Joe Hockey called for a financial inquiry today. Finally. Here is my short take at ABC Online. I should note here that no Labor government has ever initiated these sorts of inquiries. Hard to understand why.

 Continual learning in financial regulation

ABC’s The Drum, 25th October 2010.

Let’s get a few things straight about our financial system. First, much to the surprise of everyone it weathered the global financial crisis.

Indeed, it did this so well, it is probably best we stopped using that phrase and instead call it the North Atlantic Financial Crisis.

Second, we have no real idea why our banks and financial institutions came through this scratch-free. The markets certainly didn’t expect it and marked them down with the rest of the economy for a long time.

To be sure, we have theories. One theory is that our system of regulation was superior to most countries and prevented our banks from engaging in all of that subprime nonsense. That may be the case but it is also true that in the dark days of November 2008, there was a tonne of scrambling. Remember the Rudd government’s dramatic weekend guarantee of all bank deposits? That was a good move but it was certainly on the fly. Previously, they had been inching towards a modest guarantee except that to do so in the midst of crisis would have alerted the public to the fact that their deposits were not protected.

Fortunately, the media avoided all questions over whether the equity in their home mortgages was guaranteed. But it is worth remembering how close we came to a real crisis at that time.

The other theory is that this is a side-benefit of our oligopolistic banking system. The idea is that the lack of competition means two things. First, that our banks are relatively large and so find it easier to diversify and not fail under crisis. Second, that our banks are not pressured into ever-riskier adventures that can precipitate such crises. Both of these are nice options but they carry with it a sinister-side: for goodness sake, don’t let the banks face real competition otherwise we will be in trouble.

The problem there is obvious: a lack of competition – especially competition that gives banks an easy life – is not great for consumers. As an economist I am naturally sceptical of such arguments and moreover, think we can be far more imaginative in our system of financial regulation than entrusting our future stability to banking oligopoly.

Last year, these concerns motivated myself and five other economists to write the Rudd government a letter calling for a new financial inquiry. The economists represented all sides of the political spectrum and the logic was, in our humble opinion, compelling.

Australia has done well from past inquiries. The Campbell Inquiry led to great efficiencies in our lending institutions while the Wallis Inquiry freed up some competitive bottlenecks and opened up the banks to further competition.

We are told that the world is changing so rapidly that we need to keep up with no economic and financial developments. Given this, we need to revisit our system of financial regulation and supervision on a decade-by-decade basis. It is time to do it again.

Joshua Gans is an economics professor at Melbourne Business School. He blogs on these topics at http://www.economics.com.au.