Dad’s Army fumbles the bazooka

God save me from the Australian media. Robert Gottliebsen, who I openly acknowledge is a legend, has really lost the plot today. Apparently:

The debate is on. When I set out yesterday how Treasurer Wayne Swan now has the power to play a big role in setting the level of interest rates, and that the independence of the Reserve Bank of Australia to set interest rates is crumbling, I realised it was going to the heart of our economic debate.

What I did not realise is that my commentary, and the amazing Business Spectator reader conversation that went with that commentary, would become part of what will almost certainly be a cabinet discussion on the issue.

That commentary and the conversation with it are vital for anyone wanting to understand the looming cabinet debate. In essence my proposal is that, instead of Australian banks borrowing high-cost offshore money, the Commonwealth government should undertake the overseas borrowing and lend the money to the banks, giving them much cheaper money and enabling them to lower – and not increase – interest rates.

My heart is a pounding! Not because Gotti is wrong. But because he’s probably right. Gotti and the crew of interests that generate much of Business Spectator’s output are, no doubt, being taken seriously in the Cabinet Room. Sadly it is just this kind of policy phantasmagoria that has defined Australia’s post GFC response. Why we can’t just sit down at a nice inquiry and ask ourselves a few basic questions is beyond me. What kind of financial system do we want in ten years? What needs to be done to deliver it? And what trade offs are appropriate in constructing it?

But no, what we need is:

…the more Machiavellian of cabinet ministers are cottoning on to the fine print. Let’s say the government offers banks money at 1 per cent below what they borrow overseas and pockets a 1 per cent profit. Any bank that did not take the money would be at a disadvantage to their competitors and would lose market share, so they would be forced to take it.

But, as some cabinet members see it, there could be some tags to the offer – the benefits must be passed on; job cuts and overseas call centres are out. So it’s true this would enable Canberra to exercise greater control over the banking industry. And that has a big downside.

But any industry that rubs the nose of the treasurer of the land in the dust must expect to cop it in the neck. And remember that unemployment is about to rise dramatically; and overseas hedge funds are contributing to our unemployment by treating the Australian dollar like gold.

Let me cast readers minds back a few years to the RSPT debate when it’s probably fair to say that mining was rubbing the same Treasurer’s nose in something other than rose oil. Here is what Gotti had to say:

Here at Business Spectator, Alan Kohler, Stephen Bartholomeusz and myself realised that Rudd and Swan had made a diabolical mistake soon after it was announced. We decided to highlight every aspect of this terrible measure until it was changed. In all the KGB wrote some 80 commentaries on the tax and I think that, with a few print journalists, including Matthew Stevens on The Australian and Terry McCann on the Herald Sun, we led the push for the government to act in the national interest. Our readership soared to 400,000 as the business community turned to Business Spectator to understand what was happening. This is the first time I have been involved in an exercise like this and I have found that electronic communication is more powerful than print.

On that occasion, Gotti’s hysteria spearheaded the removal of a Prime Minister. Whether he deserved it is not my point. What about a reasoned debate?

If Gotti is really serious about this article then it is inconsistent and irresponsible. If he doesn’t mean it, and is only trying to build traffic, then it’s time to hang up the bazooka.

Comments

  1. When offshore investors turn away from Oz, that is exactly what the government is going to have to do. Did I read somewhere else on this blog that offshore holdings are 80%?? That is a number waiting to be spanked.

    • Because what we need now to keep fueling our growth is more debt at cheaper costs.

      I mean, the government effectively guaranteeing masses of cheap debt to the Australian public. Nothing can go wrong, right?

      (Or, we could let the disleveraging continue, maybe encourage it with jawboning, and only take action if the foreign funding dries up – but provide funding to the banks not at cheaper government sourced levels, but with a nice margin to the government that resembles the 2012 end margings on overseas covered bonds issues.)

      Anyway, so when did Gotti decide he was a cheap debt peddler?

      • If the government did borrow money to pass onto the banks at a cheaper rate maybe another trade off would be that the bank could lend at the current rates (and hence cool the housing market) but be made to borrow to small/medium businesses (This is what makes jobs)

      • The trade off for the cheap interest rates is more consumption and more foreign debt. I keep wondering why people think you can get something for nothing.

  2. I’m surprised that it has taken so long for someone to work this out.

    I have a natural suspicion for any solution that seems “too easy” so caution and investigation is necessary, but it is an interesting proposal.

    Have faith though, politicians would never take the easy way out – would they?

    • It’s an absolutely idiotic proposal. Why on earth should the government be pimping its good credit rating out to the banks?

    • It is probably not an issue of “easy” vs “hard” for pollies (and people in general).

      All decisions wil be “hard”, given the headwinds.

      No, IMHO, it is an issue of “short-term” vs “long-term”, founded on an individuals assumptive (and necessary) belief as to whether the system can be “saved”.

      I think it is VERY likely that the “hard” decision will be made to think of the short-term (whilst calling it the long-term!), on the assumption that the system can be saved.

      ie. taking the medicine will be avoided; and, in effect, the long-term will be compromised very significantly for the short-term.

      The “hardness” of the ideas will just make people think they’re making a good decision, not recognising that all the roads are “hard”.

      My 2c

    • Peter note above. The liability always comes up somewhere. When a bubble is full to bursting you poke it somewhere it will bulge elsewhere.

      • Flawse – if they didn’t add to the money supply or change the cost then nothing would change, other than cancelling the foreign debt and it would put in place a nice little income on the money, which would cost them nothing.

        My concern would be for future political abuse, but as a short term measure to overcome any market difficulties it may have a use.

        But really it’s not about what you or I want, it’s about what a politician might do, and how that affects us.

        I don’t think that people have really come to grips with this idea yet – this could also be done in the USA, the UK, to name but a few, and it is a real game changer.

        You can see from the comments here that the seriousness of this has been largely misunderstood.

      • Nope! It will show in teh value of the dollar. Peter, despite what MMT believe (and I know you are not a disciple) there is no free money.
        Now just in case we are thinking a decline in the dollar is a good thing, we are not talking a small decline. We get very high inflation as a result and then what do you do with interest rates?

        When you said “then nothing would change, other than cancelling the foreign debt” you should smell a rat.
        There IS no free lunch.

  3. Dear god, they are not actually considering this are they? It would be the greatest catastrophe in Australian history!

    • Im not fully educated in these matters but why would it be a catastrophe?

      I mean in theory interest rates would fall but is your objection to such an idea is that it will reignite the bubble or would it have other consequences I can’t see.

      • Assuming I am understanding correctly what Gotti is suggesting…

        I feel opposed to any measures which provide cheap debt that is effectively guaranteed by the government. We are effectively publicising private debt on top of inflating any number of asset bubbles. Have we learnt nothing from the last decade?

        And if you were a bank suddenly offered a massive source of cheap money, what would you do?

        Better question: what did Macquarie Group do with the government guarantee during the GFC?

