Friday, November 5, 2010

And the winner is ... Michael Pascoe



This blogger would like to congratulate Michael Pascoe. Today he wins the award for the worst ever argument published in the Australian media.

For you skeptics, let's roll the tape...
Oh ye of little faith - a little pricing power causes wholesale abandonment of confidence in markets to sort out supposed hubris. So much for a robust free market economy.

The bank mania sweeping Canberra, whipped along by the usual populist commentaries, is starting to take on bizarre proportions as the two major parties compete to sound the most interventionist and to display the least confidence in the market mechanisms. The outbreak of posturing by the Australian Competition and Consumer Commission isn't a good look either.

The CBA's 45-point mortgage rate increase and the big profit numbers from all the banks have combined to unleash a wave of largely irrational bank bashing not seen since Ben Chifley was trying to nationalise them.

We open with fallacy number one: Extrapolating the specific to the general. It is quite possible to maintain faith in free markets and still want to closely regulate financial systems. Banks hold a special position in an economy and, if mismanaged, go a long way to undermining free markets in every other sector. That is this blogger's position.

Moreover, Mr Pascoe's favourite rhetorical trick is the straw man. Pretty much whenever he writes, Mr Pascoe establishes himself as some isolated but illuminated hero battling an idiot consensus. From time to time this is amusing but in this case it's just plain wrong. As this blogger has noted over the past week or so, the vast majority of commentary has been making the very same point as Mr Pascoe: that the banks are hard done by one way or another. So, two fallacies and a mistake in the opening two paragraphs. Back to the piece:
Yes, the absolute number of the big four banks reporting $21 billion in combined profits is certainly big – but so are the banks. Their return on equity is less than the likes of BHP, Woolworths, Telstra and plenty of others.

Goodness, we've hardly resumed and we're plunging into fallacy number three. This one is known as the false analogy. The ROE of the banks versus miners, grocers, phone companies is irrelevant. What matters is the ROE of banks versus other banks over time.

Moreover, the whole issue at stake here is what balance should Australians strike between bank returns and the fundamental utility they perform for us. By making the comparison with other businesses, Mr Pascoe has presupposed his own conclusion. That is, he's using circular argument. That would be fallacy number four. Back to the piece:
In any event, with one caveat, if the big banks' big profits are too big, it creates more space for the existing competition to grow and would encourage new entrants into the market as well.

That's what happens in business.

If the banks were really making excessive profits, the overlooked competitors in the form of credit unions and the remaining mutual building societies would start creaming it, the industry super funds (ME Bank) would plunge further into the business and the happily wealthy Asian banks would be tempted to expand here.

Yes, that is what happens in business, in theory. But in practice it is not always true. There are such things as barriers to entry, which in this case include four gigantic, public-backed monsters that can borrow funds more cheaply than anyone else. That is the essence of too-big-to fail. On this one Mr Pascoe is not guilty of more fallacy, he is just plain wrong. Back to the piece:
Counter to sentiment behind the Joe Hockey and Wayne Swan anti-bank race, it's arguable that there's been something of an outbreak of competition among the big four on the only interest rate the politicians seem to care about – the standard variable mortgage. One member of the club (NAB) has made a brave pledge to only move rates in line with the Reserve Bank while another (CBA) has sprinted beyond the pack.

The caveat is that the market must be relatively free. The proper role of government is to ensure there is healthy competition and that the banks don't use their market power to stifle it – but all the ACCC seems capable of, or all the ACCC can find wrong with banking, is Graeme Samuel's rather airy-fairy suspicion about publicly telegraphing pricing intentions.

(It was a bit like his appearance on 4 Corners on Monday night. By all means bag Macquarie Bank’s involvement as a financier to the shonks who’ve been ripping off small businesses. The bigger question is why the ACCC hasn’t been more successful and gung ho about dragging the dodgy perpetrators through the streets and hassling them out of business. The ACCC, like ASIC, tends to arrive rather late at the scene of the accident and then lets the painstaking pace of legal formalities interfere with obtaining justice and protecting victims.)

The genuinely anti-competitive action by the banks – taking over some of their competitors – was waved through by the ACCC, albeit in the shadows of the GFC. As far as the impact on competition goes, the ACCC allowing Westpac to take over St George was far more damaging than CEOs publicly answering questions about their funding costs and pricing wishes.

Sigh...fallacy number five: Internal contradiction. If the ACCC is so hopeless, why does Mr Pascoe cite it as the authority for judging whether banks are uncompetitive? Back to the piece:
In any event, the CBA's attempt to regain some pricing power in mortgages is not per se anti-competitive. As Swan and perhaps Hockey know, the banks increasing rates by more than the RBA official movements also has minimal impact on what the average person ends up paying for his or her mortgage. If the banks all cut their rates by 50 points tomorrow, the RBA would immediately lift the cash rate by about that to force the banks back up. Overall interest rates at any one time are more-of-less where the RBA wants them to be.

The spread between official rates and bank rates has doubled from 1.5% in 2006 to 3% today. And it's worse still in business loans. Again, factually wrong. Back to the piece:
Initiatives to make banking easier, to allow the individual a little more leverage over the bank, can help the individual, but it won't do much for interest rates overall.

What? If 30% of CBA customers fled to ME Bank, they wouldn't cut prices? Back to the piece:
...It's much easier to grandstand with a bit of bank bashing, to be full of sound and fury, signifying nothing.

Hmmm... yes, it is easy to grandstand. But this blogger wonders what William Shakespeare would have thought of Macbeth being quoted in support of power-hungry banks.

Look, this blogger is sorry. Mr Pascoe is entertaining. But the question of how to regulate the banks goes to the heart of our country's future. It deserves better.

2 comments:

Septimus said...

David, although you seem to think that we need more effective competition between the banks, it seems that the fallacious arguments are not only coming from Canberra.

Given that we have QE2 in the US, and record low rates in the UK, both with interest rates well below the RBA's 4.75%, how come there aren't overseas lenders queueing up to lend our Banks money at 3.75%??? Particularly given our strong, and apparently secure, economy?

Then, the Westpac data showed Westpac as getting less than 20% of its' funding from overseas borrowing. I assume CBA would be similar. That implies that the interest rates paid by our Banks to overseas sources have increased by more than 1.5% Huh??

Westpac's profits were about $6 billion. That's about $240 per man, woman and child in Aus. For all 4 big banks, that is about $1000 per man, woman & child in Aus. Don't you think that's a little over the top? I know I'd be really teed off if my bank managed to take $1000 off me in a year.

If I'm in error here, please correct me.

Luke Garratt said...

Because Septimus, that's the thing. No one is lending. When the world looks rocky, institutions and people hold their money. And plenty of the overseas lenders have had their fingers burnt lending money to/buying securities from those in the mortgage business.

Add in the currency conversion risks, worldwide deleveraging and the rush to bonds - end result is it costs the banks more for overseas capital.

And everyone is wary of our strength versus size. Ireland was strong and secure once. So was Iceland. The US too. We are... for the time being...