A New People's Bank

If the government can support China’s Asian Infrastructure Investment Bank, why can’t Australia have its own Development Bank?

The major banks have largely become investment banks for the top end of town. Deregulation of the banks has not delivered lower interest rates to small business and farmers, once fees and charges are included. It is arguable they have not delivered lower mortgage rates than prior to bank deregulation. Services have been slashed to many communities. Despite government assurances, there is the constant threat of takeover by foreign banks or seeing our major banks shift their headquarters overseas.

There is an urgent need for the Federal Government to establish a new Commonwealth-style bank, as has been done in New Zealand.

This Bank could be run through Australia Post commercial centres. This is how the New Zealand Labour Party planned to implement its new People’s Bank. The New Zealand Government allocated $NZ80 million to its establishment phase.

Affordable bank loans

It would lend at lower interest rates to households, to small to medium businesses and to family farmers. In order to do this, it would raise its capital in three ways:

  • First, from credit issued at low or even zero interest rates from the Reserve Bank.
    According to US Federal Reserve Bank Chairman, Dr Alan Greenspan, “Central banks can issue currency, a non-interest-bearing claim on the government, effectively without limit. They can discount loans and other assets or banks or other private depository institutions, thereby converting potentially illiquid private assets into riskless claims on the government in the form of deposits at the central bank” (Central Banking and Global Finance lecture, January 14, 1977).Of course, he added the qualification that no government would want to overdo it and flood the nation with money, causing excessive inflation.The issuing of low interest credit by the Reserve Bank used to be a standard practice, but ceased on the 1981 recommendation of the Campbell Committee. It argued that if the Reserve Bank issued credit at commercial rates, the Bank could operate functionally independent of the Federal government.However, it did admit that the practice of financing the Federal government at one percent was part of how governments operated in the public interest, involving considerations “beyond economic issues” (Campbell Committee Final Report, page 29).Such non-economic “considerations” should include helping families buy their own homes. Economic reasons should include helping to give our farmers and businesses a competitive advantage in world markets.
  • Second, funds can be raised in the capital markets.
    Being a government-backed and secured bank, it could raise funds at the 10-year commercial bond rate, which is about 6.5-6.0 percent, as of the end of 2000. However, were the government to offer concessional tax rates to investors in such bonds, they could be issued at lower than commercial rates.
  • Third, funds can potentially be raised from the huge pool of superannuation funds, of which about $90 billion is currently invested off-shore.
    There is sound reason to tap into the latter. What is the point of having a savings system that invests so much off-shore, at the same time as the country has borrowed $294 billion offshore, risking the country’s economic stability? Super funds invested in a special Commonwealth-style bank bond issue could be tax exempt, allowing the funds to be raised at lower than government bond market rates.

A More Prosperous Australia

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There are precedents for such a new bank. The Commonwealth Bank was originally established to assist those who were not serviced by the commercial banks. The Commonwealth Development Bank was a special service to farmers and small businesses, offering long term loans at low interest rates. For farmers this is essential. Their incomes can vary enormously because of the vagaries of the agricultural markets, the weather and pestilence.

In Germany, the Kreditanstalt für Weideraufbau (KfW) was established to provide small and medium-sized businesses with cheap, long-term loans to help establish themselves or to expand their operations. The KfW is widely respected, has a gold-plated credit rating, and is seen as pivotal to Germany’s post-war resurgence.

Even in the home of the free market, the United States, special assistance is provided to home buyers. Home owners write off $50 billion in annual interest repayments against their taxes. They also have US Congress approved Fannie Mae and Freddie Mae home-lending schemes, with generous tax breaks, currently providing over $US1,000 billion in home loans at one percent less than other financial institutions.

This may contradict American faith in free financial markets, but even the avidly free trade US Congress supports these schemes because it believes “that expanding home ownership is good for families, communities and the economy … [Without them] mortgage rates would rise to the ‘jumbo’ level, forcing consumers to pay over $US20,000 more in interest, driving them out of the market” (Letter to The Economist, John Buckley, senior vice-president of communications, Fannie Mae, November 18, 2000).