More bank reform leaks

From the SMH today:

Treasurer Wayne Swan will this week unveil his long-awaited package of measures to rein in the banks and boost competition in the sector.

A senior Labor source confirmed Mr Swan would present his reform package to cabinet when it meets tomorrow. He will then make final adjustments to the package, which is designed to break the dominance of the four major banks following a series of super-sized interest rate rises, over and above the Reserve Bank's official cash rate.

Following a government crackdown on unfair mortgage exit fees, the Australian Securities and Investments Commission has unveiled a new online calculator that helps borrowers to work out if they will save money by switching home loans. It works by comparing any loan on the market and generating any potential savings if the user wants to switch.

The Christmas reforms are expected to be delivered to the public on Thursday or Friday.

The Gillard government's banking reforms are expected to include:

- Strong measures for credit unions to help them become the fifth pillar of the banking sector.
- Steps to curb excessive bank fees and charges so they reflect costs and not contribute to bank profits.
- Abolishing mortgage exit fees.
- Tax breaks on deposits to replace complex franking credits.

The government has clearly been using BusinessDay to leak its intentions vis-a-vis bank reform. So this looks a more reliable timetable than that suggested Friday by BankingDay.

Interestingly, the description of the reform package provided here is more conservative than those provided earlier in the week by BusinessDay. Either the journo has mistakenly truncated the list, removing reference to securitisation reforms, or the reforms are more conservative than earlier mooted.

More reading...

How to leave the euro. The Economist
2011 markets. FT
Chinese inflation. Doug Noland
Return of the vigilantes. FT
US unemployment, the ugly graph. Calculated Risk
ETF madness drives JPM copper squeeze. Zero Hedge
Hugh Hendry on global macro. Zero Hedge

Weekend reading: US not

What happens to big houses after the crash? FOX
No FDR. Krugman, Palley (h/t nakedcapitalism)
US' very disappointing employment report. Calculated Risk
The job creation needed for recovery. Zero Hedge
Gold signals QEIII. Kitco
Bob Janjuah's yeah right. Zero Hedge
New Glass-Steagall. Thomas Hoenig
Remember ForeclosureGate? Euromoney
Global übermenschBaseline Scenario
Trichet fights. Gavyn Davies
ECB splinches vigilantes. Zero Hedge
Ireland, Portugal squeezed.
Greece, Spain, Belgium in a touch. Italy out.
Retailers howling. SMH, The Oz. Good, go Glenn.
More leaks on bank reform. Adele Ferguson
Bank porn. The Age, The OZ
The bankrupt housing model. Michael Stutchbury
Rio/Chinaclo looking for met coal and copper. Steel Orbis

Will EQE weaken the euro?

The FT has an interesting take on whether or not EQE would weaken the euro, a key contention by this blogger in its assessment that the Aussie dollar is headed for weakness. Let's take a look:

Silver denarii were often debased by mixing in lesser metals when the Roman emperor needed more money to raise an army. Inflation followed, as people typically demanded more of them for the same amount of goods. The process is electronic today, but the principle is widely believed to be the same: when central banks create more money, their currencies should fall.

The European Central Bank has, for now at least, taken quantitative easing – the modern equivalent of printing money – off the agenda. It hopes to stop contagion to Italy and Spain with limited purchases of peripheral country bonds. If it fails, the idea of creating money to solve Europe’s problems may return.

This is a vital issue for traders of the euro. But how much does it really matter?

The expansion over the past two years of the US monetary base (physical greenbacks and coins plus cash on deposit at the Federal Reserve) suggests some link between creating money and the weakness of the currency. The dollar fell when the Fed conjured up money to fix the banks, and rose again when it stopped intervening. But the link is far from perfect.

More importantly, in the long run there appears to be no link. Barclays Capital compared the US monetary base, adjusted for the size of the economy, with the monetary bases of major trading partners, to see if printing money affected the currency. It found that over the past half-century the dollar has moved independently of the monetary base.

This sounds counter-intuitive, but modern money is not like denarii. Commercial banks create money when they lend; if they create less, then the central bank magicking up more may have little effect on the broad supply of money.

With banks in Europe’s periphery in crisis, and euro-area broad money growth still lower than any period from 1971 up to last year, perhaps the ECB should drop its visceral opposition to QE.

This blogger certainly agrees that endogenous money creation (that is, by banks) is part of the money supply, but the FT analysis misses the point that we live in a time when money itself is distorted by the outer ring of global finance that churns through $600 trillion in derivatives every year.

