Picture this. It's the height of the financial crisis. Economies worldwide are about to tank. And yet, one western economy bravely looks toward crisis and tackles it head on.
Budget stimulus helps the economy avoid recession - lump sum payments are given to families, and the government decides to spend lots of money building schools and other infrastructure. Interest rates are cut and a bank deposit guaruntee is brought in.
None of the country's major banks collapse, and no bailout are needed. A few fund managers collapse, but overall structural damage to the economy is minor. Government debt as a proportion of GDP only reaches 18% and it will be paid bank by 2023/14. Government debt is way lower than European countries, most of whom sit between 50%-100% of GDP. And it will be paid back within 4 years. Unemployment peaks about about 6.5%.
And most importantly of all - the country avoids official recession. We even have money to reform health care and introduce a national paid parental leave scheme.
Sounds like a fantasy? Nope. This country does exist. It's called Australia.
So this begs the question - why are we still firmly on our feet?
The reason why we are still firmly on our feet is because wise political leaders made decisions over 25 years ago to ensure the stability of our financial sector.
After the financial crisis, all our major banks crowed how they were wise investors who didn't engage in risky lending practices. What they didn't tell you is that government policy forced them to act more prudently and limited them to a certain size.
In the 1980's, under our centre-left labour government, many economic reforms were passed. Some of these included reforms inspired by the neoliberal agenda. But others were strongly social democratic. Under the then Prime Minister Bob Hawke and the treasurer Paul Keating, a package of reforms were passed to open up competition in the banking sector.
But these leaders were smart - they had a different view of competition. Their vision wasn't of the type of competition that allowed banks to compete with each other to get bigger, take on more risk, and get swallowed up by massive institutions. No, competition had to mean something to consumers. The creation of massive oligopolies in the financial sector would have a negative impact on our economy. If that one or two big banks fell over, we'd all be in trouble.
Australia has four major commercial banks - the Commonwealth Bank, ANZ, Westpac, and National Australia Bank.
The Australian banking market (and our small population) wouldn't have supported any more major banks than the four that existed. Knowing this, the temptation would have been for these four banks to merge together with the others to create a large oligopoly or monopoly in the market. Banks wanted this so they could compete internationally with other large institutions - but the flipside would be greater concentration on holdings in the hands of one or two banks that had become "too big to fail".
Hawke and Keating realised that the process of consolidation - of creating banks that were "too big to fail" would actually have negative consequences for consumers and small businesses. If the sources of home loans and other banking products were restricted to one or two operators, banks could jack up home loan rates and fees and there would be no negative consequences because people would have nowhere else to go. (Even with four banks, this still happens). Building societies or small credit unions were the only alternative options, but they couldn't provide the same amount of financial services that bigger banks could.
In 1990, our political leaders decided to plot a different course.
The Hawke-Keating Labour government passed laws preventing the "big four" Australian banks from merging with each other. The government called it the "four pillars" policy - and it has withstood the test of time, through both labour and conservative governments.
Laws were further strengthened by allowing secondary lenders and foreign owned commercial and investment banks to themselves enter the Australian market, providing more diversity and competition and helping to drive down rates for mortgage.
Importantly - because the size of banks was limited and because they faced greater competition, most of our banks had limited exposure to the sub-prime mortgage crisis because they were less willing and able to take on really risky investments like CDO's.
During the financial crisis, none of the four major australian banks collapsed. None. All of them are still standing right now - and in fact all four of them were part of only a dozen or so banks around the world to have retained their top credit ratings during the financial crisis.
Importantly, our government never had to bail out the big four banks. It did provide assistance to some smaller lenders who were struggling to get credit through the collapse of global credit markets. And it did institute a bank deposit guarantee.
But we never had to implement the gigantic bank bailouts of the US or the nationalisations of Europe.
Australia was also helped by the fact that we didn't have artificially low interest rates like the US - when the crisis hit, rates were almost 7%. We were able to drop that rate to 3.25 % very quickly to stimulate the economy - providing valuable cash flow into the financial sector very quickly. In other words, we had room to move.
Of course it hasn't been without its problems - banks have swallowed some of those interest rate movements and haven't always passed them on to consumers due to worries over the margins. Smaller institutions that ran into difficulty were allowed to be taken over by bigger banks reducing competition. But the key point still stands - all of our major banks are still standing right now.
The banks tried to claim credit for this - but the truth is, they were trying to get these regulations removed for twenty years. A report in 1997 recommended the removal of four pillars - but our conservative government at the time - yes, conservative - decided to keep the regulations largely in place. They made it possible for foreign banks to buy out local banks, but in practice this has been a dead letter, with the treasurer having the final veto.
Our political leaders resisted calls by the banks to remove four pillars. And guess what? Our leaders were dead right - to the benefit of these banks, and everyone! These banks continue to argue today that these policies artificially limit their size - well, good! They're still standing because of these laws - and they're now some of the most secure banks in the world. They should be mighty thankful!
Wikipedia has a brief article on four pillars here:
http://en.wikipedia.org/...
Why post this now?
Currently your congress is debating a financial reform bill.
I have read that one of the amendments to that bill encourages banks to be broken up and to have their size greatly limited. I believe it's called the Brown-Kaufman amendment, or more formally, the "Safe Banking Act of 2010".
I firmly believe that such a bill would have enormous benefits to the health of your financial sector, and indeed the broader economy. Australia proves that this kind of policy can work.
I'm by no means an expert on every aspect of Australia's financial regulations - there is much more that others could add. But I know one thing - our economy never hit official recession. Unlike Europe or the USA, no structural damage was done and the Australian economy has rebounded very quickly. Unemployment rose but never went more than about 6.5%. These are not accidents - I believe these can be firmly linked to our far stronger financial regulatory regimes.
So if you want some inspiration to how its done - look down under. From financial reform to universal heath care, we do things differently down here.