      • It sounds like we are talking about the Australian Government borrowing in a foreign currency (US dollars) and then lending to Australian banks in Aussie dollars. This would expose them to huge currency risks. If the China boom ends and our dollar tanks, the government would be on the hook for many billions in currency losses. Supposedly they could hedge this, but who’d be dumb enough to take that bet, and have the pockets to pay up if required, without charging an arm and a leg for the insurance?

        If they borrow in Aussie dollars it’s not so bad. But in that case why not just get the Reserve bank to lend to the banks?

        I just hope we avoid the Irish trap of letting the banks sink the national finances.

      • his would expose them to huge currency risks. If the China boom ends and our dollar tanks, the government would be on the hook for many billions in currency losses.

        The fact of low interest rates TENDS to increase consumption which would increase the CAD which would TEND to devalue the dollar. At the moment this effect is drowned in the flood of foreign investment money and spec money.

        You don’t get anything for nothing despite what some protagonists in here argue.

      • I agree, though I haven’t read the article what is printed above is crazy. I know the government is assumed to be a backstop for the financial system anyway but moving this from implicit to explicit debts will only make our system more susceptible to shocks. How long would it take for gov funding costs to rise? The rating agencies already assume that are banks are guaranteed by the gov which is adding a few notches on their CR; thus the moral hazard is strong enough today – they do not need to flame it any stronger.

        The screams for lower rates and more competition (covered bonds, Jap banks) from the vested interests was enough without this added to the mix.

  4. A friend of mine raised the possibility of a new government-run bank being set up (ie revisiting the ‘old’ Commonwealth Bank model).

    It wouldnt surprise me if something like that, or the govt taking on funding as outlined above, comes to pass.

    I have little faith that the long-term health of the economy will be duly considered in trying to avoid the short-term pain that is coming.

    • “I have little faith that the long-term health of the economy will be duly considered in trying to avoid the short-term pain that is coming.”

      Agreed – it’s also known as Ponzi-ing up the rest of the economy and society…

      …only to eventually fail anyway (but the offenders get away ‘OK’ in the end!)

      Sorry to sound like a broken record…

  5. A good example of a baby boomer going berserk, trying to defend their ponzi retirement scheme at ANY cost.
    .
    And they have the gall to accuse Gen X/Y of being the “me, me” generation.

    • +1 gen X/Y are smarter than you think, sure we can rehearse all one liners from Jersey shore but with access to some infromation (internet) that our parents didn’t have gen X/Y should be a hell of a lot smarter than previous generations.

      Maybe after we mature and stop wanting to travel the world and getting in touch with nature and all that other garbage like planking ><

    • > A good example of a baby boomer going berserk, trying to defend their ponzi retirement scheme at ANY cost.

      That’s it, Mav. Just when you thought those in charge of the scheme had run out of ideas. Nope, the scheme’s operators are surprisingly resilient. They will not give up.

  6. Reasoned debate…sigh… at the moment what the corporate lobby groups want the lobby groups get.

    If we are having this debate, how nice it would be to use it as a chance to lose the lecherous passive property investors and get housing off the financial asset list…

  7. Gotti, good grief. But realistically HnH, reasoned debate? What about Wallis, Henry, et al, all serious reasoned ‘debates’ cherry picked by the politicians, tramped or trumped up but not addressed. Too hard basket brimming over.

    “…Gotti’s hysteria spearheaded the removal of a Prime Minister…” well it didn’t the first time (as Four Corners well documented) but if we’re lucky will this time.

    • No it was the mining lobby that killed Rudd. Feeding private polling to senior ALP figures! My God, just how low can the Minerals Council stoop?

      God help our democracy.

      Over to you MineBot…

      • The mining lobby plus the U.S. moles Paul Howe and Bill Shorten. It think it was dem two in the Wikileaks memos.

      • You have it exactly right there littleguy. Shorten’s remark to another parliamentarian the morning of the change-over is telling in that regard. It’s too obscene to repeat here.

  8. Gotti is a legend?

    The reason I stopped reading BS and came here was mostly because of how silly I thought Gotti’s hyperbole was.

    • that, and the fact that nothing appears there that hasn’t already been covered in some other blog hours, days, or weeks previously.

      • I actually wasn’t being facetious there. When you read the “revelations” in articles by the dads army you can almost figure out exactly what blog they have just been reading.

      • and I was laughing just because it was so true 🙂 have seen more than a few pieces that are macrobation in motion, often Maley (bit like Irvine).

      • Maley…I don’t think so. She’s been pretty out in front for a long time. Gotti is mostly Ok and does have some good stuff (current article excepted…brainless)but Maley does have a fair bit of different thinking. Anyone thinking she is the same as MB don’t read most of her articles.

    • I think “used to be a legend” is more accurate. He’s been writing some garbage recently.

      My favourite was his article saying that interest rates needed to be lower because people who earned $150,000 and had borrowed $750,000 had no money to spend. No surprises that Mark Bouris had a hand in it as well.

      http://www.smartcompany.com.au/economy/20110603-rba-could-send-economy-into-deep-spiral-with-rate-rise-gottliebsen.html

      The Bouris table illustrates the plight of a family that is earning $150,000 a year – in other words, they are on the government’s ‘rich list’.

      A vast number of these ‘rich’ people, according to Bouris, have borrowed $750,000. Bouris then plots their fortunes since August 2009 and calculates what two interest rate rises, a flood levy and a likely carbon tax will mean to their finances.

      • General Disarray

        Sorry, I couldn’t read past “But very few of the interest hike gurus go out into the real world and discover what is actually happening. That’s my job.”

        I also recall there was some controversy about the family they “selected” for that piece of propaganda.

        facepalm

  9. Yes – that was a very entertaining article by RG.

    What a bizarre concept.

    Drop everything and have Mr Swan and the Commonwealth wander the globe with its sovereign credit status in hand looking for cheap money to sprinkle around keeping the Housing Ponzi Scheme afloat.

    Having said that, RG is not alone in wanting the ‘low interest rate’ inflatable life boats to be launched immediately and in abundance. There are plenty of people who are begging the RBA to do just that.

    He just has an inventive life boat design in mind.

    RG should relax and remember that as the economy undergoes the painful adjustment from a private debt boom model there will be plenty of things to be done by people with energy and imagination. And those that lack those qualities will be able to collect their safety net payments until someone who does, offers them a job.

    Even in a worse case scenario of house prices falling at a steep gradient the housing construction industry could easily be kept active building the houses that, the rental vacancy rates suggest, are in short supply.

    And when we have built enough build some of that infrastructure that seemed too much like hard work to build over the last few decades.

    The end of the debt bubble economy does not mean the end of economic activity. It just means we have to think outside the box.

    I am sure that the irrepressible RG will start looking to the future (rather than the ponzi past) before long.

  10. How is this different to the banks borrowings today?

    Aren’t they effectively backed by the government already? i.e the ratings agencies attributing 2 notches to the ‘implied support’…

  11. The government owned CBA wiped out hundreds of farmers in the 80’s with these same idea, borrowed in Swiss Francs at a low rate and then had the currency go agaisnt them. Ask the Hungarians at the moment how borrowing overseas funds at a cheap rate has worked for them. I believe the head of the Hungarian Central Bank actually did the numbers and took a debt in this manner. People are doomed to repeat the same mistakes.

