Friday, August 23, 2019

Book review. Banking Bad, A Wunch of Bankers

Banking Bad, Adele Ferguson, ABC Books, $34.99
A Wunch of Bankers, Daniel Ziffer, Scribe, $32.99
It’s Your Money, Alan Kohler, Nero, $34.99

Inertia can be deeply unhelpful. On those rare occasions when important parts of our world really do change, as they did in the 1980s when our banks suddenly started behaving monstrously, we react as if they haven’t, as if each new piece of bad news is isolated and our financial institutions remain on the whole "world class", as one leading commentator infamously claimed while warding off calls for a royal commission.

Each time an insider from the Commonwealth Bank approached journalists from The Australian and The Sydney Morning Herald before he found Adele Ferguson, they'd tell him the story was "too complicated, too risky, too much work, too this, too that".

Australia's most venerable bank – the one we let into our schools – couldn't be completely rotten.

I thought that myself, even while spending time with the first wave of bank victims who'd been plied with foreign-currency loans whose repayments had exploded to more than their businesses and properties had been worth, taking everything they had.

I put them on PM and AM on ABC radio. But I kept my equilibrium. Surely the banks were still trustworthy institutions that had themselves been victims of currency gyrations just as their customers were. They can't have intended to make them destitute.

David Murray
The first inkling I had that the banks might no longer care about their customers came in a conversation with David Murray, then the head of, or about to become head of, the Commonwealth Bank, and for me the most intriguing person in Ferguson's book, Banking Bad.

He told me the victims of currency loans must have known the risks. One was a maths teacher. But my mother had been a maths teacher and she wouldn't have known the risks unless they had been carefully pointed out to her.

I put it down to an unfortunate lack of empathy on Murray's part, not to a change in the nature of the institution he led.

Ferguson documents the change, while unintentionally documenting her own repeated struggles with inertia as she came to realise the banks were not only selling loans that couldn’t be repaid, not only earning fat commissions and a healthy margin on the currency each time those customers tried to trade their way out of trouble, not only ordering staff to sell products they had no reason to believe were right for their customers (playing happy tones into their ears when they made phone sales and sad tones when they did not), not only deducting fees for advice from the accounts of customers who had died or no longer had advisers, not only allowing crime syndicates to launder money through high-tech automatic machines that whisked it overseas before it could be checked, but also – heartbreakingly – refusing to pay out insurance claims in the face of medical advice that they should, and dragging out cases until their terminally ill customers died or ran out of money (which they could determine by checking their accounts).

Murray was 42 when he was offered the top job at the newly part-privatised Commonwealth Bank. He'd joined it as a teller when it was a public institution with a public-service culture. "It's a bit early, isn't it, for me?" he told the chairman, before transforming it – closing branches, sacking staff, rewarding tellers for sales rather than service, buying an insurer whose products they could upsell, setting up a stockbroker and financial planning arms whose products they could upsell, and imposing relentless never-ending targets. The bank manager at Goulburn in rural NSW was told to sell 150 loans a week. Goulburn had only 10,000 income-earning adults, and four big banks.

It would be tempting to think it was only the bank's staff who cut corners, because of the pressure placed on them. But time after time Ferguson details what happened when their bosses found out.

"Dodgy Don", a financial planner whose legendary ability to sign customers up for almost anything put him at the top of the Commonwealth's league table, was suspended when the bank discovered he had been charging improper fees, putting clients into products for which they were totally unsuited and slipping back-handers to tellers who sent victims his way. Then he was reinstated and promoted to "senior planner".

Staff who tried to help victims were discouraged. At least one was made to sign a legal agreement not to.

Ignorance on the part of the victims, each one believing he or she was alone, was essential if they were to keep quiet and the good public image of the bank maintained.

That's why when Ferguson's Four Corners program (same title as the book) exploded onto the screens in 2014 she was inundated with emails and calls from victims who'd paid up or kept quiet, not knowing they had been part of something systematic.

In Parliament, it was the Nationals who pushed hardest for the royal commission. Several had been victims themselves. Labor, perhaps less in touch with voters, was cautious. The Liberal Party was either profoundly ignorant about the behaviour of the banks or thought it was OK. It blocked just about every move to treat customers better, including (bizarrely) attempting to remove a legislated requirement that financial planners act in the "best interests" of their clients.

