By Roger Raven
Re-regulation of the financial system will be necessary if the problems associated with financial speculation, mismanagement and the concentration of the banks are to be overcome.
For instance, to cater for different community needs and curtail the exploitative practices of big business, it would be necessary to reintroduce the distinction between savings banks (for consumers) and trading banks (for business). It would also be appropriate to reintroduce special-purpose banks, to lend for long-term environmental rehabilitation, venture capital and industry development.
However, such a specialisation would not be very helpful if the same interest rate structure applied everywhere. Instead, high interest rates for speculative investment and low interest rates for long-term or consumer lending should apply. Furthermore, in a regulated system, the manipulation of interest rates would not be used as a means to keep the economy at a constant temperature.
No government can adequately control the economy while foreign exchange transactions are uncontrolled. Currently, these transactions total $14 billion daily, enough to employ the one million unemployed at average wages for a year. For all foreign exchange transactions either approval would be required at least a fortnight beforehand or a 10% transaction tax would apply for unapproved transactions. The value of the dollar against other currencies wouldn't need to be closely controlled.
Culling the sharks
But there is enormous pressure against regulation from institutions controlling huge amounts of capital. Superannuation funds, for example, may have $600 billion in assets by 2000. Yet the industry is still touting the same deceptive policies already exposed by deregulation: that the government should not influence investment; that managers would always seek the maximum financial return; that managers are the best judges of risk; and that competition would always benefit the consumer.
Without regulation, the funds will inevitably make indiscriminate investments because of the need to do something with the enormous inflow of money they control, and the result is likely to be another financial crisis in seven or eight years' time. Rather, the government should be enabled to influence the overall allocation of capital within Australia. Only when investment in
manufacturing industry is satisfactory, for instance, should investment in property development cease to be discouraged.
The role of government trading enterprises should be elevated; they need to be given more capital, better management and clearer policy guidelines. While we need to be well informed about the costs of "cross-subsidisation" and it should occur only where necessary or sensible, it should be remembered that many necessary social benefits can not be expressed in money terms.
The role of the official union movement in this sphere has left much to be desired. For example, the Finance Sector Union has shown no real interest in protecting its members at the Rural and Industry Bank, or any other. The Civil Service Association has mumbled about the undesirability of flogging off the SGIO, but little has happened.
While it is difficult, regulating the regulators is another very important requirement. This could be done either by recall of representatives who fail to perform their regulatory role adequately or close scrutiny at the time of reappointment or replacement. A well-informed and active public would be even more powerful.
The rural activists' organisation Bankwatch is an excellent example of what can be achieved. Nevertheless, what often happens is that such organisations wither once the immediate crisis has passed. Furthermore, seeing "socialism" as their enemy, many small business and farmer organisations often fail to challenge the ideological foundations on which many evil financial practices are based.
State banks
The case of the R&I Bank of WA Ltd is indicative. The state government partially privatised the bank soon after an article by one John McGlue calling for privatisation appeared in the West Australian. John McGlue is now a stockbroker. The managing director of WA Newspaper Holdings Ltd is Trevor Eastwood, who is also a director of the R&I Bank.
R&I is Australia's seventh largest domestic bank, with assets of $8.8 billion. Its past performance has been poor, largely due to governmental neglect and a lack of adequate capital. In theory, a new role for the R&I could be based on the idea that social and environmental targets are as important as economic ones. Such ideas can be found in J.K. Galbraith's Economics and the Public Purpose, which counters the narrow concerns of neoclassical economics.
One possibility would be to add a Strategic Venture Office to the
R&I to provide long-term and low-interest loans for:
- Environmental rehabilitation and improvement. This would include rejuvenation of degraded agricultural land (where doing so would eventually be profitable, or require a slight subsidy), relocation of hazardous facilities and greatly expanded energy efficiency and waste management industries. While the National Party is now talking about farm subsidies, these are commonly for general expenses rather than rehabilitation and could encourage environmentally unsustainable practices.
- Business finance, such as venture capital for firms with a good product but inadequate capital. Probably only 5% of the needs of small businesses for this type of capital is being met.
- Cooperative venture finance. "Newco" is the Australian Wheat Board's vision for a new grain marketing structure that would include grower ownership of grain processing factories. As it might need hundreds of millions of dollars in grower finance, support from the R&I would lighten the load considerably. Cooperatives are a socially desirable form of ownership.
- State development. Whether economic growth continues to be the dominant social aim or not, a balance between a long-term view, maintaining the current quality of life, and gradually reorienting our culture towards a less destructive pattern of behaviour will require substantial publicly controlled investment.
A "greened" financial sector which is concerned about maintaining employment should be the aim of progressive environmental and political organisations.
[Conclusion of a two-part series.]