Centralisation versus decentralisation.
It’s one of the themes I often explore here at The Rum Rebellion.
Put simply, in centralised political systems, the power resides with the few. In decentralised systems, the power is with the people.
Think of China’s one party political state. There is a huge concentration of power at the top. Any dissenters are shut down immediately. And when I say shut down, I mean silenced…for good.
For example, the Chinese communist party banned Falun Gong, a spiritual group which teaches mediation and self-improvement, about 20 years ago. They branded the group as an ‘evil cult’ which threatened social stability.
They did more than just ban them though. As the ABC reported back in June:
‘China is murdering members of the Falun Gong spiritual group and harvesting their organs for transplant, a panel of lawyers and experts said as they invited further investigations into a potential genocide.
‘Members said they had heard clear evidence forced organ harvesting had taken place over at least 20 years in a final judgement from the China Tribunal, an independent panel set up to examine the issue.
‘Beijing has repeatedly denied accusations by human rights researchers and scholars that it forcibly takes organs from prisoners of conscience and said it stopped using organs from executed prisoners in 2015.
‘But the panel said it was “satisfied” that the practice was still taking place, with imprisoned Falun Gong members “probably the principal source” of organs for forced harvesting.’
As despicable as it sounds, organ harvesting is big business in China. But what makes that possible is the centralised nature of political power and control.
While far from perfect, Australia has a relatively decentralised political system. We have three levels of government, local, state and federal. The designers of the constitution made it that way to prevent a concentration of power at the top.
The same principle applies to financial markets. However, there is no constitutional protection to prevent a concentration of power as there is in politics.
Over the years, the financial system has become more concentrated (centralised) under the guise of efficiency and consumer protection. At the same time, ‘central’ banks (there’s that word again) have become increasingly dominant.
It took nearly 20 years of lobbying by the big private bankers to establish the Federal Reserve in 1913. And even then, they had to call it a ‘Federal Reserve’ (with 12 regional banks) not a ‘central bank’ (which it was) in order to get it over the line.
This centralisation of banking power could not have occurred without removing gold from the financial system. So not surprisingly, around the same time as the Federal Reserve came into existence, the removal of gold from the hands of the people began.
In the 1930s, President Roosevelt had to outlaw individuals owning gold, such was its power to prevent the centralisation of banking power. Gold only remained as ‘money’ in bank vaults.
Soon though, gold left the national banks and went into central bank vaults only, where it remains concentrated today.
The centralisation of ownership of gold and banking power go hand in hand. You cannot have one without the other.
New players eating into the banks’ profits
In Australia, we have one of the most centralised banking systems in the world. For example, our top four banks write around 80% of all mortgages. It’s an oligarchy. Yet, strangely, we don’t refer to our banking chiefs as ‘oligarchs’.
The politicians and bankers sell this concentration to us as strength and stability. But as the royal commission showed, it’s also a platform for abuse of power.
More than that, it’s a platform to take risks. The banks know they’re too big to fail. They know the central bank will always help them out with taxpayer money.
But nature always chips away at power concentrations. Protected industries get lazy and complacent, and new players enter the market and cut their lunch.
With this in mind, it was great to read about the entrepreneurial success of Netwealth Group Ltd [ASX:NWL] in the Weekend Australian. Netwealth, a wealth management platform, is a father and son business, 20 years in the making.
It is benefitting as advisers and investors flee the big banks in the wake of the royal commission.
The Heine’s, who started the business, have a long history of entrepreneurial endeavour. They have a family document ‘Lessons from History’ that seeks to build knowledge from this experience and hand it down through the generations.
One of their lessons is that ‘It is ultimately your responsibility. Taking responsibility for when things go wrong is more important than taking responsibility for when things go right.’
It’s a lesson that all investors should heed. When you take responsibility for your mistakes, instead of blaming others, you tend to learn the lessons much quicker.
Netwealth isn’t the only company benefitting from the slow malaise of the big four Aussie banks. There is an increasing number of players with leaner business models and a better service offering, and they are eating into the banks’ profits.
Editor, The Rum Rebellion
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