This system operates with little discipline and through extreme leverage. It reacts to underlying stimuli in the inner rings of real commerce and macro economics through the views of traders. That means, as David James of BRW describes it, that the system is semiotic, it reacts to symbols. If the ECB prints money then then ipso factotraders will devalue it because they believe, in theory, it will devalue.

Thus US QE can devalue the $US before it even begins. And may prove completely inadequate as a tool of devaluation if European panic spreads. It's about symbols, narratives and sentiment, not hard rules of economics.

Witching hour

Banking Day reports that the witching hour for bank reform is upon us:

Momentum may be reaching a peak over the federal government’s activist policy package on banking, with talk of an announcement by the Treasurer, Wayne Swan, this Sunday.

Speculation over the contents of the policy plan is centring on a widening of the Australian Office of Financial Management’s mandate so it becomes an investor and guarantor of pools of mortgage securities.

The AOFM seems set to become an investor, and price leader, in subordinated tranches of mortgage-backed securities rather than restricting itself to AAA-rated senior debt, as it does now.

Some version of the Canadian system of guarantees on mortgage bonds, with the AOFM once again at its centre, is also being talked about.

Just about every option is covered here so it isn't adding much to yesterday's SMH leak. This blog will only note in passing that it hopes the SMH proves to be right because what is being suggested here is beyond the pale. If the AOFM uses your money and mine to buy subordinated tranches of RMBS, that is the the high risk securities that default first, then this blogger is emigrating.

And the SMH has more details on moves by credit unions:

An alliance of 25 credit unions is setting up a vehicle to tackle the big banks with money from superannuation funds and global markets.

Sources told BusinessDay plans were well advanced for the funding vehicle, which expects to raise up to $1 billion to provide mortgages. Bank regulator the Australian Prudential Regulation Authority has given in-principle support for the scheme.

Let's wait and see.

Miraculous correction

A few weeks ago this blog pronounced in the post 'Pricing the miracle commodity' that:

... the contract price for Rio is currently hovering in the high $150s per tonne and BHP slightly below that.

Looking at the current quarter (Q4) for clues to contract pricing for next (Q1), to date the average price in the quarter is around $153.4.

Therefore, with a month to go in the quarter, we're looking at a 2-3% correction in ore prices for Q1.

A key pillar of the terms of trade is looking strong another 4 months out.

In recent days, a slew of media reports has suggested a 7-8% increase is on the cards. This blog has checked his math and it was fine. He can't, however, say the same for his ability to read a calender, as his friends and family will attest regarding many missed birthdays.

It got its quarters mixed up.

Therefore, the correction reads: The current contract price is around $142. The current average for the quarter is roughly $155. So, a 8-9% rise is looking a fair bet for Q1.

Links December 3: 'Tis the season...

All in. Greece, Spain, Ireland, Portugal, Italy, even poor Belgium
Metals Party. Barchart
Coal to soar on weather. The OZ
US pending home sales rise. Calculated Risk
Upside surprise for US jobs? Barry Ritholz
Chinese leading indicators soft. Zero Hedge
European bond crisis vs Asian financial crisis. Baseline Scenario
Negative gearing exposed again. The Unconventional Economist
Deep T.'s crusade. Delusional Economics

Internecine

There's a war going on in Canberra.

It's being fought between the Reserve Bank of Australia on one side and the Treasury allied with the government on the other.

This blogger has no special leak to offer, nor insight from the generals that are directing the battle, but the war is now out in the open in respective policy formulations.

The Reserve Bank is using aggressive interest rates and moral suasion to shift Australians from their debt-addled addiction to house prices and over-consumption. As was made clear by Glenn Stevens last Friday

As of today, the government is using the Budget to boost mortgage credit and house prices to fire up the addiction.

The RBA is engaged in an historic undertaking. And one that is without prior success, to this blogger's knowledge. It is attempting to backfill an enormous bubble, to grow beyond it, instead of suffering the calamitous deleveraging that is afflicting the rest of the Western world.

It has been granted the opportunity by a moment of historic serendipity; that China just happens to need an awful lot of Australian exports right now.

This gives the economy the external demand it needs to shift its drivers of growth from unproductive mortgage-led investment to productive business investment in mining and associated industries.

Regular readers will know that this blogger has issues with the RBA's faith in mining. It believes greater effort should be put into other export sectors. After all, mining will flourish anyway.

However, it is full of admiration for the manner in which the RBA is disregarding the pleas of housing and consumption related interests, allowing both to deflate whilst productive business investment catches up to the offshore borrowing that has underpinned our overblown lifestyles.

