A long way to go to bring banks back into their box

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The root cause of the global financial crisis was ideological: the belief that the more lightly regulated banks and other financial actors, the better they would serve the interests of the wider economy, convinced that their greater freedom would not encourage them. to take excessive risks as this would be contrary to their interests.

False. This misinterpreted the perverse incentives that the bank executives had to face – the heads earn big bonuses; my shareholders are making their dough – and the heat of competition can make business people do things they know they should not, not to mention the "moral hazard" of knowing that if the worst comes to s To make matters worse, the government will have no choice but to save us.

As it actually happened. In the North Atlantic economies, politicians and central bankers have made the right decision in saving failing banks. If they had not done it, the entire financial system would have collapsed and the loss of wealth and employment would have been much greater than it had been.

But do not try to tell an audience that saw governments accumulate billions of dollars to save banks and bankers, who then went to the streets who could no longer afford the mortgages they did not have. should never have gotten.

The mistake of the US authorities has failed to make a clear distinction between savings banks to protect their customers and prevent the collapse of the system, and to punish the managers and shareholders of bankrupt banks.

Why not them? In short, because banks are too powerful politically.

Which brings us to Australia's response to the global financial crisis and how we escaped the Great Recession. Our big banks did not fall because our economists never thought that banks would not be foolish enough to take risks that could jeopardize their survival. Our banks did not buy toxic assets because our supervisors did not let them down.

This did not stop the GFC from damaging business and consumer confidence, so the real gross domestic product contracted by 0.5% in December 2008. We avoided recession thanks to the rapid action of the Reserve Bank and the Rudd government by applying huge fiscal stimulus, which have prevented the economy from deteriorating.

At another level, however, economists believed that banks should be slightly regulated in their dealings with customers and could be trusted not to abuse them. Equipment such as the Australian Securities and Investment Commission has been cut off and given the green light to not be too active.

The absence of a crash meant that our governments did not learn that market forces could cause, while limiting, the mistreatment of customers.

The absence of a crash meant that our governments had not learned that in the unconventional world, market forces could cause, while limiting, the mistreatment of customers. The strong political influence of our own banks has reinforced this naivety, prompting governments to put aside the growing evidence of bank misbehavior and increasing public concern and mistrust.

In a sense, the Royal Bank Commission is the product of our earlier failure to learn what we should have from the GFC.

But we still have a lot to learn from the crisis, which applies to all advanced economies. The fact is that the banking and financial services sector is much larger than necessary, is inflated by rent seeking, involves many more transactions enter banks (a form of gambling) as trade between banks and customers of the real economy, and thus constitutes a waste of economic resources.

While the share of financial services in our economy (and most other advanced economies) was growing rapidly in the decades before the crisis, economists told us that we are benefiting from financial innovations and progress in managing financial risks. .

The GFC revealed this justification as being of the order of 95%. Not to mention Keynes, the economy would be better if most people who invested a lot of money in finance had useful jobs, such as dentists.

Ross Gittins is the economic editor of The Herald.