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THE DISTILLERY: Wholesale destruction
It’s all good! The wholesale guarantee is to be removed from Australian banks and everyone is happy about it. But why, this column has to ask? Because not one commentator debated the need to withdraw it, nor analysed the implications of removing it, nor asked any questions about how it will work in the future. The Australian Financial Review editorial demanded its removal several weeks ago, without any analysis of why, when or how. And that’s it, nothing since.
It is a fitting end for a policy whose critical nature has been swathed in denial from the outset – Australia is special, not utterly vulnerable to disruptions in global markets.
Nowhere is that denial more onerous than at The Australian. Regular op-ed contributor Peter Swan, Professor of Finance at the Australian School of Business, NSW, swoons with ideological delusion. According to Swan, "Abolishing the scheme was long overdue. The scheme was announced on October 12, 2008, at the height of the global financial crisis. According to the Treasury, the Rudd government introduced the scheme to promote financial system stability and ensure the continued flow of credit at a time of heightened turbulence in international capital markets”, as well as “to ensure that Australian institutions are not placed at a commercial disadvantage vis-a-vis their international competitors that have received similar government guarantees on their bank debt ... Both of these rationales are questionable. First, the government has rightly boasted that the Australian financial system is perhaps the safest in the world and thus least in need of direst taxpayer subsidies via guarantees in order to function. Secondly, it is hard to imagine Citibank and similar recipients of US subsidy would use these subsidies to take the place of Australian banks in the Australian market during the global crisis by providing low-cost loans. Should the Rudd government have been in the business of guaranteeing loans in the first place? In my view, there was never any justification for the Australian government subsidising wholesale bank loans.”
Swan echoes the words of Herbert Hoover’s Treasury Secretary, Andrew Mellon, who told the President in post-1929 US to “liquidate the workers, liquidate the farmers, purge the rottenness”. This column has strong sympathies with Austrian economics, but history proved this was a recipe for Depression. Not a reasonable policy choice.
Nor would it have been Citibank or any Western bank snapping up Australia’s financial system for a song. It would have been the Bank of China, or some other state-owned enterprise; one that had not over-indulged in the preceding free-market driven shadow banking mania. Either this, or given its political implausibility, a part-nationalisation.
John Durie of The Australian sees the announcement in clearer focus. "Wayne Swan's belated but welcome decision to remove wholesale borrowing support for the banks still leaves him with a host of competition issues ... The measures introduced last year were part of a worldwide effort to keep credit flowing in the wake of the financial crisis ... But in Australia the scheme exposed a weakness in the banking system – its reliance on offshore funding – and strengthened the market power of the Big Four banks, particularly Westpac and the Commonwealth ... As much as Swan arguably needed to do something to keep credit flowing, the sad reality is that the banks now know that whatever mess they get themselves into, the government will come to their rescue.”
Correct. But Durie, too, understates the problem. Without the guarantee, Australia’s big four banks faced insolvency, the current account deficit would have been corrected virtually overnight by the brutal market forces on display in the Asian Financial Crisis, housing would have crashed and national spending stopped. Steve Keen may have been elected Prime Minister as an independent.
Durie also recognises the long-term moral hazard problem the guarantee has created. But why does he simply stop there? Accepting the moral hazard as inevitable? What about questioning the government’s method of removal? Why so sudden? Why without any statements of future intent? Why without reference to new banking rules to prevent a repeat occurrence? How will APRA and RBA prevent excessive wholesale risk-taking? By precipitously announcing the removal of the guarantee, without reference to, or discussion of, the future, the Treasurer has reinforced the perception that the guarantee is only suspended, ready to roll out in the next crisis. He has, in effect, turned the entire Australian banking system into one giant Fannie Mae, a banking system with an implied guarantee.
Some of these dangers are of immediate concern in the banks’ land grab within the wealth management sector. According to Adele Ferguson of The Age, “It is no surprise then that in Australia, where investors have been acting as though the financial crisis never happened, banks have been laying the groundwork for this day ... They have been charging big rates for corporate loans, demanding a lot of collateral, putting up rates more quickly than the Reserve Bank, and raising more capital than needed to fund acquisitions for growth.” She concludes that the banks “will take any chance to use their excess capital, particularly as they face a land-grab in wealth management that will not be repeated.”
But how does anyone even know that the banks even have excess capital? What are the Basel rules going to demand? How will APRA adapt them? What of the liquidity provisions? What of new rules separating deposit-taking banks from capital market activity? None of it matters, so long as there is an implied guarantee.
Elsewhere at Fairfax, including the Australian Financial Review, there is silence.
We’ve had no inquiry into how and why our banks got themselves so dependent upon wholesale funds. We’ve got no clear regulatory coordination for rewriting bank rules to address the problem, let alone manage the chaos of new global rules and removal of extraordinary supports for banks. Instead we have an implied guarantee on our financial system, asset markets that are pricing themselves for a perfect economic expansion until 2050 and a press with either no idea or no interest in any of it. This column has a notion. Go short Australia.