  12. That is an awful idea.

    If the banks are paying more for borrowings than the government there is probably a good reason for that.

  13. Has anything any politician has said or done indicated that there is any desire to do anything but keep house prices inflated? Perhaps nowhere else on earth is so much energy spent on an essentially non productive asset.

    The baby is going to go out with the bath water. The final straw may well be that the government itself is denied access to credit markets.

    Oh to sail the south seas..

    • …an example of what i mean by “Ponzi-ing up the rest of the economy and society” <— this is where this sort of action leads, if consistently taken (including tighter and tighter govt grips in many aspects of life, to "make things work….for the good of the people".

  14. Doesn’t anyone look to the US to see how really really low interest rates are working out for them?

    “…by treating the Australian dollar like gold.” Is that a recommendation by Gottliebsen to buy gold instead?

    • “Is that a recommendation by Gottliebsen to buy gold instead?”

      Nice try! 😉 I read that as him saying that both have been bid up above their realistic value.

  15. If this happened then surely Aus govt debt would quickly reach the yield of bank debt anyway? All this would do is change who is on the hook for the currency risk.

      • If the bonds are issued in A$ who is wearing the risk and at what premium for the hundreds of billions involved.
        W#e are trading what $600 Billion (the actual amount doesn’t matter)over the next 18 months? We have to spend A$ to buy all that amount of currency. What is the effect on the value of the dollar? It sinks out of sight unless we sell yet another huge block of our resource assets to foreign buyers.
        What about if those lenders who hold USD or Yen or RMB whatever don’t want A$?
        Then when the bonds mature what happens…we print up a few hundred billion and hand it to them in payment. What happens to the currency then? We sell up another huge block of resource assets?

        There IS nothing free about printing A$.

  16. What a ridiculous idea. When will these guys understand that the mis-pricing of money due to government/reserve meddling has been the underlying fuel to the flame of the credit explosion that led to all this in the first place.

    At any rate, Gotti is proposing that you can get something for nothing – and we at MB know that’s not true. Is he suggesting that investors in Australian government bonds won’t demand a higher risk premium (and therefore drive higher overall government funding costs), knowing that any subsequent issue is just part of Gotti’s crazy bank funding carry?

    • Is he suggesting that investors in Australian government bonds won’t demand a higher risk premium (and therefore drive higher overall government funding costs), knowing that any subsequent issue is just part of Gotti’s crazy bank funding carry?

      This. Thanks for making that point – a few of the commenters here don’t seem to grasp that and are fixated on other risks instead…

    • Your right.

      If government bond investors demanded a higher risk premium because of this scheme, then the scheme ends up being a taxpayer subsidy to banks.

  17. HnH, I’m with you.
    I can’t figure Gotti out. The articles he’s writing are all over the place. Often he contradicts himself from one article to the next. While he’s possibly pushing for the image of an independent journalist who will look at all issues from all sides, it is the oncstant infusion of his own very inconsistent opinions that gives him away.

    He seems to meet with a lot of opinionated people. So to me, it looks as if he’s got no understanding of the major themes and issues himself and just regurgitates whatever he hears or reads elsewhere. I cannot possibly see a reason why else he would be so all over the place otherwise.

  18. “the amazing Business Spectator reader conversation that went with that commentary”

    Ha ! It would be even more amazing if BS actually published most of the comments that get submitted. Just one oblique reference to Macrobusiness in a perfectly civil comment I submitted to them months ago, and I haven’t been able to get a single thing through since, no matter how inoffensively bland or obsequious. Am I being paranoid, or do those guys filter comments to the max to project an appropriately corporate friendly image ?

    • I can only say that they’ve published all of my comments but it needs to be written more in the ‘letter to the editor’ style to appease.

    • Same experience here. They seem to take censorship very serious there on behalf of their corporate masters.

    • I got through a ripping attack on Joye one day – same maniacs that deny the presence of bubbles will be the first ones to throw their hat in the ring to fix the problem when it blows up.

      It stayed up for about 3 hours, then I’m guessing Christopher must have read it. I’ve never had another comment published since.

  19. If we go down the road he is suggesting then we deserve everything we get. Taking on potentially hundreds of billions in liabilities without ownership if the banks will be a disaster. The world will see it for what it is a desperate Irish type move to keep the ponzi scheme alive.
    ludvig Von Mises said words to the effect that nothing can stop the final collapse of a credit boom brought on by monetary expansion anything further expansion only serves to prolong the one ribald and make the eventual suffering worse. Hard to believe those words where written so long ago.
    You can have all the Wallis type enquries we like but if we don’t have sound money and the public are keen to steel from eachoher with schemes like negative gearing and first home buyers boost, then we deserve everything that is coming.
    If you want to see some non monetary solutions though head over to the depression.org.au

  20. dissonanceMEMBER

    MB is a great site but it concerns me prone to ‘group think’, especially along the philosophical lines of the main contributors. This is a really interesting idea on many levels with real merit yet very few seem willing to stand against the tide of superficial bank-bashing derision. In fact I have only ever posted once before on MB and it was with a similar suggestion well before Gotti picked up the idea (CBA pays the price 6th Jan 2012) yet I received not one response amongst the flurry back slapping by ‘the end is nigh’ brigade. Here goes again anyway.

    Firstly, Goverment sells bonds in AUD, so no currency risk, which also sterilises the funding as existing overseas funding is repaid to match. The Gov bond market gets bigger, which solves a complaint for many Oz and OS players, satisfying the obviously large international demand for Ozzie paper.

    Govie 5 year Bonds for example currently more than 2% lower than OS swapped funding banks are currently paying. This would allow Gov to take, for example, 1% as a fee and pass on 1% savings to banks, who would pass that savings on to customers. Competition, including from overseas, will still determine the net interest margin as it does now. When the Japanese banks arrive later this year with deep pockets of sub 1% cost funding and a low cost internet based mortgage broker rolled out model, I suspect they would still make handsome earnings while sending our Big 4 sending close to the wall, but that is another story.

    The net benefit to Australia is massive. Currently Oz banks have approx $400B in overseas wholesale debt (http://www.bankers.asn.au/Bank-Funding/default.aspx), which would save Australia some $8B in overseas directed interest expense per year. Of this, $4B would go to government as a ‘1% fee’ and the other $4B a straight out saving. The drop in bank funding cost would remove the requirement to RBA to aggressively cut the cash rate therefore maintaining a higher income level to the very significant quantum of Australian savers, both floating and fixed.

    RBA could still manage monetary policy as required. The banks are already assumed to be TBTF and government backed anyway, so at least the country actually receives a benefit from the explicit guarantee rather than not under the current implicit situation. Questions of moral hazard and competition etc can still be legislated against through APRA or more direct legislation. Whether the banks like it or not government issue their license to operate and could regulate returns similar to utilities or Telstra.

