A number of economists, including the blogosphere’s own John Quiggin and Nicholas Gruen, today released a letter in Canberra calling for a new enquiry into the financial system.  As Bernard Keane observes in Crikey, there are much more pressing issues associated with finance than can be encompassed by a ‘debt truck’ (or, to be bipartisanly sceptical, a ’saving jobs truck’). Apply for truck finance. Among the suggestions for items that should be considered by such an enquiry is the establishment of a “People’s Bank” utilising the infrastructure of Australia Post. The economists’ worry is that there is decreasing competition in the banking and finance sphere, driven in part by the consolidation of market power attendant on the GFC and facilitated by some of the policy responses of the Rudd government.

No doubt, as with most of the measures taken to increase competition in the interests of consumers and citizens, the usual suspects will find some reason to decry “government interference” or whatever. Such are the contradictions of neo-liberalism. The ideological patter is all too often a screen for a sort of dirigisme that supports the interests of big business above all others. We’ll see – surely no one could object to these important matters being canvassed in an informed and wide-ranging enquiry?

Back the debt truck up — we need big ideas like the People’s Bank

by Bernard Keane

Back at the start of the year I suggested the economic crisis had taken us into a new world where the role of government had been transformed, and hoped that our best economists should start thinking about where we go from here.

Today several of our best economic thinkers from across the ideological spectrum did exactly that, with an open letter urging a comprehensive review of the Australian financial system ?—?and how it interacts with those across the globe.

The timing couldn’t have been better, coming the day after Malcolm Turnbull revived the debt truck from the early nineties and the ALP ?—?who had evidently been waiting for just such a moment from the Coalition ?—?replied with the clunkier “Supporting Jobs Truck”, which presumably hasn’t been donated by John Grant. While our politicians mess about with trucks, there are pressing issues to deal with.

There are a couple of key issues identified by the economists that have so far not received the attention they deserve. One is that the collapse of the residential mortgage-backed securities (RMBS) market ?—?in essence, non-major bank lenders ?—?has indirectly put pressure on business lending, and particularly higher-risk business lending, because the big banks have moved to fill the gaps left by the RMBS market. This goes, as the Prime Minister would say, to the vexed issue of whether bank capital costs really have increased, as they claim.

Another is that it is not merely global capital markets that are interconnected, it is government policy that is similarly interdependent. New policies already implemented, and being now developed in other countries will have significant impacts on the Australian financial system, but we don’t as yet have any comprehension of the nature of these impacts ?—?and no process for doing so.

Above all, they worry that it may have been good luck rather than, or in addition to, good management that meant the Australian financial system was relatively safe from the sort of disasters that beset the American and European systems. How will we fare next time?

The letter raises fourteen specific questions, each of them meaty issues. There is plenty to alarm the big banks, but the most disturbing will be a suggestion that consideration be given to a basic financial service based on existing Government infrastructure such as Australia Post.

In particular, the group wonder whether there is a role for a publicly-owned entity like Kiwibank in New Zealand, which operates from post offices and participating retailers, but offers both deposit-taking and lending, including business lending.

A more minimalist option would be the establishment of a deposit-taking entity that invested in the Future Fund. That would increase competition for deposit interest rates, whereas a full Kiwibank model would challenge the big banks across most of their activities. It would require significantly greater infrastructure and expertise than a simple deposit-taking entity, but not necessarily need to replicate the full branch-based structure of the major banks.

The proposal flies in the face of what was accepted wisdom before September last year; now, however, even in Australia government is deeply enmeshed in the financial system via the bank guarantee and its own efforts to prop up the RMBS market (not to mention the stillborn ABIP proposal).

It merits serious consideration because the long-term project ?—?pursued by both sides of politics ?—?to maintain competition in lending in Australia is failing. It depended on the availability of externally-sourced capital for the RMBS market, which was fine while the world financial system was spilling over with finance but ended the moment the crisis hit ?—?especially after the bank guarantee massively strengthened the hand of the major banks over what was left of the non-bank lending sector.

Now we are left with a true oligopoly, operating in a manner indistinguishable from a cartel and unable or unwilling to reduce business lending rates.

It’s hard to see what downsides there are for the Government in conducting the sort of inquiry urged in the letter. It has handled the triage stage of the financial crisis very well. Now is the time to take a step back and consider an overarching strategy. As the Prime Minister noted in his comments overnight in Germany, managing the recovery sustainably will be as challenging as managing the crisis itself.