And so far, it's working. As yesterday's quarterly growth figures showed, much of the economy is not much above stall speed. Today we get the news that retail sales fell in October. Earlier in the week, it was obvious that housing has plateaued and is deflating in some areas, so far slowly and manageably. Yet employment is still strong and we're saving more.

This is eminently sensible policy in a post-GFC world that is governed by an inherently unstable global capital market system.

The government should be looking for ways to support this project. Finding ways to take the pressure off the dollar and boost exports outside of the resources sectors.

Who knows, a coordinated effort might even pull it off.

But as of today's leaked policy targeting greater availability of mortgage credit, the government is doing precisely the opposite. It has aimed up at the RBA's audacious project. And is wantonly deploying the one asset that has kept the nation from harm during the last several years of global turmoil: the Budget.

Bearing the burden of guarantees for bank liabilities big and small as well as the products of our most unstable credit providers, the Budget is being sent to struggle with the RBA over the personal balance sheets of Australians.

The Budget has been ordered into the trenches to shoot at its own.

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.

Well, glad that's over

It's all 'risk oooaaarrrrn'. And this blogger doesn't buy it.

EQE can't save the euro. It can only devalue it. That stuffs the current macro settings for reflation and sooner rather than later the markets will realise it. The US recovery cannot carry the world without a falling dollar even given it's slow strengthening.

Moreover, the risk of an Irish default looks very high. As this blogger has been saying, and Barry Eichengreen, Michael Pettis and Yves Smith (see links) make clear in a debate today, why wouldn't they? The bailout package is fiscal rape.

As for our dollar. This blog stands by its call that it's in trouble. UBS came out late yesterday and endorsed the call. Here's a sample of their reasoning:

It's been a quiet week here in the US with Thanksgiving really knocking out the week from mid-Wednesday onwards. Even so there has quite a lot going on, not the least in the currency markets where Ireland's bailout has failed to restore Euro strength. To my mind, one of the most interesting developments has been across the Pacific where the risk on currency darling - the AUD - has taken a severe pounding, falling from 0.9954 to 0.9657 versus the USD over the past five trading days. Our FX desk in Stamford noted this morning that "0.9593 is the next level in AUD to watch - is where trend line support drawn off the 0.8084 low of June 8 currently intersects. Dropping through this trend line would signal a trend reversal, opening the way to 0.9220."

...It all looks rather worrying. I am getting a lot of questions about whether the risk on cycle has ended and I am increasing coming to the opinion that it has. My contention has always been that Risk On/Risk Off is just a beta market response to swings in the short-term Chinese economic cycle from relative expansion to contraction. Expansion is when jobs are a priority and contraction when inflation becomes the greatest fear. In the early Northern Hemisphere summer, the rhetoric out of the People's Republic was much more concerned with expansion, now it is dominated by fears of inflation.

Yes, commodities especially metals have so far but for how long under this pressure? This blog adds European disintegration fear and the shift in macro settings and still gets a correcting Aussie.

Links December 2: EQE rally

Here comes EQE. FT
Or massive IMF pool. Zero Hedge
What's wrong with poor old Belgium? Spreads widen. All else in.
Clear macro weaknesses. Martin Wolf
Ireland the rise & crash. NYRB (h/t nakedcapitalism)
Politics to kill Europe. Michael Pettis, Barry Eichengreen, Yves Smith
US bond bubble bust. MarketWatch
Financialisation of commodities. VOX
The fifth pillar. SMH

Australia's shitty growth. Tim Colebatch (h/t The Lorax)
SWF. Michael Stutchbury
Steel demand & prices down. IW
What kind of dill makes this prediction? Bloomberg

Aussie at the brink?

That looks like a pretty tight head-and-shoulders top on the Aussie battler. The neckline is already busted and its along way down to the waste.

For extra frisson, have a look where it was trading during the last bout of European debt woes in May.

Time to buy those $US travelers cheques...

Though you didn't hear it here, because this blog doesn't offer investment advice.

It's just as well because at the rate of decline we're seeing in manufacturing, pretty soon it'll be hard hats all around. The PMI slumped again last month:

God knows how you can have an economy with record business investment and manufacturing in terminal decline, but somehow we're managing it.

Fish food

Carassius auratus auratus, the common goldfish, a much maligned creature, rumoured to have a memory-length sufficient for one circuit of its bowl.

What do Australian business readers have in common with this humble fish? There's the easy life and danger of obesity. Certainly a small pond.

And there's one more similarity. The presumption of their masters that they won't remember a thing. A case in point is a couple of recent comments by Alan Kohler and Stephen Bartholomeusz of Business Spectator.