    Bank funding would be issued by government as senior secured debt so shareholders are still on the hook first and significantly. Common sense tells you that the government will continue to monitor and protect the real-estate market and bank asset base from crashing in any case, thereby protecting their ‘investment’ while simultaneously regulating capital adequacy ratios etc and keeping a tight reign on any undesirable risk taking or expansions (bank equity buffer if you like).

    The currently extortionate overseas bank funding originates largely from European, Japanese or US central bank printed money in any case. The OS banks get money at 1% or less with almost unlimited liquidity through Central Banks via LTRO and other cash for crap programs, all handed over with the promise of “lower for ever” interest rate settings. OS banks are basically running a carry trade from almost free central bank QE money into Australia with very little risk and handsome profits to essentially recapitalise from their previous mistakes at Australian borrowers’ expense. Keep the carry trade at home I say!

    If our economy weakens and inflation slows the RBA may chose to buy Gov Bonds on market through expanding the balance sheet like all other countries seem to. This ‘Ozzie QE’ would have the effect of lowering the AUD which is having such a deleterious effect on much of our industry. Fiat money is at the end of the day simply a commodity to be produced like any other but which we are pricing so much higher than everyone else. Sooner or later the ‘cheap money’ will own us lock stock and barrel! Is it any wonder we lose the like of Fosters and our coal miners to overseas players borrowing money at next to nothing?

    Many will come back with cries of moral hazard, increase sovereign risk, higher government funding costs, tax payer subsidy, manipulation of market rates, ponzi scheme etc but these are short sighted populist criticisms. Look overseas to see UK printing many hundreds of billions in QE to buy government deficit issued bonds but see interest rates at historic lows. The market cares more about the security and return of their money than the return on their money. Australian government bonds issued to banks would not just be self-funding but net profitable over cost, further strengthening government’s fiscal position not weakening it. Our foreign debt and thus risk would substantially decrease. The chances of a funding starved banking credit crunch causing a self-fulfilling real-estate crash would lower. Government bonds would not weaken given the issued bonds were self funded, bank shareholders will still be on the hook for any loan losses as they should be, while government makes a carry trade profit in return for ultimately back-stopping the banks as do ultimately.

    Our two-speed economy, the over-extended real-estate market, overseas indebted banks etc are all fact, whether we like it or not. The powers to be will not just let the real-estate market or economy go over a cliff no matter how many here would love the schadenfraude. The world is shifting and moving at an ever increasing pace and Australia needs to react as the situation demands. Playing with a straight bat while all others manipulate currency, interfere with interest rates, subsidise production, under-cut taxes, transfer prices, dump excess marginal production etc will likely see us come undone in a nasty manner. Outside the box thinking, national interest policies and social dividend legislation are what our children will thank us for or curse us without.

      • dissonance seems to have taken a lot of time to prepare his views on this. Is that the best you can do?

      • Yes, a LOT of time, and why? I’m getting a feeling the official wheels were already moving on this one. And maybe that’s why the RBA didn’t cut. This more comprehensive ‘solution’ to funding costs was already under consideration. Heaven help us.

    • Curse you without it? I’m violently angry at your suggestion. More debt is going to make the fallout worse and make Australia a worse place to live. This bubble is going to come down one way or another.

      For me, I suspect that it’s going to come in the form of departure to another country, many of which are looking better on a daily basis.

    • “The powers to be will not just let the real-estate market or economy go over a cliff no matter how many here would love the schadenfraude.”

      I’m just relieved that our powers that be are so much smarter than the stupid powers that be that let so many other real-estate markets and economies go over the cliff.

    • No offense, I like Steve Keen’s idea of a debt jubilee to reduce the debt, rather than perpetuate the ponzi finance with taxpayers money.

      • Then you wipe out all the savings as well. In addition you reset the economy with all the problems that caused the crisis still in place but exaggerated a billion times!
        All those living in multimillion dollar houses with multimillion dollar debts get to keep them and have no debt.
        The rest of the country gets to keep their houses and no debt. You haven’t reset anything else so what do you reckon the cost of housing would become to anyone trying to buy.
        There are an abundance of reasons why this is not any sort of an idea let alone a good one.

        Lastly…we have a Chinese worker who used to earn $20 per month and now earns $300 or $400 a month, works really hard, lives very frugally, saves 30% of their wage so that their family will have a better life…and you are going to persuade them to give up their savings so we can live, not only in the manner to which we have become accustomed, but in a manner richer than ever before?
        Good luck with that!

      • Flawse, that is not what Keen’s debt jubilee looks like. Instead of banks acting as monetary pimps, both savers and borrowers get money directly from the government. Savers can keep it or spend it as they see fit, but borrowers will have to compulsorily use that money to extinguish/reduce their debt.
        .
        It is QE without the banking pimps and the additional mountain of debt.

    • Diss,

      I’m not sure if you’re alleging group think among contributors or commenters but I’ll respond as if it were me your’re talking to for usefulness.

      This post is not about Gotti’s idea. In fact, I think it’s quite possible that something like his idea will become reality through no choice of our own.

      No, it is about the manner in which he expresses it.

      Gotti is basically saying that his idea should be adopted by the Cabinet in some backroom deal because of panic caused by himself.

      I would laugh this off as an empty rhetorical trick except I’ve witnessed it working first hand. Our pollies have glass jaws these days. To me that’s irresponsible media.

      I don’t agree with Gotti’s idea, and see other ways of dealing with the context you describe, which I do more or less do agree with. But you may have noticed I didn’t respond to Gotti’s idea in the post, only his manner of delivery.

      • As someone who has at times made remarks that don’t reflect the general concensus of this forum, I can assure you that a group think attitude does exist here amongst the poodles that snap at the heels, especially from the many bloggers who “want” a real estate crash in this country, not because they see it as beneficial for the wider community, but because it suits them financially and might realign the BBQ bragging rights – a worthy cause indeed.

        However we move on – the glass jaw that you speak of is a result of poor voting choices by the community who couldn’t make up their mind on who they wanted to form government, AND political leaders who simply lack “guts” and possess a poor sense of ethics.

        The study of the political failures of the Gillard government will be meat for consumption in our universities for decades to come, but it really boils down to a grab for power at any cost with an unhealthy appetite for any compromise rather than a “back me or sack me” ethical stance.

        I don’t think that anyone can blame any journalist for thumbing their noses at this lot of political pygmies that we see running both sides of the chamber.

        If the pathetic politicians we now have running the country can’t make hard political decisions without first getting their lead from journalists and opinion polls then perhaps we would be better off with a few experienced journalists running the country.

        Does anyone think that Oakes, Gotti and co would do a worse job?

      • I disagree. The media is called the Fourth Estate because it’s an integral component of a nation’s democratic political economy. Fill it with amoral imbesiles and you’ll get zero accountability plus the rule of self-serving interests. Ring a bell?

