Using money to strangle debtors

The Hayne royal commission into the finance sector continues to uncover aspects of a toxic corporate culture. Lying, cheating, fraud, cover-ups – you name it, someone did it, was paid good money for it and left some customer worse off as a result.

Yet, as disgraceful as the exposed schemes are, there is a bigger picture of systematic financial rip-off.

Australia’s big banks reported after tax profits of $31.5 billion last year, up 6.4 percent on 2016, according to consultancy firm KPMG. The big four – Commonwealth, ANZ, NAB and Westpac – and their subsidiaries are at the centre of financial life.

The finance industry holds more than $6 trillion in assets. The banks’ share of that is 55 percent. The big four control more than 80 percent of all loans and more than 50 percent of retail investment funds.

The power and size of finance have grown tremendously over the last decades as governments have allowed greater speculation and widened potential exploitation.

“They create the investment products that we buy, sell [them] to us via their financial planning networks … put our investment portfolios on their platforms, and then lend us the money to buy them and of course our home, perhaps an overdraft for our business and more”, writes Stephen Tunley, CEO of Balmain Funds, a finance and investment firm.

In the early 1970s, significant controls were in place to manage monetary policy, limit bank lending, allocate credit to priority areas of the economy and direct funds to government.

Gradual deregulation from the 1960s, increasing dramatically in the 1980s, unleashed the banks. Financial system assets as a proportion of GDP rose from 100 percent in 1985 to more than 350 percent in 2007, before the global financial crisis.

Overall, the Australian financial system has more than doubled as a proportion of the economy since 1978.

The largest contributor to the growth of bank balance sheets has been the growing indebtedness of the population, particularly with mortgage debt. Between 2002 and 2015, the mortgage holdings of National Australia Bank, ANZ, Commonwealth Bank and Westpac increased by 388 percent, 435 percent, 475 percent and 554 percent respectively.

The financing model is simple: the banks borrow at a low interest rate and loan at a higher one. However, the tremendous expansion of credit since the 1980s has helped to inflate asset prices – the basis for rising mortgages. The higher the prices go, the greater the income of the banks.

And because of government guarantees to international financiers, the banks can borrow at lower rates than would otherwise be the case.

“[W]e’ve now created these monsters – financial behemoths – which have enormous power and arrogance”, Rob Ferguson, former chief of investment bank BT Australia, told the Australian Financial Review’s Karen Maley last week. “And they’re all part of an oligopoly, so their profits are served up to them on a platter.”

From having one of the lowest household debt-to-income ratios in the 1980s, Australian households now are among the most indebted in the world. Thirty years ago, the housing debt-to-income ratio for an average household was a little over 30 percent. Today it is almost 140 percent – a more than four-fold increase.

Total household liabilities are $2.3 trillion, putting Australia at the top of the Bank for International Settlements list of indebtedness.

Big finance has most of the population – through mortgages, personal loans and credit cards – in a choke-hold, squeezing interest out of households already struggling with stagnating wages. (And you don’t have to be a mortgage holder – renters pay indirectly via landlords.)

Marx noted that the credit relationship is about more than simply repayment; it’s also about judgement of the debtor, who has to prove him or herself worthy of access to the funds required to live.

“Human individuality, human morality itself, has become both an object of commerce and the material in which money exists”, he wrote in 1844. “Instead of money, or paper, it is my own personal existence, my flesh and blood, my social virtue and importance, which constitutes the … corporeal form of the spirit of money. Credit no longer resolves the value of money into money but into human flesh and the human heart.”

It’s the impersonal force of the market assessing a person’s worth. And while the person – the one applying for a credit card or taking out a loan – has to prove themselves an upstanding and disciplined member of society, the creditor displays all the ethics of a viper.

Ironically, however, today’s vipers – financial advisers detached from ownership of the capital they allocate, and instead drawing commissions – are all the more predatory for failing to make genuine assessments of their customers’ capacities to repay. Indeed, some of the most egregious offences involve selling products or advancing credit that lead to the debtor’s ruin.

Those practices, generalised, underpinned the global financial crisis. Interest-only or low-interest-period loans with a great deal of fine print were pushed throughout the United States and onsold in broader investment packages. Interest rates jacked up and principal repayments kicked in after a year or two; millions lost their homes, and the financial system collapsed.

We’re told that things are different in Australia. Keep in mind, however, that more than one-third of outstanding mortgages here are interest only; for a large number of those, the interest-only period will expire in the next four years. A key difference here is that loans are “full-recourse”. That means mortgage holders can’t walk away from debts by handing the keys back to the bank; debtors are locked in.

We’re also told that, while big finance might have hired some bad apples, it is just an allocator of funds from savers to investors – like a giant corporate dating app, linking needy firms with cashed-up companies looking for a good time – and in the process oiling the entire economy and providing a public service.

But there is no good reason that the allocation of resources should be carried out by corporations squeezing interest payments out of everyone and everything they touch. Better to nationalise the financial sector so that the immense resources at its disposal can be used for socially useful projects – public housing, public transport and health and education infrastructure, for example – rather than being abused by speculators or junk industries.

And no more locking people into debt for the term of their working lives and beyond. That’s the ugliest aspect of the domination of finance – not the amount of money lost or conned or squeezed, but the time and mental energy expended over the course of a life trying to make repayments on living.