There’s a scene in Armando Iannucci’s Death of Stalin where Krushchev et al. lament the loss of their leader. ‘A great reformer,’ they say. Despite their praise, all of them are terrified. Deviating from the party line means death, after all.
For those who don’t get it, this scene relies on what we call irony. Both the Soviet parvenus and the audience know Stalin was a tyrant. His ‘reforms’ primarily involved the conversion of living people into dead people — ‘liquidating’ them, to use their chilling euphemism. ‘A great reformer’ indeed.
On the 24th and 25th of September, The Australian ran three pieces concerning Treasurer Josh Frydenberg’s proposed changes to banking regulation. To stimulate the economy in the wake of the COVID-19 economic crash, Frydenberg wants to remove the ‘responsible lending obligations’ enacted by the ALP after 2008’s worldwide insolvency catastrophe — AKA, the GFC. These changes were announced the same day that the Coronavirus welfare payments were slashed.
These reforms have put Robert Gottliebsen in an uncharacteristically euphoric mood. The man is ebullient, offering hyperbolic praise for Frydenberg’s initiative. To him, these changes to banking regulation will place our Treasurer in the Pantheon of the ‘great reformers’ of Australian political history. ‘Unshackled banks’, it seems, are the antidote to our economic peril.
Do you see where we’re going with this?
In my eyes — and, I hope, those of anyone with a basic grasp of macroeconomics — these reform are inappropriate. My argument is simple, and to a great extent, I agree with Frydenberg. He is right to say that our country does not have a problem with either liquidity or lending. No: our malaise stems from the lack of investment.
Our macroeconomic indicators should make this obvious. Aside from a small increase in 2018, investment as a share of GDP has declined every year since we elected Abbott’s LNP in 2013. The figure recorded for 2019–23.26% — is the second-lowest since 1960. Meanwhile, household debt as a share of GDP reached its all-time high in 2016–121.7% — while our economy’s savings remained within their normal range across the 2010s. The RBA cash rate also sits at an all-time low of 0.25% following a decade of consecutive cuts.
All this is to say: access to credit is not the problem today. Given the escalating level of household debt, it isn’t even clear that it has been an issue at any point over the last decade. Without wishing to deny Mr Frydenberg his touching anecdotes, the consumer’s inability to borrow has not harmed the macroeconomy in recent years. In all likelihood, changing these regulations will do little for our economic recovery.
Accordingly, the RBA’s fear of a ‘credit freeze’ hasn’t arisen because of draconian regulations. Nor are banks are not ‘too scared to lend’ due to our asphyxiating rules. Much like the GFC in 2008, our issue is not liquidity per se. It’s the fear of insolvency that emerges after an economy realises that a mountain of debts, both prudent and speculative, can no longer be paid. It’s the economic pessimism that diffuses outwards from human psyches in the wake of crises, plunging whole economies into a miasma of doubt. It’s the depressing ‘animal spirits’ that Keynes wrote of so eloquently, those psychological forces that destroy our spontaneous optimism, our hope, and our future. Our problem is an unwillingness to invest because we are afraid. But ironically, it is our hesitation that we really ought to fear.
Frydenberg knows this. He writes: ‘Liquidity in the banking system is not an issue.’ Thus it is disappointing that his ‘great’ reforms address nothing but consumer liquidity. But it is even worse that they increase our vulnerability to future crises. Eliminating the restrictions on lending will only accelerate our already troubling reliance on debt-financed consumption. (To bastardise Hayek, this is a ‘road to serfdom’ if there ever was one.) Removing the RLOs, so badly needed after the decades of insufficient financial regulation whose legacy is the GFC and a decade of economic stagnation, will increase the likelihood that bad debts will proliferate. Without them, we risk another banking crisis in the future.
So we return to our most important, albeit unstated question: how do we help our economy recover, then? To this, I offer Keynes’ classic formulation: support investment. Doing so will increase job creation, which will improve tax revenues and incomes, which will raise consumption expenditure, which will improve savings and investment, which will improve economic forecasts, which will support investment, which will improve job creation… you get the idea. Naturally, this will help the banks too, who will be more willing to lend their abundance of liquidity if they expect to make a return.
If this means we must commit to a ‘comprehensive socialisation of investment’ via government expenditure, so be it. To quote Keynes once more, this is ‘the only practicable means of avoiding the destruction of existing economic forms in their entirety and as the condition of the successful functioning of individual initiative.’ Paradoxically, we can support our commitment to liberal-individualism via increased intervention. As Frydenberg ought to know by now, the laissez-faire deregulation of banks supports neither the individual nor society. Sometimes limits improve our freedoms. And no ‘great reformer’ would insist upon ineffective measures so blind to such basic truths, would they? But of course, this is the great irony at hand: Frydenberg can never attain greatness, for like Kruschev et al., he is blind, shackled to irrational party lines.