        As for the schadenfreude of many commenters, can’t deny that. But, equally, the politico-housing complex is a corruption of the system we are told we have so that’s going to breed malcontents isn’t it?

      • A fair reply. The political situation will be resolved soon enough, I only hope that Australians get over the Don Chipp “keep the bastards honest” attitude and elect a government that can make decisions and move on with reforms that are or will be needed.

        Back to the comments of Dissonance – have you a reply to the pros and cons of the measures that he has discussed, or alternatives that have similar considerations.

        If the government actually implemented some of these ideas, which you suggested my eventuate, then it would be a game changer in our funding sources, and it has potential for both much benefit, and much misuse in political hands.

        Well intentioned politicians (eg. Bill Clinton)come up with seemingly great ideas that lose their way in the paths of implementation.

        This has the potential to be a game changer in cricket speak.

      • Peter…you have to follow all he says through to the external account.
        It all comes back to bite you on the a..e!

        To reply in detail you need to go through his post and reply piece by piece. It’s a long and detailed process to refute claims that are simply wrong in here. Everyone believes in the Magic Pudding.
        Did you see him refer once to the effect in the external account? I’ve posted often enough the effects of this stuff in the external account, the value of the dollar, resulting inflation. Then you have the choice…raise interest rates to impossible levels that will bankrupt everything in the country or let inflation have its head.
        As per your post on politicians the latter will be the case.

        Ref your post above that’s why I currently loathe the Libs…for God’s sake instead of this petty stupid trip why can’t they put out a good policy and let people decide!

      • I’m not interested in a property crash for BBQ bragging rights. I’m interested in property coming back to earth because I’m fed up to the neck about government deciding who wins and loses and the course of my life being decided not by my choices (good or bad), but because of when I was born and if I chose to make a horrible decision to saddle myself with debt that would eventually be monetized by the government.

        Personally, I think that the effects of the bubble are outweighing the effects of a crash. We need some sanity and accountability once more if we are to run a stable society. Or are you suggesting that our society has failed, so we should just game it?

        I’m not sure that I can take too much more of Australia’s staggering economic success…

      • I’m not sure that I can take too much more of Australia’s staggering economic success…

        Good one! 🙂

      • …especially from the many bloggers who “want” a real estate crash in this country, not because they see it as beneficial for the wider community, but because it suits them financially and might realign the BBQ bragging rights – a worthy cause indeed.

        I’d say most here are worried about the poor use of capital, and high private debt-to-GDP ratio causing problems for business’ that rely on discretionary spending.

        …the glass jaw that you speak of is a result of poor voting choices by the community who couldn’t make up their mind on who they wanted to form government

        Have you read Animal Farm?

    • Dont assume that if people disagree with you that it is because they haven’t given consideration to the ideas you raise and they are just engaging in group think.

      Also just because no one responds to a comment you make is no reason to stop contributing. Persuasion takes time and you may overlooked the possibility that they did not respond because they agree.

      Having said that i dont agree with your proposal but not because it doesnt have merit.

      There is a good argument that we should exploit the cheap money of foreigners if they are silly enough to take the risk on an investment in Australia. afterall that has been the approach of the west over the last 20 years.

      In principle it is no different to reaping the fruits of low paid (though now risin) workers in police states like China in the form of cheap TV’s.

      The question is do we distort our economy in doing so.

      I think it does.

      By the way – when the govt sells its bonds under your proposal can foreigners buy them? Wouldnt that put upward pressure on the dollar as they seek to purchase $aus to buy them?

    • “satisfying the obviously large international demand for Ozzie paper”
      Assumption

      “1% as a fee and pass on 1% savings to banks, who would pass that savings on to customers”
      Another assumption that rates wouldn’t move as the borrowing increased.

      Common sense tells you that the government will continue to monitor and protect the real-estate market and bank asset base from crashing in any case
      An assumption about the power of the government. Why did the banking industry around the world get into trouble in the first place if govts are so omnipotent?

      When the Japanese banks arrive later this year with deep pockets of sub 1% cost funding and a low cost internet based mortgage broker rolled out model
      We haven’t seen this scenario play out anywhere before have we?

      The drop in bank funding cost would remove the requirement to RBA to aggressively cut the cash rate therefore maintaining a higher income level to the very significant quantum of Australian savers, both floating and fixed
      In other words maintain a high internal savings interest rate compared to assumed external borrowing, what will happen to speculative flows under this scenario?

      The banks are already assumed to be TBTF and government backed anyway, so at least the country actually receives a benefit from the explicit guarantee rather than not under the current implicit situation
      Well existing home owners would possibly benefit, not sure about anyone else?

      Questions of moral hazard and competition etc can still be legislated against through APRA or more direct legislation.
      Would bankers be prepared to forego all bonuses and high salaries seeing this move amounts to putting the whole industry in a government nappy.
      ……[email protected]…………@…………[email protected]

      economy weakens and inflation slows the RBA
      Why would this happen with all the govt juice being provided to mortgage borrowers?

      . Look overseas to see UK printing many hundreds of billions in QE to buy government
      Done wonders for UK currency hasn’t it? It’s keeping them afloat in the short run, but they are cutting the rate of deficit increase, and somehow this is austerity. How many poms are making acquisitions with their devalued money?

      bank shareholders will still be on the hook for any loan losses
      Who are the shareholders, yes lets have the pension funds take one for the team so banks can continue the status quo.

      “The world is shifting and moving at an ever increasing pace”
      Everytime I read this line I know someone is trying to pull a fast one, essentially an appeal to armageddon if we don’t comply


      In short I see plenty of assumptions, and hope of a free lunch to be had. And to what end, having a few more over mortgaged householders. You discount the moral hazard far too easily.

      For the record I don’t think the housing market is going over a cliff, but a moderation in price appreciation is welcome while some debt is repaid. This is the only answer to stabilising the market in the long run, and certainly not a reason to reach for the steroid cabinet because 1/3 of Australia, those with a mortgage had to pay 0.06% more interest on a mortgage of a half-million dollar property.

  21. …great…

    Just what we need: the ability to generate MORE cheap debt.

    Yep, the ability to reach another debt ceiling, and Ponzi up more of the economy and more of the future.

    And what more? More of the State? Why is MORE govt intervention always the key to “the solution”? Why can’t people see where this trend leads?

    For crying out loud! When are we going to learn! This system is not Saveable without massive wealth and power transfer….which means it is not actually Saveable, per se, but that people will try, cause massive systemic transfer in the meanwhile, Ponzi up everything else, and then have it fail eventually anyway…

    * annoyed *

    • Thank you Burbwatcher!
      I simply can’t believe people see more cheap credit as the solution to the problem of too much credit. These people are totally detached from reality. I recently asked a senior capital markets guy in the funding department with one of the big four why they don’t just let supply equal demand and forget about all these new deposit products they are launching and covered bonds. They could just price domestic savings at a level to meet demand for loans. He just looked at me and said that is one thing we definitely do not want to do! They know the game is up but are going to bring down the whole country rather then go quietly into the night.
      I had hoped the banks would just go bust quietly when the time came but it looks like they will bury Australia rather the die honorably.
      A guy on the box last night said the world moves in cycles, Capitalism then Socialism then Barbarism.

