MSM GFC porn

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Australian media operates in a vested interests continuum. Over the weekend, every major paper carried headline stories about a looming credit crunch, but the analysis of the outcome was caught in a binary of false opposites with the stroking of banking vested interests at one end and house prices porn at the other.

The irony is that this tribalising of the debate is a part of what has given rise to the problem in the first place. The business press simply recounts and endorses that which business tells them. And the metropolitan dailies pump out emotive drivel on the latest threat or opportunity surrounding housing. Nobody occupies the ground that matters, the middle ground, where our society should come together and hold both ends of this bubble binary to account.

The banking apologism pole was occupied early on Friday by Robert Gottleibsen:

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Directors of Australian banks will need to make some hard decisions given what is happening to their counterparts in Europe. If our banks make the correct decisions, the events in Europe will not cause an Australian banking crisis although they will still cause some pain.

If the Australian bankers make the wrong decisions, then we will have a credit squeeze and dangerous asset price fall. Or putting it another way, Australian bank chief executives are about to really earn their money and if they fail, they will be put on the scrapheap.

…Until yesterday, Australian banks could still access the same wholesale funding markets although the lenders wanted much higher interest rates. But outgoing Commonwealth Bank chief executive Ralph Norris told Fairfax media that as of today, those wholesale markets had been frozen for all banks, including Australian banks. This may change, but it is very dangerous.

The problem our banks face is that they will be tempted to respond by making the criteria for making loans to Australian customers much tougher and so adjusting bank balance sheets to reflect the conditions.

If they do that, then Australian banks will reduce asset prices and lift their bad debts. If Australian bank bad debts rise then wholesale money will be even harder to obtain and even more expensive. It will be a vicious circle.

This analysis is factually wrong and it misrepresents the economic and political moment in such a way that CBA becomes an innocent victim. Australian banks were not shut of wholesale markets as of yesterday owing to some specific event in Europe. They have been shut out for months, as John Laker, head of APRA confessed to parliament in October. In fact, CDS prices began signaling stress as far back as June and issuance had all but ceased by August. Hence there was an imprudent rush to pump out the saviour of covered bonds, which did fail this week. Gotti is simply continuing the great Australian business journalism tradition of absolving the banks of failed liability management.

But the Australian Financial Review was just as bad on the weekend. According to our most August business paper:

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Australia’s largest lenders are once again facing a sharp rise in financing costs as the worsening sovereign debt crisis spreads beyond the northern hemisphere. Commonwealth Bank of Australia group treasurer Lyn Cobley said the turmoil in Europe had driven the cost of funding to very high levels and, as a result, local banks were sitting out of the funding markets.

“It’s at almost unprecedented levels that are close to around the time of Lehman [Brothers],” she said. “We’re going to be very challenged if this environment continues.”

Global credit markets have slammed shut ahead of a $140 billion annual refinancing task that the big four banks and Macquarie Bank face in 2012. And the dislocation in credit markets is affecting even the safest borrowers such as the state governments, as their bonds have been sold off in a brutal week of trading.

This has raised fears that tighter and more expensive funding markets will lead the banks to increase their lending margins or slow the provision of credit into the Australian economy.

…Banks may face another headwind as ratings agency Standard & Poor’s is expected to conclude its review of the local sector as early as the coming week, and many analysts expect a downgrade of their credit rating to AA-.

Nevertheless, Australia’s banks remain among the most highly regarded in the world. While their borrowing costs have risen in the long-term wholesale markets, they have been beneficiaries of a flight to safety in the short-term money markets.

“The international short-term market understands the Australian banks and understands our relative credit worthiness,” CBA’s Ms Cobley said.“This impacts the availability of financing, and forces deleveraging to migrate across the broader economy,” he said.

The banks will need to return to the wholesale debt markets in the first quarter of 2012 but can tap the short-term markets in the interim. The Reserve Bank of Australia, which has expressed its faith in the local banks’ assets, also stands ready to provide short-term funding.

Again, no analysis of why the banks need this money, who is responsible and how it can be rectified. Just the same old stuff, dodgy markets shut for fantastic banks. If the markets are shut to the banks it says something about the banks.

Moreover, the AFR is also preaching false hope. The problem is neither in the short term funding markets, nor are they any solution to it. The problem is longer term funding and APRA will rightly not allow the banks to reduce the maturity of their rolling bonds. They did just that throughout 2008 and when the credit event arrived, the banks got sucked under all the quicker.

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The Australian was on much the same page:

In the past week, banks have found their own attempts to borrow money on international markets increasingly difficult and are having to offer higher interest rates to investors to obtain funding they then lend to mortgage-holders.

