High time for Wallis

As predicted, the national media has sidelined the Moody’s decision. They could not be more wrong. It is time to revisit a new Wallis Inquiry.

Australia has a big imbalance. Call it what you like. A housing bubble. An overvaluation. An external imbalance. It doesn’t matter. It just is, and the rest of the world knows it.

Following yesterday’s stark diagnoses of the problem by Moody’s, we face a clear choice.

We can try to go on doing what we’ve done for well over a decade, borrowing offshore to pump asset prices, and pretend we’re not taking a big risk. We’ll have to pretend too that we’re not irrevocably tearing the fabric of our private banking system nor jeopardising the national Budget.

Or, we can face up to the causes of the imbalance and take control of our own destiny. We can launch a new formal Inquiry that explicitly calls for a redesign of the architecture that governs our financial system.

There won’t be a better time. The economy is flooded with commodity income. Unemployment is low. The Budget is improving. The world can’t get enough of our currency. The banks are making money hand over fist. We have s trade surplus. Choosing to do it now, in the best of times, is the adult way.

What should such an inquiry conclude? I have no idea. Personally, the Moody’s description of Australian banks public support looks like a good starting point:

At Aa2, the major banks’ ratings continue to incorporate 2 notches of uplift from systemic support. Moody’s views bank supervisors and the government in Australia to be supportive by global comparison and the banks to have high systemic importance, as implicitly recognized by the government’s “Four Pillars” policy (which restricts M&A among the banks).

That sounds like grounds for charging the banks.  I don’t mean in a crude and ham-fisted way. I mean a thought-through mechanism that builds a buffer into the system and slowly eases the banks from implicit backing to an explicit and macro-prudential control.

As Delusional Economics makes clear today, the rating agencies are  doing it anyway. They are now the macro-prudential managers of Australian credit. Maybe we want to leave it to them. Or, maybe we don’t. But let’s make a decision.

Our more seasoned readers will recall that the proto-edition of MacroBusiness – the three blogs Houses and Holes, Unconventional Economist and Delusional Economics – conducted its own ‘Son of Wallis Inquiry’ late last year. It sought to find a solution to the problems outlined above. The submissions were excellent and contained truly novel as well as practical ideas. I offer them to you again today as some contribution to a debate we really need to have.

In no particular order, beyond the winner:

David Llewellyn-Smith
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  1. The MSM’s reaction has been extraordinarily reductionist, looking only at immediate impact on cost of funds, not Moody’s underlying concerns… but then again that’s what I expect these days.

  2. The only quibble I have is that I think the Media should always sideline the reports of ratings agencies. They are not impartial or reliable. They actually stated in the fallout from the GFC that their ratings were ‘opinion’ only. And they are not working in our interests only their own. They often use the threat of ratings reduction to bully companies or governments into complying with their demands. They are criminals and bandits. The sooner we wake up and stop listening to these leeches the better.

  3. Ratings agencies didn’t see the GFC coming, and S&P only just made a warning to the US on debt, so the agencies like the accountants are part of the system.

    The RBA/banks now have one more rate rise whether they agree or not, as foreign lenders lend on risk.

    I don’t disagree with Moody’s on their assessment in this case however.

  4. Guys, the ratings agencies are on the nose, yes.

    But the reality is they still determine credit worthiness across the entire global capital markets.

    We just had our whole economic model downgraded. You can shoot the messenger but it doesn’t change the fact.

    What happened yesterday is huge and our media thinks it can throw a bit of mud and everything will be fine.

    They are deluded.

    • Absolutely. If anything, the reluctance of rating agencies to act in the past means that a downgrade occurring is a massive event, and signals greater weakness than they are willing to make public.

      The fact that they have said it should really be another couple of notches lower makes it even worse.

      Lastly, that the media is not reporting this with the attention it deserves is almost criminal. Our economy is NOT rosy, yet the media are (for the most part) happy to delude the masses.

    • Just listened to the ABC’s economic analyst opine on this – nothing to worry about, only one notch down the scale – Australia still in the elite level, largely historical 2007-08(!), just means we don’t have enough domestic deposits to fund our loans so we have to get money from overseas, nothing in it, no effect on interest rates – already factored in.

      This is the level of ‘analysis’ from our national broadcaster. Yes, I’m critical of the ratings agencies, yes, I’m aware or their role and yes, our economic model has been downgraded. But what really peeves me is the generally appallingly low level of analysis, on economic issues, by the msm. There is no attempt to understand issues if it involve anything more than reading a press release. You could ask most journalists their understanding of the implicit guarantee of the banks’ wholesale debt (as well as the explicit deposit guarantee) and you’d probably get “what guarantee” as a response.

    • Certainly true. Although it is a bit sad that crooks like Moodys can have real effects on the economy with their self-interested assessments.

      Moodys is actually right though about our banks and general economic outlook being worse than the MSM believe. Really if anything Moodys is still viewing our banks through rose tinted glasses. The reality is almost certainly far worse and an accurate credit rating would be much lower.