all this growth [in finance] was
actually a good idea; maybe finance had become too big (and too risky)".
The
huge advances in information technology could have been expected to
result in lower costs for financial services, but unit costs have
actually increased over the past 30 years.
All the trading on financial
markets is supposed to lead to better "price discovery" and thus
improved efficiency in the allocation of resources, but a study found no
evidence of financial market prices becoming more "informationally
efficient".
Adair Turner, former chairman of Britain's Financial
Services Authority, sees "no clear evidence that the growth in the scale
and complexity of the financial system in the rich developed world over
the last 20 or 30 years has driven increased growth or stability".
Bird
and Grey conclude that the starting point of the Murray inquiry's
analysis should be to assess the financial system's effectiveness and
highlight where it is falling short and why.