Earlier this month, the National Australia Bank angered the government when it passed on only 20 points of the Reserve Bank’s 25-point cut in official interest rates, citing increased funding costs.

Industry analysts and former bank executives warn that the ability of all banks to pass on future rate cuts in full is being further undermined by conditions in Europe, where AAA-rated Germany struggled to raise funds from bonds investors this week.

“We are right in the middle of a pretty serious crisis right now,” ANZ chief executive Mike Smith told The Weekend Australian.

“This has all the makings of being very nasty.”

Mr Smith, the new chairman of the Australian Bankers Association, refused to be drawn on the direction of interest rates but said the euro crisis was rolling through the global economy.

“There is a credit crunch in Europe now. It is spreading to Asia and it will spread here too,” he said.

Yada, yada, yada. I will note only that that’s now three of the four majors’ CEOs out last week undertaking “the softening” – preparing the people for the coming bailout – which the above papers have all swallowed so enthusiastically.

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But at least these outlets discussed banks. Over at the Fairfax broadsheets it was an orgy of house price porn. In started Friday with Michael West:

The implications of another meltdown in credit markets are dire. Roughly a third of the funding for Australian mortgages comes from overseas bond markets. Were a third of the big banks’ sources of capital to suddenly dry up so would credit for housing markets here. Ergo, price drops.

This is the government’s greatest fear, that the great Aussie dream becomes a nightmare. Hence the favours to the banks, the recent fillip to funding from “covered bond” legislation and so forth.

This credit market squeeze is, as they say, the worst case scenario – and one which was narrowly averted in 2008 at the time of the Lehman Brothers collapse and the Wall Street bailout.

Then, the US banks were way over-geared. Now it is the European banks; with their leverage of 25-times only a modest fall in asset prices renders them technically insolvent. Many say a large swathe of them are already insolvent.

Most are not in a position to lend – especially since their sovereign governments are battling to raise money themselves on bond markets. What chance does an Australian bank have of selling bits of paper (bonds) to investors if the government of Germany itself failed to get a bond issue away this week?

Well, if they managed their liabilities better, they’d have every chance. But are the implications of an ongoing freeze “dire”? Yes, they certainly are, unless the government honours the guarantee that ratings agencies have already assumed. A discussion about what the guarantee will mean second time around might have been interesting. Will it work as well? How long should it run? What will it do to Federal funding costs?

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But it wasn’t until we hit Saturday that the Fairfax porn really got going:

AS WORLD economic woes increase and the Economist predicts doom and gloom for Australian property prices, Sydney agents and vendors were preparing for the biggest auction day of the year.

The spring market hits its peak today, with vendors rushing to have their property sold before Christmas. There are about 650 auctions scheduled, which is close to 20 per cent less than the same time last year.

…Bresic Whitney principal Shannan Whitney said his agency had 15 properties going to auction around the east and inner west today, priced between $500,000 and $2 million. He said his vendors were confident of a result.

”It hasn’t been a dynamic spring like some of those past, in terms of results and the number of listings. But I don’t feel as though there is anything to suggest catastrophic reductions in property values in Australia.”

A report in this week’s Economist begs to differ.

It says home prices were overvalued by about 25 per cent or more in Australia, Belgium, Canada, France, New Zealand, Britain, the Netherlands, Spain and Sweden. It singled out Australia where ”housing looks more overvalued than it was in America at the peak of its bubble”.

The measures used were the price-to-income ratio as a gauge of affordability and the price-to-rent ratio.

And then this:

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Australian house prices could plunge by as much as 25 per cent if the European meltdown causes a global credit crunch, The Economist magazine predicts.

In a dire warning for Australia and other developed countries, The Economist says global house-price indicators suggest property was still overvalued.

”The latest global house price indicators are now falling in eight of the 16 countries surveyed by the magazine, compared with five countries in late 2010,” the magazine said.

The Economist said that, yes, the global housing correction may only be half over. It also said Australian housing was 25% overvalued. It did not say “Australian housing could plunge 25%”.

With only the two types of coverage available – house price porn for those caught up in the bubble and corporate apologism for those that have profited from it – there is no room for what we really need, a space for the commons discussion of the political economy that created the problem in the first place. Where is the debate how the banks got themselves into this? How the authorities let them? How we all participated in it in our own way? How we’re going to get out of it? What compromises should be made and what not? Who’s going to pay the bill?

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I don’t know if this is deliberate obtuseness or incompetence but such polarised media coverage that panders to vested interests is itself a direct reflection of the failing political economy that got us here.

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.