In today’s AFR, Joe Hockey makes a simple and elegant argument for Wallis:
The Wallis Inquiry formally rejected government guarantees of private companies (including deposit guarantees) for fear of inducing irreversible “moral hazards”. These risks found in all insurance markets where the availability of such protection has the perverse effect of encouraging beneficiaries to assume abnormally high risks by playing the “heads we win, tails the taxpayers lose” game.
Yet during the global financial crisis, Australian taxpayers were compelled to deploy more than $850 billion worth of guarantees of the liabilities of private financial institutions. About $690 billion worth of guarantees of bank deposits were put in place because of concerns depositors were rapidly withdrawing savings from smaller banks, potentially precipitating a run on the wider system.
This insurance was provided to the banks for free – no premium was paid to taxpayers. A further $163 billion worth of taxpayer guarantees of the banks’ wholesale debts was furnished to allow them to leverage off the commonwealth AAA credit rating. The Reserve Bank of Australia also supplied the banks with $43 billion worth of finance on advantageous terms via its “repo” facilities, which used the banks’ home loans as collateral for the first time. Finally, taxpayers committed to inject $16 billion to support the private residential mortgage-backed securities market.
At its most basic level, our financial system was not designed with taxpayer guarantees in mind. So it needs to evolve so that it can appropriately respond to, and manage, these new risks. The time has therefore arrived for a root-and-branch review of Australia’s financial system.
Any regular reader of this writer will understand the deep sense of satisfaction it feels that a political leader has offered this pellucid reasoning for a new Wallis Inquiry. It has made the case for new scrutiny of the not-that-well-hidden regulatory fallout from the GFC in these terms for two years in different fora, with almost no support.
It co-wrote the book on the bank’s role in the GFC. It beavered away at the topic at its original blog which became The Distillery column at Business Spectator.
At The Distillery, it fearlessly pursued Australian commentator’s universal espousal of triumphal bank rhetoric. And it was the first to declare that the Australian banks were the new GSE’s, a point of view now shared by all serious analysts.
Then, of course, it donned this current helmet and enslaved itself to the Sith Lord that is blogging.
Forgive it for this huge trumpet blast of self-congratulation but taking this stand was not always easy and today the truth does out.