      • “They could just price domestic savings at a level to meet demand for loans. He just looked at me and said that is one thing we definitely do not want to do!”.

        I’ll be honest – that sent a cold shiver down my spine. Proves yet again that financial innovation is there only to distort markets and make them more opaque to invite the next bigger fool to step right in.

    • Some great points.
      The state is not going to let the whole economy go down the drain. They will do ‘something’. So why not look at the most practical or least bad way of cushioning the deleveraging?
      The banks are TBTF so the government shd put in place some security/laws to prevent them taking down the whole economy.
      I think the government needs to think creatively and not be hemed in with the usual complaints of interefering in business. (After all spme MB bloggers feel the car industry shd be supported with tax payer handouts…is that not government interefering in a dying industry to try and keep jobs?)
      MB is a fantastic site and it would be a pity if ‘group think’ prevailed.
      (Run for cover)

      • UE, the car industry is troubling. Given the Holden 22% negotiated with the union, no productivity gains nor concessions. I mean, really? Perhaps if taxpayer support is provided (indefinitely) certain expectations must be met – the first being wages rise in line with CPI, at best. Agreements like this make a mockery of the readiness of governments of all persuasions to provide assistance…the finger. Secondly, a genuine focus on providing what the market wants. Thirdly, an ethos of excellence in innovation, quality of product backed by quality of service. Just have to wonder if the furore created when the Toyota honcho politely pointed out the outrageous ‘sickie’ tradition at it’s Oz plants should be paid the attention due – you need taxpayer support, you accept certain conditions. Kinda like Greece.

      • Mining BoganMEMBER

        Um…Have a look at the 18% rise over three years awarded and you’ll see that a lot of it is catch up from the pay cuts they took during the GFC. The rise is only 3% a year plus bonuses and catch up.

        The devil is always in the detail eh?

      • Nope. Not when the way it was presented, influential across the automotive sector, reliant on assistance, ammo for other unions to flex the muscle, Nope.

        This sector should be treated the way the public service once was. Little difference…

        And with automotive it is never ending – every country where one of the big operators have established they have totally finessed the subsidy factor.

        Come on!

      • Catch-up for the time they spent stood down at 50% of pay?

        Every other poor b….d in this country, when there is no work, he loses hid job! He gets nothing.
        Now we have these blokes who get paid 50% of an already high wage to go on holidays!
        Why should a bloke, working hard and trying to raise a family on $40k a year subsidise that?

      • MiningB, The Press Release. Well Der.

        Bad publicity. 22% no prid quo pro and the begging bowl almost filled. Better fix that:

        “oh, oh, there’s a deal…somewhere, I think…could be (can we sell it as such?)

        yeah, right.

      • Yikes. Lorax? Jeesh.

        My turn, something about your comments over time have the taste of a “ring in”…

        Can’t quite put my finger on it, but…something’s not quite right.

        MB, I have always hoped you a free-thinking individual but kinda sensing clone of HnH, yea or nay?

      • Mining BoganMEMBER

        Nah, just a bogan wandering through trying to educate myself.

        Never had much of a chance for fancy book learnin’ and stuff so I watch discussions here. Some have changed my mind, some have reinforced my views.

        Some leave me bamboozled and make me reach for the wine bottle.

        Nope, no clone. Just an aimless traveller.

      • “it will still slash the number of shifts next month and that means pay cuts of around 25 per cent for most of the plant’s 3,000 staff.”

        Shifts were cut 25%! So 25% less pay!!! Then we start calling it a pay cut and they need compensation. Hells bells talk about euphemisms!!!

  22. I more convinced that the RBA needs to put in some form of algorithmitic adjustment factor that hits the importers of cheap credit, goods,etc and subsidizers export of australian credit goods etc. In the old days it would be called a fixed currency

  23. There are ways that hot money coming into Australia could be taxed, so making Oz less attractive to these sort of funds.
    Unfortunately Julia Gillard thinks a strong currency is an indication of good economic management. So its unlikely to happen, unless Bob Brown thinks its a good idea.

  24. dissonanceMEMBER

    I am not a bankster or bank appologist but neither am I blinkered by dogma and one sided disgust at the mess we are in. Some people really need to open their mind and think more about how the system works before jumping on the “print more money ponzi scheme” wagon.

    Firstly, when a government sells bonds it raises the money from private holdings that already exist. Therefore money provided to the banks from these bond sales is said to be ‘sterilised’ because in fact no more moeny has been created. In reality the government would be soaking up the cash made available by banks redeeming their existing overseas debts when they come due, because the banks have swapped that debt into AUD and it is AUD that holders of bank debt will get repaid.

    Secondly, the governemnt is not creating “more cheap debt” but just replacing expensive bank funding with cheaper bank funding. The cost of debt in Australia to businesses and would be house buyers is still set by the RBA via their cash rate operations. It would just be that savers don’t get crucified by an extra 1% off their savings rate for the RBA to achive the desired level for the cost of money. Cheap credit has nothing to do with this suggestion.

    That said, “money” or “credit” is highly fungible between countries, meaning cheap money overseas inevitably leaks into high return destinations like Oz pushing up our exchange rate, hollowing out our industries and moving employment offshore. Having a revulsion for money printing and interest rate manipulation is all well and good but what you gunna do when it comes for you? Australia is bleeding to death paying foreigners interest on money that was created out of thin air, essentially created by foreign central banks with the stroke of the keyboard. Does that make sense to anyone here?

    Whether we like it or not the rest of the world is running a money printing ponzi scheme. Australia is still playing by the rules and Gotti’s suggestion is about sterilised government funding not money printing funding. But while we’re on that topic, if Australians are going to pay usury and buy over-priced houses at least lets keep the interest payments in Oz! And if it need be ponzi printed money down the track then let it Made in Australia printed money 😉

    • > I am not a bankster or bank appologist

      Do you work in the public service? Economic adviser to gov’t? Are you at liberty to tell us if this idea was already under consideration when the RBA decided not to cut rates at its last meeting?

    • Interesting take dissonance – I thank you for your input.

      Just for the record, there is some differences of opinion (and more) between the MB Team, it probably looks like groupthink because we effectively have a single editorial policy – but this is based on feedback too (e.g todays post by HnH on Dad’s Army…)

      Other commenters – give some slack and remember my “ideal” for how we conduct this conversation – cafe/pub with a jest here or there, but no belittling or dismissing of another’s opinion, even if you think (or know) they are dead wrong. We tread a fine line between a robust discourse and descending into troll nest like chaos, so keep your heads in, I’m more than prepared to delete comments or users left right and centre.

      Back to regular printing…err programming.

      • Good considered comment, Prince.

        I too am interested in dissonance’s views (would welcome more) but as you know have also raised the ‘groupthink’ tag. To be honest, still think it has some merit, on the part of some commenters more so than the editorial.