When the Liberal Party succumbed, it made the commission's time-frame short and added in a reference to trade union-associated industry super funds, about which there had been hardly any complaints and to which the commissioner gave a clean bill of health.

Ferguson, who covered the hearings for The Age and The Sydney Morning Herald, was astounded by what she heard (some of it was new even to her), but disappointed by the result.

"Vertical integration" of the kind pioneered by Murray at the Commonwealth Bank will be allowed to continue, although for the moment the Commonwealth and two of the other big banks have abandoned it. Murray himself had gone on to chair the Future Fund and then the government’s financial system inquiry, in which he warned against the dangers of vertical integration. During the royal commission AMP appointed him as its chairman, to "lead the redevelopment of governance processes".

Daniel Ziffer doesn't suffer from inertia.

His book, A Wunch of Bankers, is a super-charged flight through the absurdity of the year he spent reporting from the commission for ABC TV.

He gives us the good bits: the Commonwealth Bank might have charged dead people for financial advice, but AMP charged dead people for life insurance.

National Australia Bank flicked commissions to "introducers": gym instructors, architects and other trusted non-experts who pushed $24 billion in loans its way.

The financial services firm IOOF, whose website says it has been "helping Australians achieve financial independence since 1846", decided against putting its members into better products on the grounds they were generally disengaged and wouldn't know the difference.

An unnamed director protested, using caps for emphasis: "In what circumstances would it NOT be in a client's best interest to transfer to the new pricing if it was lower than their existing pricing?"

The unnamed hero later asked, in an observation Ziffer describes as "meta": "How would this look on the front page of The Age?"

Alan Kohler offers practical advice about how not to get ripped off by the finance industry, enlivened with insights from the commission and the inquiries that went before it.

It’s Your Money is an extraordinarily valuable book, but only for people able to take control of their money. As he concedes, many people can't, and it's up to the authorities to protect them. The authorities have failed in that job for the best part of 40 years.

The government has before it recommendations that would help, not only from the royal commission (and unfortunately the government has already backed away from the commission's recommendation regarding mortgage brokers), but also from the Productivity Commission, whose plan to put every new worker into a good super fund is being opposed by an unholy coalition of retail and industry funds.

It's up to those of us who can to keep up the pressure. The financial services industry will. It's been shamed, but never remains shamed for long. Among people who weren't paying attention, it still has a good public image.

In The Age and Sydney Morning Herald

Friday, August 09, 2019

RBA update: Governor Lowe points to even lower rates

Reserve Bank Governor Philip Lowe has said two things about unemployment in the past few weeks. Together, they lead to an inescapable conclusion.

The first was in a speech in May, expanded on in a speech in June. At both times the published unemployment rate was 5.2%.

Lowe said in May that while the Reserve Bank had long thought an unemployment rate of 5% was the best that could be achieved without generating worrying inflation, that view has now changed:

From today’s perspective, I think we can do better than this. My judgement of the accumulating evidence is that the Australian economy can support an unemployment rate of below 5% without raising inflation concerns.

It was good news. And then it got better.

In June he put a number on how low the unemployment rate could go before inflation became a concern:

While it is not possible to pin the number down exactly, the evidence is consistent with an estimate below 5%, perhaps around 4.5%. Given that the current unemployment rate is 5.2%, this suggests that there is still spare capacity in our labour market.

The Reserve Bank should be able to cut interest rates until unemployment fell below 5% and approached 4.5% without worrying about inflation, Lowe argued.

And in May, in a report back from a board meeting, he made it clear that’s what he would do:

At that meeting, we discussed a scenario in which there was no further improvement in the labour market and the unemployment rate remained around the 5% mark. In this scenario, we judged that inflation was likely to remain low relative to the target and that a decrease in the cash rate would likely be appropriate.

It would likely be appropriate to cut interest rates and keep cutting until the unemployment rate was driven below 5%, continuing to cut until it approached 4.5%.

Today, appearing before the House of Representatives economics committee in Canberra with the unemployment rate still stuck at 5.2% despite two consecutive rate cuts, he delivered what on the face of it was bad news.

He said the bank’s central forecast was that the unemployment rate would stay above 5% again until 2021. That’s right, 2021.

But taking the two statements together, it is reasonable to conclude that the Reserve Bank will keep cutting rates until unemployment does fall below 5%. In other words, it will keep cutting rates until 2021.

