Circle September 2, 2008, in your calendar. The Olympics will be finished but we are set to have an almighty tussle between the private banks, the Federal Government and the Reserve Bank of Australia. If, as expected, the RBA moves to cut the cash rate to stave off economic downturn it will be expecting the big banks to follow suit and pass on an interest rate cut to their customers.
However some of the banks, especially Westpac and the Commonwealth Bank, have said they will not necessarily do this on the argument that the cost of funds has risen with the global credit crisis.
In other words, the efficacy of monetary policy is about to be somewhat diminished because the private banks want to line their pockets and please their shareholders. It also goes against what the assistant governor of the RBA, Philip Lowe, said that the banks' cost of funds had fallen in recent days meaning their protestations were groundless.
This has what 20 years of financial deregulation has come to. Long gone are the days of quantitative controls and interest rate setting which was then under the direction of the Treasurer.
In the past 20 years the RBA had, more or less, control over interest rates. So brazen a control, in fact, that its decision to raise rates and hold them there put an end to the Keating and Howard governments respectively.
Today the Government has no say in interest rate setting except bluster. We are reduced to having Wayne Swan threatening to cast his ''eagle eye''on the banks. It's as effective as his predecessor Peter Costello's advice that if you did not like they way the bank treated take your business elsewhere. It did not seem to dawn upon him of the transaction costs of doing so. In the nicest possible way, Rudd said passing on the interest rate cut was the ''right and reasonable thing to do''.
All this moral suasion might count for little at the end of the day. It might be that the big banks are playing a cat and mouse game of trying to entice the RBA to deliver up a bigger interest rate cut, say half a percentage point.
What amazes one is how supine we are in taking all this. In the early '90s the banks were called bastards for their onslaught of fees and for getting rid of low value customers. It's a campaign the banks would rather forget but if they live up to their threats we might have another round of bank-bashing.
ACTU president Sharan Burrow noted that banks have lifted their lending rate four times independently of the RBA. She has accused them of ''profit gouging''. The record profits announced by the Commonwealth Bank last week would suggest she is more right than wrong. There is certainly an asymmetry at play with the banks eager to bid rates up but not overly rushed to haul them down again.
In all this debate there has not been the merest mention of financial regulation. In the Depression era the Scullin Labor Government, and its mercurial treasurer, E.G.Theodore had such a torrid time that years later Ben Chifley pushed through the bank nationalisation bill which would have ended private banking in this country.
Labor minds were of the opinion that the depression had been exacerbated by the banks refusing to lend and not cutting interest rates quick enough. In 1931 Australia's central bank, the publicly-owned Commonwealth Bank, which also practiced as a trading bank, refused to accommodate the Federal Government's attempt for borrowing to cover a deficit budget. The other trading banks regarded the Commonwealth Bank as a competitor and would not follow its directions.
In one episode the Bank of NSW, now Westpac raised interest rates because the general manager there felt he had a better handle on monetary policy than the governor of the Commonwealth Bank.
It's ironic that with Westpac now re-claiming the mantle of Australia's largest private bank following its merger with St George that it has been most vocal about not necessarily following the RBA's lead. Instead of engaging in pussy-footing maybe it's time the Government took to the banks with a bit of old fashioned socialist bombast. Instead we are probably likely get something like a bankwatch website.
Alex Millmow is a senior lecturer in economics at the University of Ballarat.
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