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Commentary
Our Best Plan To Avoid A Recession? Simple, Boring Banks
Here are two facts about Australia. One, it’s our ally. And two, it’s really, really far away, so it's likely that most Americans ignored its election earlier this month. That’s too bad. The Australian outcome could teach us something about making our economy more secure against a future recession, which may not be as far off as we like to think.
In a case of “Dewey Defeats Truman Down Under,” conservative Prime Minister Scott Morrison defied the polls to upset his Labor Party opponent. Morrison is an evangelical with an anti-immigrant bent who's made no bones of his jones for Donald Trump. So his triumph partly owed to the populist stench stinking up our own politics.
But Morrison's victory also reflected an economic miracle that would bolster any incumbent: His nation hasn't had a recession for 28 years. (For perspective, the current American expansion will become our longest-ever boom this summer, at a runtish-by-comparison 10 years.) The global financial collapse a decade ago barely grazed Australians, in large measure because banks — culprits in our Great Recession — are more smartly regulated there than here.
The U.S. is one of the few countries in the world mustering such a regulatory posse.
Therein lies a teachable moment. The Democratic presidential candidates have formed a veritable Justice League to combat big banking, firing reform suggestions like lasers. But nobody talks of taking a wrecking ball to our byzantine batch of institutional watchdogs over the financial sector, and imitating the Aussie way, which boils down to two words:
Simple and boring.
In Australia, the New York Times recently reported, “There is a single powerful regulator, rather than a patchwork of them as in the United States,” where the Federal Reserve, Comptroller of the Currency, Federal Deposit Insurance Corp., the Consumer Financial Protection Bureau and the Securities and Exchange Commission all get a piece of the action. The U.S. is one of the few countries in the world mustering such a regulatory posse.
Australia’s single regulator enforces simple banking that the Times did indeed dub “boring.” The country’s banks didn’t traffic in the risky, unfathomable securities in which Wall Street wallowed in the early 2000s and whose flimsy foundation of bad mortgages ultimately toppled the U.S. financial system.
As a campaign slogan, “Making Banking Boring” would never get past a candidate’s political advisors. But it headlined another Times column a decade ago by Nobel-winning economist Paul Krugman. He noted that rigorously regulated, conservative bank lending in the U.S. after the Great Depression, similar to Australia’s approach to lending now, helped usher in America’s post-war prosperity, with no rerun of the catastrophic 1930s.
The Upshot section of the Times reports:
No doubt Australia has missed out on some opportunities by not hosting the big, complicated banks that operate worldwide and do more sophisticated forms of finance. Sydney does not have the concentration of high-paying finance jobs that London and Hong Kong do. But having a conservative, domestically focused, highly concentrated banking system meant that Australia wasn’t stuck importing other countries’ financial contagions when crises hit.
To be sure, Australia’s good fortune is partly good luck; forces like China’s rapacious demand for Australian goods also propel the no-recession streak, the Times noted. But other nations in the region with similar economies haven’t matched Australia’s performance, because they haven’t mimicked its smart policies.
Democrats, the party of regulation and thus of bureaucracy, too often shun simplification. As economic populists, some of the Democratic presidential candidates hammer the finance industry, plugging ideas that, while deserving discussion, probably aren’t the cure-alls they claim them to be.
The global financial collapse a decade ago barely grazed Australians, in large measure because banks ... are more smartly regulated there than here.
Elizabeth Warren warns about “too big to fail” banks. She’s right to worry about their outsized political influence. Economically, however, big banks needn’t crater an economy. Four banks have 80% of Australia’s deposits. (Australian law bans them from merging with each other.)
Hawaiian Congresswoman Tulsi Gabbard wants to break up banking behemoths, and she and Warren would resurrect Depression-era walls separating regular commercial banks from riskier investment banks. The latter is a fine idea for various reasons, but those walls wouldn’t have affected the institutions that dragged us into the Great Recession.
If the Democrats miss the root problem, Republicans are worse. They engineered a partial rollback of the Dodd-Frank financial regulations passed under Barack Obama. Dodd-Frank, a monument to complexity with its thousands of pages, could stand better draftsmanship, but it had necessary reforms. Trump and the GOP will never support effective regulation padlocking Wall Street’s casino, simple or otherwise — not when it would crimp paychecks for financial-sector moneybags.
At a recent congressional hearing, Republicans badgered regulators to pick up the pace on Dodd-Frank’s rollback, to loosen capital and liquidity rules for certain banks. The month before, House Democrats grilled big bank CEOs, at least taking their oversight duties seriously.
But neither party, sadly, seems to be interested in simple, boring banks.
