You’ve got to love the framing of the issues here. Invisopower! is hard at work. There’s no sense at all that there was ever any excess debt accumulation or misallocation of capital into housing. It’s all just twenty years of a “relatively high level of investment”.
This is the old deposit shortage argument, generally promulgated by the banks. That superannuation unfairly sucked away the banks’ natural funding source and, to meet the demand for credit, they had to go for wholesale debt. Poor things.
What about the supply of credit? What about the banks’ historic plunge into offshore wholesale debt (which doesn’t even rate a mention) from the late nineties? What about the banks’ innovation in the use of derivatives that enabled them to manage the credit and currency risks of borrowing offshore? What about the dramatic expansion of non-bank lenders, which did much the same thing? Both of which happened to coincide with Australia’s great asset inflation? What about the clear evidence in the chart that in the latter years of the boom, the banks were channeling rapid deposit and wholesale debt growth?
What about the fact that bank asset growth, profits and bonuses all went parabolic from the turn of the millennium? The same binge which later left them facing insolvency in the GFC.
And if the debt accumulation that inflated asset prices to extreme levels wasn’t in some way misallocated, why is the RBA so determined to see it flatten out now? And why have debt-loving paradigms such as the Pitchford thesis been consigned to history? That’s where we can return to Debelle:
So banks have experienced a slowdown in asset growth and have funded the assets with a greater share of deposits. A consequence of this is that wholesale debt issuance by financial institutions has declined to its slowest pace since the mid 1990s. The most pronounced slowing has been in the issuance of short-term debt as banks have sought to lengthen the average maturity of their funding by increasing the share of long-term debt in total funding
There are reasonable grounds to expect these trends may be sustained for some period to come. In particular, if one thinks about the composition of growth in Australia in the period ahead, it is likely to be investment-intensive. But much of that investment is likely to be funded by companies which are cash-rich or tap global capital markets directly. This means that the growth in the economy in the period ahead may be associated with less growth in business credit than has been the case in the past. It is also likely to boost deposit growth. So banks may be seeing a prolonged period of faster deposit growth but slower asset growth.
Which, as I’ve argued before, means you shouldn’t buy their stock.
There’ll be nobody happier than I if the trend of increased deposit growth continues. I’m on board with the grand experiment of disleveraging. The attempt by the Stevens RBA to backfill the bubble is a ground-breaking endeavour in the history of central banking.
Airbrushing history discredits the project. Not to mention that it sets us up for a repeat episode.