It's been a strange journey for Treasurer Joe Hockey to the point where he has hired a man who ran one of Australia's banking giants to conduct an inquiry into a financial system that the big banks dominate.
This inquiry is a test-tube baby, conceived in 2010 as part of Hockey's disengagement from overzealous bank-bashing. Its lack of natural kindling is revealed in its draft terms of reference, which ask for a review of everything, basically. There is no particular focus, and that creates both promise and risk for the probe that Hockey has asked former Commonwealth Bank managing director David Murray to conduct.
Hockey aligned himself with the idea of a new financial system inquiry in July 2009 by backing calls for one from economists including Nicholas Gruen, Christopher Joy and Joshua Gans.
He formally proposed it along with eight other ideas in October 2010, when he was part back-tracking, part elaborating on earlier comments that the government should use "a range of levers that are punitive in measure" to pressure the big banks not to raise interest rates more aggressively than the Reserve Bank's cash rate.
It was a bad idea, the antithesis of the free market the Liberals support, and Hockey was out on a limb as soon as he floated it. "I'm not aware of any precedent for the Federal Parliament regulating interest rates, at least in recent years," Malcolm Turnbull offered when asked.
Hockey hunted his escaped thought-bubble down in following days, surrounding the flawed original idea of intervention with a more general dissertation on the financial system, the power of the banks and their dependence on the government for support including deposit guarantees.
The Reserve Bank had "belled the cat" by commenting that bank funding costs had stabilised and were effectively at pre-financial-crisis levels, he said in an interview on October 21, 2010. (It actually said that bank funding costs had been relatively flat in recent months, but lending spreads were still well above pre-crisis levels.)
The banks were hugely profitable, the crisis had wiped out smaller competitors, and they were so heavily weighted to mortgages that their plans to increase their earnings necessarily involved a focus on increasing home lending margins, he said, adding that while he wasn't out to damage the banks, he was "fed up on behalf of Australians that are facing higher interest rates".
The Coalition did not believe politicians should set lending rates, Hockey said in the October 25 speech in which he unveiled his nine-point plan, but it was legitimate to ask whether banks should be "unrestrained growth stocks" or more akin to staid, safe utilities.
That and many other questions can be considered by the inquiry that Hockey has kicked off. The draft terms of reference are all-embracing, covering system architecture, tax arrangements, the impact of technology and changing consumer demand, the performance and structure of key regulators, and changes in the way savings are held and redeployed, including the role played by superannuation, a system within a system that now rivals the banks for size.
It may come up with important initiatives: a way to attract super and other savings pools into infrastructure investment without providing tax incentives that are too costly, for example; ways to introduce more competition to the banks; or ways to handle the internet and what it enables - new networks, new players and in the startling case of bitcoins, a new virtual currency that exists beyond the walls of the global clearing system.
It could recommend dismantling the central "twin peaks" regulatory skeleton of the system, but should not. Twin peaks worked well during the crisis, and Hockey and Treasury like it. History tells us that inquiries that recommend changes the government isn't looking for gather dust. Some fear that the appointment of Murray, a high-conviction personality, increases that risk.
Murray's appointment is also interesting given Hockey's earlier focus on bank power. As it turns out, bank power is only one of many issues to be considered, but there was an argument that the inquiry should be headed by an outsider, as were the Wallis inquiry in 1997 and the Campbell inquiry in 1981.
After Murray's appointment, the inquiry needs an orientation towards youth in other appointments, to arm it to consider the massive changes the internet is delivering.
Much has already changed since Hockey's nine-point plan in 2010. His suggestions included allowing the banks to issue covered bonds, regular updates from the Reserve Bank about bank profitability, bans on price-signalling by the banks, and an investigation by the regulator APRA into whether the banks are taking on excessive risk.
Covered bonds were legalised with bipartisan support in October 2011, and the banks have raised $57 billion using them. Laws prohibiting anti-competitive price-signalling came into force last year. The Reserve Bank updates annually on bank profitability and was already doing so in 2010, and checking whether the banks are taking on excessive risk is APRA's main remit.
They are changes within the existing fabric, however. The internet is changing the fabric itself.