Lowe ain’t done cutting…

Indeed, the Reserve Bank’s quarterly forecasts update, released as Lowe spoke, countenances that happening. As foreshadowed by the governor, it forecasts that the unemployment rate won’t fall back to 5% until June 2021.

And it contains several other unwelcome forecasts: economic growth of just 2.5% this year, down from a previously forecast 2.75%, and very weak inflation this year of just 1.75%, down from a previously forecast 2%.

But here’s the thing. All of those forecasts were compiled, as is the Reserve Bank’s custom, by taking into account not only the two interest rate cuts that have already happened (and have taken the bank’s cash rate down to an all-time low of 1%), but also two more yet to be delivered.

It is explained in the footnote:

Technical assumptions set on 7 August include the cash rate moving in line with market pricing.

The “market pricing” is the consensus of the bets placed on the futures market for what the Reserve Bank is going to do to its cash rate.

The consensus is for another cut of 0.25% in October and then another cut of 0.25% in February, taking the cash rate down to yet another all-time low of just 0.5%.

The Reserve Bank is normally at pains to point out that this is a mere technical assumption, not a guarantee of how it will move rates. But the awful truth is that its forecasts imply that unless it cut rates two more times in coming months, unemployment won’t fall to 5% by 2021, and inflation will be even weaker than the incredibly weak 1.75% it is forecasting.

…and he might not stop at zero

Two more cuts in its cash rate will take it to 0.5%, close to zero.

Lowe revealed that the Reserve Bank is investigating so-called “unconventional” monetary policy or quantitative easing that would have the same effect as taking the cash rate below zero.

“It is prudent for us to have done the work in advance to see what we would do – it’s really contingency planning,” he said.

Rates might go to zero, or below, worldwide because right now there is a worldwide glut of savings, and not enough investment.

The reality we face is that, if a lot of people want to save and not many people want to use those savings to build new capital, savers are going to get low returns. We can move our interest rates around this new structurally lower level,but we can’t escape the fact that global interest rates are low.

The Reserve Bank’s best case is that its Australian forecasts are wrong - that unemployment actually falls and that inflation, wage growth and economic growth climb.

There’s a respectable view within the bank that this might happen. Its forecasts take into account a range of positive influences, including lower interest rates, the recent tax cuts, the depreciation of the Australian dollar, a brighter outlook for investment in the resources sector, some stabilisation in the housing market, and ongoing high levels of investment in infrastructure.

Read more: Below zero is ‘reverse’. How the Reserve Bank would make quantitative easing work

But they are the result of a mechanical model that takes them into account individually. The governor’s hope is that, taken together, they will achieve more than is forecast.

He would like governments themselves to push things along, starting with the wages they pay their own employees, and he is becoming ever more bold about saying so:

Most public sectors have wage caps of 2.5%, some have 1.5%, I think in Western Australia it’s probably even lower. I can understand why governments are doing that. On the other hand, the wage caps in the public sector are cementing low wage norms across the country. Over time, I hope the whole system, including the public sector, could see wages rising at three point something.

He is as good as powerless to stop what he regards as a worldwide investment strike caused by the trade and technology disputes between the United States and China.

These disputes pose a significant risk to the global economy. Not only are they disrupting trade flows, but they are also generating considerable uncertainty for many businesses around the world. Worryingly, this uncertainty is leading to investment plans being postponed or reconsidered.

Lowe doesn’t believe further interest rate cuts would to do much to encourage businesses to invest, or to encourage home buyers to borrow.

But he is certain they will help in other ways.

They will lower the exchange rate, making Australian goods and services more competitive, and that they will free up the cash of Australians who already have home loans, what he calls the “cash flow” channel:

There is no evidence that has become less effective. It is certainly true that in the current environment, at least in my view, monetary policy is less effective than it used to be. In today’s environment people don’t run off to the bank to borrow more when interest rates fall; they are more likely to pay back their mortgage more quickly. So that dynamic is different than it used to be.

When he last appeared before the parliamentary committee in February he said the probabilities of rates going up and rates going down were evenly balanced. He didn’t say that today.

Read more: Buckle up. 2019-20 survey finds the economy weak and heading down, and that's ahead of surprises The Conversation

Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

This article is republished from The Conversation under a Creative Commons license. Read the original article.