How long until the Government is again confronted with one of the banks unilaterally raising interest rates, particularly for business lending? The problem of Australia’s banking oligopoly needs a long-term solution.

Crikey understands that one of the Wallis Inquiry members, Prof Ian Harper, also strongly supports the idea of a new inquiry.

As Christopher Joye told Crikey, “…the financial world has changed more in the last 13 years since Wallis than it has in the last 40 years… The key message of the letter is that it would be a massive mistake for the politicians and bureaucrats to persist with the self-congratulatory hubris. The fact is Australia was very lucky to skate through the crisis unscathed. Our system is good, but also has many glaring flaws.”

Something for the politicians to think about while they’re playing with trucks.

Lenders in California must put off foreclosure proceedings for 90 days in situations in which they have not made an effort to work with borrowers to modify the terms of their mortgages, under a state law that took effect Monday.

But don’t expect automatic or immediate relief under the law, written by state Sen. Ellen Corbett, D-San Leandro.

Lenders and loan services that already have a comprehensive loan modification program in place are exempt from the law. Such programs call for loans to be modified by lowering interest rates for at least five years, deferring or reducing part of the principal, or providing for up to 40 years to repay the loan.

“The vast majority of them are already in compliance with some regulation or requirement, either through federal laws or voluntary efforts,” said Chris George, president of San Ramon-based CMG Mortgage Services and a board member of the California Mortgage Bankers Association.

By applying for an exemption, lenders will automatically receive a 30-day stay during which state officials will determine whether the company has a proper loan modification program in place.

“If they do not have a plan in effect, they will be (subject) to that 90-day moratorium,” George said.

Sean O’Toole of ForeclosureRadar, a service that tracks California foreclosures, said he doesn’t think the law will make a real difference in the number of foreclosures. “It’s a law you could drive a truck through,”

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he said. “All you have to do is put in a loan modification program.”

The California Foreclosure Prevention Act was included in legislation passed in February that approved the state budget.

Paul Leonard, director of the Oakland-based California office of the Center for Responsible Lending, sees the state law working in conjunction with the Obama administration’s foreclosure plan that includes financial incentives made to lenders, loan services and borrowers who participate in loan modification programs.

“It’s a bit of a stick that will create incentives for the lenders and services to participate in the Obama plan,” he said.

Lynda Gledhill, a spokeswoman for Corbett’s office, said there are no estimates as to how many homeowners facing foreclosure the state law might help.

The California Foreclosure Prevention Act law applies to first mortgages taken out between Jan. 1, 2003, and Jan 1, 2008, for owner-occupied homes. CalHFA loans are not eligible.

The law is on top of separate legislation that requires lenders to wait 30 days before filing a notice of foreclosure after first making initial contact with a borrower who has missed several mortgage payments.

ESKILSTUNA, Sweden (Reuters) – Truck maker Volvo (VOLVb.ST) said on Tuesday it believed demand had reached its floor and some markets in Asia had shown signs of recovery, but it was still keeping a lid on production.

“We think we have hit the bottom. Now it’s a question of how fast it will come back,” Chief Executive Leif Johansson said at a capital markets day in Eskilstuna, west of the Swedish capital.

The world’s second biggest truck maker said its main markets did not appear to be bouncing back yet.

“We have not yet seen any signs of our primary markets in Europe or North America recovering, although we may have started seeing indications of trends leveling out,” Volvo said in a statement.

The company said some markets, such as China, India and Japan, were picking up, largely due to government stimulus packages.

Shares in Volvo were up 4.8 percent at 1325 GMT versus a 1.1 percent rise in the broader Swedish market .

Volvo, which plunged to a wider-than-expected loss in the first quarter, is in the midst of cutting thousands of jobs to adjust to what it has described as the steepest ever decline in market demand due to the global downturn.

It said it had cut production further since the first quarter in order to adjust to the weak demand. “We will continue to have low-cost coverage until we have balanced our stocks and costs with demand in the market, and this will impact profitability,” it said in the statement.

Annual costs would be slashed by 21 billion Swedish crowns ($2.69 billion) this year from the previous year, the company said.

It also said it had high liquidity reserves and an advantageous loan structure, with few loans maturing in the next two years.

“Furthermore, with its global presence, the Group has excellent opportunities for raising loans on the capital market,” it said in the statement.

($1=7.816 Swedish Crown)

(Writing by Veronica Ek; editing by David Holmes and Simon Jessop)