        Think this year has got off to a brilliant start, each MB blogger expanding their individuality – makes for lively and stimulating debate. This blog leaves BS in the dust.

        dissonance, you’re in the right place.

        ps dissonance, a little pep talk, I come from a perspective not really of the MB commenter accepted view – hang in there mate, debate far more interesting than continual reinforcement.

        Cheers.

    • She’s right mate! There is no such thing as the external account.
      When we start this massive print flooding the world with A$ who is really going to want them? I mean we are going to have some 1.2 Trillion of them out there.

      What holds the A$ together at the moment is the carry trade you describe but that is made a one way bet by our willingness to sell off ‘in situ’ any and all our overabundance of natural resources.

    • So as has been mentioned above, what happens to Australia’s AAA rating under this plan? Effectively they are borrowing massive amounts to fund cheaper bank lending. I mean, it’s not like there’s been any lessons we could have learnt from what has occurred overseas…

      A sudden 1% cut in IRs sounds like a complete loss of monetary policy from the RBA as well – effectively the government will now control monetary policy by funging the difference between their borrowing rate, and the rate they pass onto the banks. The only way the RBA gets control back is if Aussie bonds sky rocket (which is highly possible if Australia lose their AAA rating and investors baulk, all due to what will be seen as risky lending to overinflated housing markets).

      From my uneconomically uneducated opinion, what could happen if this occurs, especially if the government can control rates? Government does the populist thing, and makes IRs (to buy votes) as low as possible. Inflation well above 3%, RBA jacks rates but it has no effect thanks to cheap government funding. Asset bubbles (housing, equities, others) reinflated. Government debt sky rockets. The end game is a huge increase in government funding, we get a massive comeuppance down the road, TBTF banks fail on their debt from the government…

    • Secondly, the governemnt is not creating “more cheap debt” but just replacing expensive bank funding with cheaper bank funding.

      In absolute terms, the overseas debt is not expensive, it is the proper price.

      In relative terms, it does get cheaper for the banks, yes. I understand the mechanic, it is sought that the Australian government securitise the mortgages books of ALL the banks, then then government is sought to flog these securities for the same amount.

      All that changes is the governments credit rating gets swapped for the banks, and inherits a bunch of private sector risk. A sector space it has been previously told to get out of to leave the reward for the private sector.

      Quite simply, NO!

      This is private sector space, its had a bountiful time of reward, and it has done so by exposing itself to excess level of risk.

      It’s reaped the consequence of of good times, now time to reap the consequence of bad. They are the two sides of the same coin.

  25. Dissonance

    How can you state that
    “when a government sells bonds it raises the money from private holdings that already exist”
    but then say
    “Australia is bleeding to death paying foreigners interest on money that was created out of thin air, essentially created by foreign central banks with the stroke of the keyboard.”

    Surely you’re second statement contradicts you’re first.

    Anyway, what you’re advocating sounds (imho) very much that the Australian Government should do what the Irish Government did but without waiting for the banks to fail first.
    You want the gov’t to assume all the mortgage debt (think Fannie Mae) then wait for the inevitable housing price crash, then become the holder of an enormous amount of non-performing loans. The housing price crash that will engulf Australia is the final step in a long chain of events that have begun far away from its shores.

    That may not appeal to you, but to presume the gov’t will make money on the spread due to the global macro environment remaining pari passu, is to mis-read those forces. The buyers (European, US or Japanese) of this new debt won’t be there as buyers & the rates they’ll demand for this dominant asset class bond (mortgages) will kill any growth in lending stone dead.

    The example of foreign governments who’ve approximated this model is not one to be lauded but one to be feared. Moral hazard won’t be something to debate then, it’ll be something to be lamented over because hubris has already delivered its bill.

    • For the record, and sorry to dissappoint, but I’m not from the government. I have no agenda just interest in how we got into this pickle, how we get out of it and how to make/preserve some money the way. Well said Prince, I gave up blogging some time ago because it usually ends up in insults from the ignorant and idealogical. Opinions are like
      arses, everyones got one, most of them stink but some are worth looking at 🙂

      Dim View, my two statements below are not contradictory but show the difference between what I am suggesting and what is currently happening.

      “when a government sells bonds it raises the money from private holdings that already exist”

      This is the time honoured way government raises debt and what I am proposing. It sells in the market place a bond for $1M to someone from the public who stumps up the $1M, no money created just changed hands.

      “Australia is bleeding to death paying foreigners interest on money that was created out of thin air, essentially created by foreign central banks with the stroke of the keyboard.”

      This is the current situation in US, UK, Japan and now Europe. Their central banks create money that doesn’t exist and lend to their national banks at say 1% for 3 years against potentially worthless collateral. Ozzie banks then go overseas on bended knee and pay 4% to borrow that same money and bring it back to Oz (and paying a further 2% to lock in currency swap). The good mortgage holders in Australia are now paying a very significant interest premium to overseas banks who ‘sold us money’ that didn’t exist a few months ago.

      We are currrently exporting a lot of wealth overseas for the right to borrow Australian dollars from people who just printed quite a lot of foreign funny currency? The irony is that because we don’t create money out of thin are by printing we pay a huge amounts for someone else to print it for us!

      Many people are getting credit creation, money creation and cheap credit confused with a static sytem whereby the Oz government replaces the overseas banks as part-funder of our banks. In simply ‘swapping lenders’ the Oz bnaks will end up rolling over the exact same AUD dollars that already exist to maintain the exact same loans that already exist and after the RBA adjusts tha cash rate at the exact same interest rate that exists. If the governmnet wants to prick, deflate, maintain or blow-up the housing bubble etc it will be via other policies and interventions.

      There are very important differences between the Irish situation, Freddie and Fannie and what I am proposing.

      The Irish don’t control their own currency, let the housing bubble get way out of hand, then got caught in the GFC, massive unemployment and couldn’t prevent it crashing which took down their rediculously over-geared banks. They then guarenteed the banks to prevent a bank run and took on too much losses that should have gone to bondholders etc. Housing like any asset market is a confidence trick and if you let it crash then your in trouble but Australia is forewraned and therefore forearmed. Like the UK, whether you like it or not, Australia will lower interest rates, fiscally stimulate, go for QE to see the housing market have a soft landing. Meanwhile APRA is insisting the banks raise capital ratios and maintain lower gearing and a larger equity buffer between potential bad debts and default.

      It’s not technically impossible for the government to be underwater on money lent to our banks but in reality they already are on the hook because their TBTF. The worst case scenario is all shareholder and bank equity is wiped out and the government nationalises the banks which will be recapitalised with printed money for free and re-floated to the public down the track at a handsome profit.

      Freddie and Fannie are different because the US givernment has essentially bought direct exposure to the defaulting home owners through purchasing all the bundled loans from the banks. Any bad debts in those mortgages become the governments loss.

      Importantly the Oz banks still originate and own the loans so any losses come out of shareholder equity which is proper. As long as APRA forces the banks to recapitalise any bad debts then losses will stay private with the banks. The banks are therefore highly motivated to maintain highish lending standards.

