No escaping the law of unintended consequences

BANKS, Wayne Swan, the housing market and Rupert Murdoch are all copping lessons from the law of unintended consequences - and that law's lessons tend to be on the painful side.

The law holds that intervention in a complex system always creates unanticipated and often undesirable outcomes. It's a law that appeals to those of us who take a perverse or at least wry enjoyment in mankind's self-importance.

A favourite example of mine is the way the anti-fur coat brigade helped kill native Australian wildlife: the anti-fur protesters wiped out the cottage industry of trapping red foxes for their pelts in the Snowy Mountains, resulting in more of the ferals at large, resulting in more little local marsupials being turned into fox lunch.

While the odd super model was being photographed in her birthday suit as a protest against the fur trade, I like to imagine a tribe of pygmy possums waving little placards proclaiming that nothing's as sexy as a red fox coat. While he'll never acknowledge it, Wayne Swan is playing the role of a less-than-super model promoting competition in the home loan market.

The foxes in this case are the Big Four banks, while the pygmy possum role goes to the non-Big Four lenders.

The idea of wiping out exit fees on home loans was sold by Swan as a good thing that would make it easier for people to switch lenders when offered a better deal, thus increasing competitive pressure on the banks. Turned out, Swan was doing the foxes a huge favour by making it much harder for the pygmy possums to compete.

Smaller lenders generally have higher fixed costs and any wholesale funds they raise tend to cost them a bit more than the Big Four have to pay.

Originating a mortgage with all the paperwork and checking and valuations and stuff costs a lender two or 3000, depending on how efficient they are and how straightforward the transaction might be.

So, to offer a competitive interest rate, it was the smaller players who had the big exit fees to cover their costs when someone paid out a mortgage early - as the vast majority of us do.

This particular unintended consequence was born out of a basic dishonesty on the politicians' part in the first place. When the banks increased mortgage rates by more than the Reserve Bank cash rate movement, Wayne Swan and Joe Hockey both pranced about, feigning indignation. Neither wanted to admit that it didn't really matter to the average borrower who put up the rates - the RBA or the individual banks - because the RBA targets that eventual rate paid.

It's happening again with the government's silly attempt to crack down on alleged price signalling by the banks. This is the outcome of another burst of self-serving politically motivated bank bashing. There's a big leap from Dick Pratt and Amcor doing a deal to inflate cardboard box prices, to bankers publicly talking about where they see interest rates going. It will make it harder for the public to be informed about the likely cost of money and for banking syndicates to co-operate when dealing with problem loans. Next the ACCC will want to stop horse trainers discussing their nags' chances - they might be signalling some race fixing.

As for old Rupert, a corporate culture of whatever-it-takes has the unintended consequence of threatening his takeover of BskyB.

It could be a new subclause to the Law: he who rises by the tabloid, sinks by it.

Michael Pascoe is a BusinessDay contributing editor.