Two days ago, Kohler mounted the case that:

... the Australian government should learn from Ireland’s mistakes. The amount of mining investment in the pipeline suggests that the next five to ten years will see a massive boost to national income and therefore government revenue. It should be used for infrastructure, or saved.

Yesterday, following sparkling performances by Glenn Stevens in the parliament and elsewhere, Bartholomeusz joined in with a piece that endorsed the Reserve Bank Governor's view that we should seek to save the proceeds of the current mining boom in a sovereign wealth fund. He wrote:

The sensible policy would be to dedicate the proceeds of the MRRT to establishing a new fund, creating a relief valve to ease the pressure on the domestic economy and taking out an insurance policy against a either a subsidence in the terms of trade or increased volatility in them and in our economic settings.

This blogger could not agree more with the argument, not least because it will help prevent any further inflation of the housing bubble and, if the fund is held offshore, would also alleviate pressure on inflation, interest rates and the high dollar. Meaning when the boom ends, we may still have something other than dirt to export.

But one has to ask, have Messrs Kohler and Bartholomeusz been nibbling the fish food themselves?

During the debate over the Resource Super Profits Tax (RSPT) neither commentator presented these eminently sensible viewpoints. Indeed, day after day, Bartholomeusz poured scorn on the tax. And although Kohler was more measured, his colleague Robert Gottliebsen later described how:

Here at Business Spectator, Alan Kohler, Stephen Bartholomeusz and myself realised that Rudd and Swan had made a diabolical mistake soon after it was announced. We decided to highlight every aspect of this terrible measure until it was changed.

Along with The Australian, these commentators led an attack against the tax that was more reminiscent of great white sharks than it was domesticated pets. Indeed the feeding frenzy was such that it helped tear the legs from under a Prime Minister.

That is not to argue that the formulation of the tax presented by the Rudd government didn't have its problems. It did, not least being its shared equity structure and the failure to put the money into a fund. But that is not this blogger's point. Responsible media nuts those problems out in a mature and reasoned debate that includes both pros and cons.

Rather, we had a wild attack on the tax, a government in complete panic and, ultimately, the disconcerting sight of vested-interests gutting the policy in the people's own Cabinet Room.

This blogger finds it a little ironic, then, when Kohler and Bartholomeusz now argue that the country should save the proceeds of the mining boom. And unsatisfied, Bartholomeusz also took the high hand to the Parliament over the issue:

Whether one can get sensible policy given the awkward balance of federal parliament is debatable, but at least Glenn Stevens has, in the RBA’s usual subtle way, lent his support to the concept that for a variety of reasons the windfall from the once-in-several-generations resources boom should be saved rather than frittered away."

Commentators might do well to recall that the goldfish actually has quite a long memory.

Fitch as a fiddle II

The Age via Bloomberg reports this morning that:

Australia's banks and insurers would find the fallout following a 30 per cent tumble in house prices ''manageable'', Fitch Ratings said yesterday, as it released partial results of a stress test.

Whilst this blogger is reassured that Fitch has passed the mortgage complex, it might have been useful for the report to supply some context. For instance from this blog six weeks ago:

The Fitch stress test is a simple credit risk assessment for the big banks' mortgage portfolios. That is, Fitch asked what would the losses be for the banks in the event of three housing bust scenarios, one mild, one medium and one severe.

The test is a straight three year model without econometrics.

It makes no reference to any macroeconomic scenario.

Nor does it take account of losses in other areas of the banks' greater portfolio of consumer and business loans.

Nor does it take account of the liability side of the banks' balance sheets and the liquidity risk buried in their wholesale borrowings.

In short, the test is the functional equivalent of judging the safety of an aircraft by jumping up and down on its wings. If they hold, we're cleared for takeoff. The coughing engine, missing tail and dead pilot get ignored.

Links December 1: Solvency not liquidity

Ireland, Portugal in a little. Spain, Greece, Italy, Belgium widen.
EU corporate bonds widening. FT
Market focussed on solvency not liquidity. Eurointelligence, Alphaville
US dollar up, euro/risk down. Barchart
Metals decoupled.
RBA, APRA wary of covered bonds. The OZ
Bank porn. SMH
More bank porn. The Age on Fitch
Bubble porn. SMH
More bubble porn. Peter van Onselen
US house prices slide again. Calculated Risk
US consumers gaining confidence. Calculated Risk
US considers China currency bill. Reuters
Capesize down another 10% in two days. BDI
Delusional Economics' blog bubble.