In 1981, both the government and the opposition agreed to implement the recommendations of the Campbell Report, which advocated for the deregulation of the financial system. This created a forty-year economic experiment that has turned out well for the rich and badly for the rest of society. It has shown the emergent properties of neo-liberal monetary theory.
The unintended consequence of deregulation was the significant growth of the financial system due to an increase in the use of bank finance for transferring existing assets. This was not the intended outcome of the report or either of the political parties at the time. Unfortunately, the lack of control over the profits generated from bank loans has negatively affected the Australian economy and its people.
Over time, wealth has become more concentrated, with the top 10% of the population acquiring more wealth in just six months than the entire wealth of the bottom 10%. The cost of houses has increased four times after accounting for inflation. This increase in house prices has contributed to inflation and is likely the primary reason the Reserve Bank has had to adopt a 2-3% target inflation rate. The average worker must work twice as many years to pay off a house. The financial sector accounts for 10% of the Australian economy and continues growing.
Unfortunately, finance is an overhead and contributes to the slow growth in economic productivity.
In 1980, Mutual Funds and Credit Unions provided 70% of home loans. In 2023, most Mutuals and Credit Unions are banks, while the big four private banks made 90% of home loans.
What has gone wrong
The reforms made to the banking industry have resulted in the privatization of the financial sector. As a result, the banks now work mainly for the benefit of their shareholders and not for the betterment of the country, borrowers, or lenders. Bank loans are incredibly profitable, particularly in secondary markets, as they transfer existing assets. Bankers receive bonuses based on their profits, and the regulators are often years behind in identifying the various loopholes and schemes utilized by an army of accountants, lawyers, and economists who are paid handsomely to find and exploit these problems.
The recent increase in interest rates mandated by the Reserve Bank has brought to light the inequity and venality of banks. Although the risk to banks and the cost of existing loans remained the same, banks have increased their interest rates. This is because banks don't lend depositors money but can lend as much as they want, provided they have a proportion of their money in a liquid form. Typically, this means government treasury bonds at the government's interest rate.
The banks could have agreed to an increase in taxation or not passing on the interest increase. Instead, they and the other wealthy people and organisations, most notably the media owners, have campaigned successfully against governments who dare to suggest windfall profits.
Fixing the Problem
Given that the rich and powerful will not give up their economic handouts without a fight, it is up to the Community Banks to outcompete the shareholder banks and take back market share.
They can start by sharing the extra profits they get from the increase in interest rates with their borrowers. They can reduce the capital owed by including some interest in the monthly repayments. This does not reduce their immediate profits, and they can even increase the interest rate and pass on the increases to their depositors. This will mean they can offer higher interest rates and lower repayments for all home loans. Typically, it will reduce repayments by about 30% with the same profit.
The shareholder banks can do the same, but it will be at the expense of their shareholders.
For the longer term, Community Banks can work with their communities of lenders and borrowers to remove the need for loans and interest payments by forming Permanent Home Markets (PHM). In a PHM, the equity in the home is transferred payment by payment.
The house purchase cost will drop by at least 50% even though the price remains the same and the return on housing investment increases.
There is no increase in value, but financial costs are removed, increasing capital productivity. In the modern economy, with the computing and communications facilities we have today, the cost of transferring an existing home should be much less.
There is no need to monetise a house to transfer its value. Removing the need to monetise a house removes the need to pay interest, and removing interest removes the payments to Bank Shareholders. There is still a cost of the transfer, but Permanent Home Markets can remove most of those costs by turning the Permanent Home Markets into a Commons as outlined in the substack magazine A Commons Economy.
Summary
In 1981, the government did not deregulate but changed the regulations, giving the Reserve Bank more power and less to the Treasury. The Reserve Bank could have protected the Mutual Societies and Credit Unions. Instead, they chose to favour shareholder banks over community finance, resulting in the inevitable rise in inflation, excessive creation of money to transfer existing assets, and stationary money. This has resulted in a rise in the cost of the financial system passed on to the real economy.