      It is very important the government doesn’t get directly involved with lending (such as through Australia Post) because governments are not good managers of risk and money. Make sure private industry is regulated and motivated with skin in the game to best decide the risk and rates for credit distribution. Appropriate oversight and regulation shoould avoid any concern of moral hazard and reckless risk taking by banks.

      I cannot argue with someone that has set their mind on a real-estate crash happening. Like a Doomsday Cult their position is set solid in the bunker counting down the days. Consider though that history rhymes but doesn’t necessarily repeat. Forewarned of the dangers of credit bubbles and real-estate crashes around us, through the serendipidous strength of our resource industry, thus employment levels, interest rate settings etc we have a chance to manage a soft landing. The RBA is reticent to cut for this very reason IMO as it seeks to maintain the de-levergaing required to take us out of the danger zone. Savings rate up, credit growth down, housing prices softening while high immigration continues speaks of a slow melt not a bank breaking crash to me. The worst rarely happens when you expect it!

      If things go seriously pear shaped I would much rather the country’s credit and liquidity was in the hands of our government rather than relying on the bastardry of overseas institutions who would happily lend you an umbrella but demand back once it started raining. They are screwing us now even while things are looking very healthy.

      cheers

      • That all sounds fine until you get to issue of:

        Who is buying the $AUS bonds that are being issued by the Australian Government to raise $AUS to lend to the banks to replace their borrowings from foreigners.

        What security will the Australian Government accept from the Australian Banks for those loans. Covered Bonds?

        Will foreigners be permitted to buy these bonds and assuming they do what impact will that have on the exchange rate as they seek to secure the $AUS required to purchase the bonds.

        Assuming some of the bonds are bought by retail investors who would otherwise have them money in term deposits – which are funds available to the bank why would they accept a lower return on risk-less bonds when their term deposits are already guaranteed by the Government.

        What yield will be required to sell them.

        I don’t really see how your proposal gets around the problem that foreign investors who for 15+ years were willing to accept low returns for investing in Australia now want higher returns.

        If foreign investors wish to make investments in our real estate market let them. After all if their investments go bad (in a bust) they can’t take the houses off shore (better tie down the caravan though)

        The problem is that our banks have made the investments and as we know the only party that seems interested in buying Australian RMBS is the government.

        There are no easy solutions unless the Chinese Government could be persuaded to invest directly in a large quantity of Australian Mortgages.

        But they don’t seem that silly.

      • In essence my argument is that the Oz government implicitly stands behind the TBTF banks and our real-estate market and our economy as lender of last resort. If one does not accept this true then we must agree to disagree, though recent actions says it is so. The government should receive a decent dividend for such a guarentee but at the moment it recieves nothing, all bank profits go to shareholders.

        Our banks should be able to obtain much cheaper funding given this implicit guarentee but they are not. Overseas banks which are ACTUALLY broke obtain cheap funding but Australians are having to pay usurus interest rates because the world is in a credit crunch. Our government can borrow at much cheaper rates as the carry trade will fund essentially ‘risk free’ Australian government debt because our fiscal state is head and shoulders above most other countries (the tallest pigmy if you like).

        The government can either guarentee the banks funding (like the GFC) or act as intermediaries between the market at large and the banks to lower then banks cost of funds, thus lowering Australian cost of debt without slashing the RBA cash rate to dangerously low levels, with all the negative side effects that entails.

        Given the government already implicity guarentees the bank bondholders to a very large extent (note not the shareholders who still face being wiped out in a disaster) why should the government not profit from this each and every year?? Rather than guarentee the banks for a small fee they can help replace foreign debt reliance for a substantial annual dividend until the markets change to something more palatable.

        As to who funds the government it will largely be overseas funds because we have a savings deficit ATM. However, the zero interest rate policy dominant overseas means there is plenty of liquidity looking for ‘risk-free’ carry profit and Australia with it’s higher interest rates is one of the few viable destinations for this very large amount of money. A fiscally sound, very large and very liquid goverment debt market is much more desirable to foreign investors than a small, illiquid bank debt market which is prone to seisure during a crisis. IF there is a crisis, the Oz government will always honour it’s debts via the printing press (thus loosely defined as risk-free) where the same cannot be said of banks.

        I understand that on the surface this all looks like moral hazard, government subsidising bank shareholders, perpetuating the real-estate ponzi scheme but they are seperate issues. The government ultimately has overseen the real-estate bubble, private debt bubble, overseas bank funding situation and is therefore just as responsible for our current situation as any other player. The questions we should be asking is not how did we get in this pickle, whose fault it is and who should suffer but how to move forward and re-set this great country on a better course.

      • I would disagree that Australia is in a fiscally superior position – at least compared with conventional wisdom. The bear case isn’t cooked into the Australian economy ) or the world’s view of the Australian economy). We’re at the point where disleveraging of credit is going to lead to a weakened economy and deteriorating quality of loans on the banks’ books plus the resulting negative feedback loops. Why then should Australia pay less for credit? I’d argue that the current terms are too generous!

        Maybe Aus should switch to the Euro or Dollar, then. Either way, I’m wondering to what end your vision of the future will take us.

        The big 4 might also be too big to fail in the sense of not wanting a bank run, but that doesn’t mean that they can’t take a wipeout in the common and a haircut in several bond tranches.

        I guess that my position is that you can’t fight gravity forever. Every central bank in the world has or is struggling. Why do Australians think that the [email protected] can be somehow stuffed back into the horse here where it’s failed elsewhere?

      • Our banks should be able to obtain much cheaper funding given this implicit guarentee but they are not.

        Why? its a private sector, arms length transaction.

        I can understand they would like it, but it doesn’t mean they should.

        Overseas banks which are ACTUALLY broke obtain cheap funding but Australians are having to pay usurus interest rates because the world is in a credit crunch. Our government can borrow at much cheaper rates as the carry trade will fund essentially ‘risk free’ Australian government debt because our fiscal state is head and shoulders above most other countries (the tallest pigmy if you like).

        There is also a risk to the government, and it is not in the business of taking these type of risks as it doesn’t get rewarded for this type of enterprise.

        The government can either guarentee the banks funding (like the GFC) or act as intermediaries between the market at large and the banks to lower then banks cost of funds, thus lowering Australian cost of debt without slashing the RBA cash rate to dangerously low levels, with all the negative side effects that entails.

        So in other words, avoid bad outcomes for previously bad decisions?

        Then PLEASE tell me the alternative punishment you would like to give those that made bad decisions?

        Given the government already implicity guarentees the bank bondholders to a very large extent

        I’d rather a government start sending a message that it will offer less, or even no, guarantees… starting now.

      • RP
        There is no quarantining the pain you wish upon those private agents who wrought this disaster. I think that is the point of a pragmatic approach that recognises the reality of how the world actually works (as opposed to how it should work but never seems to).

  26. All sounds very “Whitlamesque”.
    Too bad a certain Mr Khemlani is no longer with us to broker the deal.