The death of Invisopower!

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.

Latest posts by David Llewellyn-Smith (see all)


  1. Hi David, I like your blog but this is wrong. The first people to publicly call for a son of Wallis inquiry were the Six Economists who published their open letter on the subject in the middle of 2009. Mr Hockey has regularly referenced them. You seem awfully reluctant to acknowledge their work, which is bad intellectual practice. I also note you claim you were equal co-author with Ross Garnaut of the book the Great Crash of 2008. However, Melbourne University Press states that the book was written by Ross Garnaut "with" you as an after-thought. This does not sound like a normal co-author arrangement.

  2. David Llewellyn-Smith

    Jeez, Sarah. Thanks for puncturing the balloon.

    FYI, I don't and never have claimed to have been the first to pursue a Wallis Inquiry. But I have pursued it with vigor and in isolation for much of the past year.

    As for the book with Ross, I'm not getting into private details and contracts but your suggestion is wrong and offensive.


  3. David, looking past the orgasmic self-congratulation, this initiative, if it comes to pass, could well be a major "make-or-break" point for Australia.

    Those of us who watched the evolution of the GFC in the US from afar initially thought that Congress would then have to sort out the Banking – Shadow Banking Securitisation mess. But what happened? More Regulation? – No, only at the discretion of the Regulators – and on and on it went. The Moral Hazard issues are as real today in the US as ever.

    Put it another way – will Turnbull allow Macquarie Bank to be fettered?

    If this Inquiry does happen, we had better be damn sure that its' recommendations are in the interests of Australia as a whole, and not just one sector.

    I hope it happens – but only if it is not going to bugger us up further.

  4. David Llewellyn-Smith


    I have no idea of the likelihood of a 'good' outcome for a Wallis Inquiry. But it has one intrinsic good. That is that it will continue to educate the public about banking, and when the time is ripe, that education will be the bedrock of a new financial services compact with Australian society.


  5. Let me be very clear – such an Inquiry really,really should happen. David, thank you for promoting the idea.

    Now, how do we keep it on the rails?

  6. Congratulations on your commitment to the cause.

    (I just re-read the post and couldn't find any claim of being first to call for an inquiry…)

    And why to the Six Economists receive proper noun capitalisation? I feel all inadequate now for not knowing who they are.

  7. Don't get me wrong David. I like you and think you are cute! Are you single? I saw a vid of you online! I however think credit should be given to Joye, Gans, King, Gruen, Wylie and Quiggin. These are our best economic brains and they have been on the money with this one! SDxx

  8. Forget same page, I would take it as an insult if I were on the same book with Chris Joye.

    Chris Joye's main idea to push for a Wallis type inquiry is probably to get his plan of a Govt backed RMBS market rubber-stamped by the commission.

    He has been pushing this idea for a long time and he keeps pushing it despite the GFC.

  9. I'm not holding out for much in the way of positive action even if this goes ahead. Will the terms of reference be rigged? What will the Government do with the outcomes? I remember my excitement in 2007 when Kevin Dudd stood there like some Messiah, stating that there would be a root and branch review of the tax system.


    And then the Henry Review was released. "Well, we did the review as promised. You didn't expect us to do much with it, did you?"

    And Joye is pushing for this as a way to get his government (ie. taxpayer) backed RMBS through. Australia has far too many vested interests in the housing bubble for a review to realistically tackle the underlying causes of our financial instability. I think we'll have to wait until thing crash and burn before anyone faces up to reality. Anyway, good on Joe Hockey for bringing this issue to the fore.

  10. Hi David,
    I agree that educating the public about banking and finance is a worthy pursuit.
    However sometimes I believe it is a lost cause.
    Despite repeatedly explaining to my friends (all in their 30's) that housing is not a guaranteed path to prosperity, they won't even consider the possibility. Housing only ever goes up or plateaus they say. There is a housing shortage etc. etc.

    It saddens me no end that many of them remain ignorant of what has been happening in the rest of the world for the past three years.

    It will take a lot more than a government inquiry to change the minds of this 'focus' group.



    (Maybe I should mention that this group include tradesman, professionals and school teachers)

  11. Torchwood makes a very valid point.

    If such an inquiry was to proceed, if its' staffing and terms of reference are not ideal, we could finish up with its' recommendations making things worse, not better.

    Obama swept into power on a reform platform, but now is considered by many to be no more than a Wall St stooge.

    Anyone who thinks that we have a bright future, that Democracy is alive and well, should check out Andy Xie's latest:

    Any such inquiry could lead to a choice between Aus continuing to be a part of that "Blade Runner" future, or becoming a quiet little backwater buried in the South Pacific.

    I know which future I'd choose, which will lead to a better quality of life for the grandkids, but this is a Democracy.

    Which means that David's objective of educating the public is vital. But is an inquiry the best way to do that?

    Could we get the ABC to do a real, in-depth doco on the impact of the GFC & the Sovereign Credit Crisis in Iceland, Greece, Ireland, the US & UK?

  12. Whether and what type of banking inquiry in Australia is required is something reasonable people can differ on, but I hope all readers can unite behind the idea that Sarah D and David should definitely get a room.

  13. "…the push for a Wallis type inquiry is probably to get his plan of a Govt backed RMBS market rubber-stamped by the commission."

    How likely do you think this outcome is?

  14. David Llewellyn-Smith

    I'm getting mixed messages about its likelihood.

    Canberra bureaucrats and intellects are undergoing a slow awakening vis-a-vis the dangers of debt, the current account and short-term funding by the banks.

    Against that, a battery of vested interests are trying turn that awakening towards a perpetuation of mortgage-led growth via new government guarantees.

    Then there's the pollies who always want higher house prices.

    The banks would be on board with it. Keeps the ponzi going and means there is no fundamental reevaluation of their role. Or the key to it all, wholesale debt.

    Against all of this is the obvious: That guaranteeing more mortgages would be insane.

    Even money bet.