It’s all good! The wholesale guarantee is to be removed from Australian banks and everyone is happy about it. But why, this column has to ask? Because not one commentator debated the need to withdraw it, nor analysed the implications of removing it, nor asked any questions about how it will work in the future. The Australian Financial Review editorial demanded its removal several weeks ago, without any analysis of why, when or how. And that’s it, nothing since.
It is a fitting end for a policy whose critical nature has been swathed in denial from the outset – Australia is special, not utterly vulnerable to disruptions in global markets.
Nowhere is that denial more onerous than at The Australian. Regular op-ed contributor Peter Swan, Professor of Finance at the Australian School of Business, NSW, swoons with ideological delusion. According to Swan, "Abolishing the scheme was long overdue. The scheme was announced on October 12, 2008, at the height of the global financial crisis. According to the Treasury, the Rudd government introduced the scheme to promote financial system stability and ensure the continued flow of credit at a time of heightened turbulence in international capital markets”, as well as “to ensure that Australian institutions are not placed at a commercial disadvantage vis-a-vis their international competitors that have received similar government guarantees on their bank debt ... Both of these rationales are questionable. First, the government has rightly boasted that the Australian financial system is perhaps the safest in the world and thus least in need of direst taxpayer subsidies via guarantees in order to function. Secondly, it is hard to imagine Citibank and similar recipients of US subsidy would use these subsidies to take the place of Australian banks in the Australian market during the global crisis by providing low-cost loans. Should the Rudd government have been in the business of guaranteeing loans in the first place? In my view, there was never any justification for the Australian government subsidising wholesale bank loans.”
Swan echoes the words of Herbert Hoover’s Treasury Secretary, Andrew Mellon, who told the President in post-1929 US to “liquidate the workers, liquidate the farmers, purge the rottenness”. This column has strong sympathies with Austrian economics, but history proved this was a recipe for Depression. Not a reasonable policy choice.
Nor would it have been Citibank or any Western bank snapping up Australia’s financial system for a song. It would have been the Bank of China, or some other state-owned enterprise; one that had not over-indulged in the preceding free-market driven shadow banking mania. Either this, or given its political implausibility, a part-nationalisation.
John Durie of The Australian sees the announcement in clearer focus. "Wayne Swan's belated but welcome decision to remove wholesale borrowing support for the banks still leaves him with a host of competition issues ... The measures introduced last year were part of a worldwide effort to keep credit flowing in the wake of the financial crisis ... But in Australia the scheme exposed a weakness in the banking system – its reliance on offshore funding – and strengthened the market power of the Big Four banks, particularly Westpac and the Commonwealth ... As much as Swan arguably needed to do something to keep credit flowing, the sad reality is that the banks now know that whatever mess they get themselves into, the government will come to their rescue.”
Correct. But Durie, too, understates the problem. Without the guarantee, Australia’s big four banks faced insolvency, the current account deficit would have been corrected virtually overnight by the brutal market forces on display in the Asian Financial Crisis, housing would have crashed and national spending stopped. Steve Keen may have been elected Prime Minister as an independent.
Durie also recognises the long-term moral hazard problem the guarantee has created. But why does he simply stop there? Accepting the moral hazard as inevitable? What about questioning the government’s method of removal? Why so sudden? Why without any statements of future intent? Why without reference to new banking rules to prevent a repeat occurrence? How will APRA and RBA prevent excessive wholesale risk-taking? By precipitously announcing the removal of the guarantee, without reference to, or discussion of, the future, the Treasurer has reinforced the perception that the guarantee is only suspended, ready to roll out in the next crisis. He has, in effect, turned the entire Australian banking system into one giant Fannie Mae, a banking system with an implied guarantee.
Some of these dangers are of immediate concern in the banks’ land grab within the wealth management sector. According to Adele Ferguson of The Age, “It is no surprise then that in Australia, where investors have been acting as though the financial crisis never happened, banks have been laying the groundwork for this day ... They have been charging big rates for corporate loans, demanding a lot of collateral, putting up rates more quickly than the Reserve Bank, and raising more capital than needed to fund acquisitions for growth.” She concludes that the banks “will take any chance to use their excess capital, particularly as they face a land-grab in wealth management that will not be repeated.”
But how does anyone even know that the banks even have excess capital? What are the Basel rules going to demand? How will APRA adapt them? What of the liquidity provisions? What of new rules separating deposit-taking banks from capital market activity? None of it matters, so long as there is an implied guarantee.
Elsewhere at Fairfax, including the Australian Financial Review, there is silence.
We’ve had no inquiry into how and why our banks got themselves so dependent upon wholesale funds. We’ve got no clear regulatory coordination for rewriting bank rules to address the problem, let alone manage the chaos of new global rules and removal of extraordinary supports for banks. Instead we have an implied guarantee on our financial system, asset markets that are pricing themselves for a perfect economic expansion until 2050 and a press with either no idea or no interest in any of it. This column has a notion. Go short Australia.
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This post has been edited by Silver Surfer: 10 February 2010 - 02:52 AM
