How to fix the credit crisis
Today’s guest post comes from Troy McErvale, Managing Director of Freedom Home Loans.
Until recently, I was a believer in the free market economy.
However, recent failures in financial institutions in particular provide more than enough evidence that free market economies are at best, falling spectacularly short of providing certainty for a government’s constituents, and at best simply do not work.
Our current “free market” format claims it carries with it certain protections, notably against anti-competitive behaviour, price gouging, profiteering, insider trading and employee exploitation.
But the free market fails because it cannot control the human factor of greed.
The answer I believe lies in the Federal government owning entities that deliver basic levels of essential services in a mixed price (i.e. combination of fixed price and free price) system economy to and for its citizens. These government owned agencies would then compete against privately and publicly owned companies for the provision of these services.
This will ensure competitive pricing, low unemployment, good working conditions and money for further funding sources to support necessary social welfare.
Essential services to be covered would include, but would not be limited to:
- The environment and its resources (water, air and agriculture)
- Health care and health insurance
- Education and employment
- Banking and insurance
- Utilities (including oil)
Employees of these entities would be rewarded on a sliding pay-scale (with factors such as efficiency, education level obtained, and contribution to the employer all factors), as well as with rewards as a member of a credit union or shareholder of a publicly listed company (for example) might. But these entities would never be listed on the ASX.
The government is held accountable and kept in check by the governor general.
We could also even introduce rewards for companies that compete in a mixed market by making incentives available for them if they deliver meaningfully (i.e. in a philanthropic way without any direct or tangible benefit as a direct result) to environmental management and rehabilitation, health care for its workers, education for its workers, or better conditions for its workers.
The implications of a policy like this on the banking system would revolutionise it.
For example, why is it now that in an environment where interest rates are historically low, and demand for housing credit is high, that lenders are tightening credit policy?
The main reason seems to be to protect / enhance a high quality loan book. But what has really changed in the past 2 years? Two years ago, lenders and mortgage insurers in Australia were readily lending to 100% for home buyers. The market may not be as buoyant, but were lenders really lending on the basis of the underlying value of the residential property increasing? The answer is of course “no” - they were lending to borrowers on the basis of their credit history, income levels and capacity to repay. Essentially this has not changed.
It is somewhat ironic that at a time when consumer demand for credit is required, and demand for credit is high, the banks are worsening the problem in Australia - all to protect their own interests in an environment that has not radically changed in Australia - despite what the banks are trying to tell us. In fact, it could be argued that the banks are using the credit crisis to their advantage by unnecessarily profiteering from their customers.
A government owned banking or mortgage insurance entity would see this come to a quick end.
If we lived in a free market economy, my position would be to let the banks fail - they are the result of their own greed. Don’t bail out the banks, but instead bail out the real victims - the families that have lost their life savings, the aging population who have lost their retirement nestegg, or mums and dads who have lost their family home as a result of this corporate greed. Evolution will see a new breed of institution emerge even better.
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wayne March 25, 2009
Funny how so many have lost faith in the free market economy. To believe in a free market allows the few to screw the many. There is no such thing as level playing field - never has been.
I hear people complaining about the fact that banks won’t lend particularly in the commercial and infrastructure area. I have heard people call for a Government Development Bank to provide the financing for major projects and also to provide finance to the little guy, those who are contracted by the develpers. Interesting how it’s back to future. We had a Commonwealth Bank once, owned by the people for the people.
I agree, there are some institutions that need to owned by the people (government) to support the people, both in good times and in bad. Thatcherism and Reganism didn’t work. If you sell it all off, then the people own nothing, but now “the people” are being indebted to bail out private institutuions with the use of their tax money. And “the people” never even got a say. Insane.
Protect the depositor sure, but let the banks, insurance companies etc fail - or nationalise them. Shareholders don’t have the right to be protected by the taxpayer. Since when has private profit turned into public debt.