The Australian Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry has confirmed that some dubious characters have been running the banking industry in this country. Importantly, and not being discussed, is that it also confirms that ASIC And APRA, the large-budget organizations responsible for supervision of the banks are, at best, incompetent.
But, the salivating hysterics of the mob baying for the break-up of the banks, and other anti-market measures, are entirely missing the point.
The point is, what caused banks to go feral, to lend money that anybody who could count to ten would have known could never have been repaid and, to overload their banks with assets (mortgages) that were bound to cause an immense problem at some point (not only to the banks, but to their customers) and, worst of all, incentivise every employee, from the manager to the teller, to act in a recklessly immoral manner?
Some years ago, Dr. Keith Weiner first coined the term: ‘perverse incentives produce perverse results’. It resonated with me and ‘stuck’ for the simple truth of its message. That one line explains much of what is wrong in the world today, not least in the area of banking.
The solution is not to further foul the banks with even more rules and regulations; nor, lamely, to call them ‘banksters’ and other pejoratives. It is to explore what incentives caused the banks to perform such ghastly acts of self-mutilation on their own business model. Why did they damage themselves and their reputations – individually as well as corporately?
If what caused them to act in such a manner is not located, examined and dealt with, then all the baying for blood is just the mindless (literally) seeking of vengeance. It might make a lot of people feel a little better emotionally, but will solve nothing.
The banks and their employees were patsies.
Government control of banks caused the crisis.
How do governments and their central banks set interest rates without the natural market mechanism of circulating Gold? How does one enforce those interest rates on the market? How does one encourage people to borrow when they may be disinclined to do so? How does one ensure that real estate prices continue to rise ad infinitum?
The banking regulations that resulted from such machinations are how the banking model was shattered. No longer was it to be the broker between those who wished to lend and those who wished to borrow. No longer would they be concerned with the marrying of the amounts and time preferences of the lenders and borrowers, with interest rates sufficient to ensure a bank profit.
Regulations obliterated that traditional model.
Banks became pushers of the system of fiat credit. They were no longer servants of their customers, but robotic implementers of central bankers’ micromanagement plans.
Banking is a noble business. Without it, Western Civilization could not have arisen. Regulations have distorted the original business model with one perverse incentive after another. Today’s banks are no longer recognisable with the traditional model.
That is not because banks elected to self-mutilate. It is because government desperately need to keep people believing that paper pseudo-money can do the job of real money.
Remove governments’ monopoly of money and Gold will immediately begin to circulate. When it does, honest, traditional banking will again re-emerge. Without that, apart from some occasional wrist-slaps for being caught, nothing will change.
Perverse incentives produce perverse results.