Thursday, December 2, 2010

The fifth pillar

Australia's best business journalist, Adele Ferguson, has a scoop today on what the government's new competition measures will look like. From the SMH:
Wayne Swan is poised to unveil controversial measures to create a fifth pillar of the banking system using the muscle of the $73 billion credit union and building society industry.

It is a move that would create a new force in banking and put downward pressure on home lending rates.

The Treasurer's plan would address rising pressure on the government to rein in the big four banks following their super-sized interest rate increases last month.

The moves are expected to target the cost of funding, including reopening the government guarantee scheme on a limited basis to the credit unions, building societies and regional banks.

Money would be injected into the securitisation market to allow non-bank lenders to raise funds at a similar cost to large banks.

The proposals are expected to fall short of establishing Australia Post as a stand-alone bank, after resistance from the postal service and the Treasury over the high costs involved.

Instead, it will expand the post office branch network by including the 112 credit unions and building societies.

The proposals are expected to provoke a strong backlash from the banks, which will be allowed a short period to make submissions before the government makes the changes this month.

Well perhaps. But this looks much more like a comprehensive victory for the banks to this blogger. Sure they face some new competition. But they'll now have renewed credit flows into housing to inflate the housing bubble to new levels and increase their loan books.

Moreover, versus the kind of regulatory discussion that they should be facing - addressing the wholesale funding addiction and moral hazard, limiting remuneration, a push to narrow banking - this is paradise.

It is, however, a false paradise, especially for the country. We are setting ourselves for a return to the already discredited post-Wallis world of banks versus credit cowboys.

While it is some comfort that the government has resisted calls to guarantee securitisation and expose the Budget to direct credit risk, we are instead doing the opposite, increasing reliance on the Budget to guarantee financial services debt.

Rather than ask ourselves if the reliance on wholesale funding that resulted in the bailout of the big four banks during the GFC is a good idea, we're going to expand the guarantees to smaller lenders.

As this blogger has argued before, this is a direct double-down bet on China and its support of the Australian Budget surplus.

We haven't asked ourselves what this means for Budget spending and whether we can run deficits in future. Nor have we asked what happens in the event of a real slowdown in China and what it means if the Budget comes under pressure from any new wave of global credit panic. Nor have we inquired into the strategic implications of doubling-down on an undemocratic rising power that is on collision course with our Great and Powerful Friend.

As for the direct support to non-bank lenders by the Australian Office of Financial Management, which it looks like is going to be sustained if not boosted, who knows where this ends?

At minimum this is a new macro-prudential tool that is loose in the economy. Yet under what constraints will it operate? When will it phase in and out? Who will make the decision to pump up credit or restrict its flow? How does and will this integrate with the independent objective of inflation targeting by the RBA? Will it remain government run? Will it evolve into a government sponsored entity like the failed Fannie Mae and Freddie Mac?

And here we come to the package's greatest failing. The RBA is having some success in containing and even deflating expectations of endless house-price growth and shifting the economy instead to productive investment drivers. What does this new package of largely mortgage credit stimulus do to this profoundly important, incredibly tricky and so far, well managed endeavor?

Why also are these reforms being rushed through, ahead of the Senate inquiry. For that matter, where's the Son of Wallis Inquiry that should be asking all of these unanswered questions about the Australian financial system?

Hopefully when released in full, the policy will come with some thought into these issues, but it isn't looking too promising.


rht said...

I would agree that it is a victory for the banks and equally so for Black Swan and the Government.
The last thing they want is a significant drop in house prices
whilst they are in power as it would certainly cause them to lose the next election.

They know that policies such as this only " kick the can down the road" and indeed will make the eventual collapse in house prices
that much worse. However they hope
that they will have had a good few years in government by then and that it will then be someone else's problem. I have for some time thought that house prices will only significantly decline here in Australia when the Government and the banks no longer have any say in the matter due to external factors /events such as a significnt China slow down.

In the meantime they still have plenty of ammunition in their locker in addition to the policy announced today: lower interest rates ( why not ZIRP for Australia ? ), covered bonds, renewed and increased grants for first time buyers, more tax breaks for investors, abolishing stamp duty and capital gains tax
( causing lower govt revenues yes
but who cares about balancing the budget when the property ponzi needs to be propped up for as long as possible )and they are no doubt thinking up other policies at this very moment.

Glenn Stevens recent speech has caused hope in some quarters that going forward more sensible economic policies will be pursued . However, talk is cheap.
Ben Bernanke says that the Federal Reserve has a strong dollar policy.

As for the " comfort " that the "govt has resisted calls to guarantee securitisation" I would ask who exactly will be lining up
to purchase these residential mortgage backed securities without a govt guarantee? No sensible investor would want them.

But that's OK. When no one else wants them, as in 2008 the AOFM ie the taxpayer will buy them. Even better, perhaps Black Swan can enact legislation to make it compulsory for Australians to buy RMBS for their super funds, I think this has in fact already been suggested.

Although some bloggers now think that a significant decline in house prices is now upon us I am not yet convinced. I would not want to understimate the determination of the govt and the bankers to put this off for as long as possible regardless of the eventual increased costs to the Australian taxpayer.

David Llewellyn-Smith said...

Nice post.

Anonymous said...

rht, nice post. but lets go back to the old chestnut. if it's happened against the best efforts (zirp etc) of just about every developed economy on the planet and clearly isn't supply/demand driven, why are we so different to think we can stop it?

PeterJB said...

I am never shocked anymore as to what politicians and bankers say, do or utter, but really, W. Swan's (the Black Duck)use of the term "Fifth Pillar" alongside Bank shows that Justice and humor go hand in hand and is really just too much to bear.
Universally speaking and which I find highly amusing (ROTFL)I must ask, Penance? Creation of fiat ex nihilo? Usury as the adopted political banking system? A Pilgrimage? Shrieks of Laughter (SOL).

As Mr Stevens has said, banking is a tricky business (I paraphrase) and so tricky it is so, indeed, not only does our adopted system centralize and concentrate its ex nihilo creation, but it also granulates that creation while moving exponentially into the realms and heavens of the gods at play.

More banks never create competition nor do they satisfy the expectations and criteria of competition, a priori.

Nor does 'popularism politics' ever produce growth and prosperity; but both produce collapse after passing from relative freedom, through a variety of stages of democracy [sic] socialism, fascism and a priori, war.

Perhaps Messrs Swan and Stevens could consider the Haj and pray for that what is coming, be offset by the 'Fifth Pillar'.

Methinks that the USA is about to be gob-smacked by a collapse in the "Munis" which it seems everyone has been ignoring and hoping will go away. Unfortunately, once fiat is unleashed and abused, it takes on an irrational nature of its own. There is no doubt that Australia should be preparing the welcome mat for the Global Economic Collapse (GEC).