Phil Lowe’s mission impossible: save housing

Oh Captain, my Captain! Phil Lowe at the Reserve Bank of Australia:

Good afternoon and thank you for joining us today.

When I spoke a few weeks ago, I talked about the importance of building a bridge to the recovery and helping as many people and businesses as possible get across that bridge.

Over the past month, the scale of that national bridge-building task has grown in size – as our efforts to contain the virus have stepped up, that bridge has had to be bigger, longer and stronger. As a country, we have been up to this task.

While we still face some difficult days ahead, Australians can take some reassurance from the fact that all arms of public policy are pulling in the same direction. We are all working to support the Australian economy through what is a very challenging period and to make sure we are well placed to recover.

Today, I would like to provide some details about the economic outlook and an update on the implementation of the Reserve Bank’s recent policy package.

The Economic Outlook

Economic forecasting is difficult at the best of times. It is even harder at times like this when we are experiencing a once in a lifetime event. Given this, I don’t think it makes sense at the moment to focus on forecasts to the nearest decimal point, as we often do. Instead, I would like to focus on two broad issues:

  • the immediate outlook for the economy
  • the nature and speed of the recovery.

The next few months are going to be difficult ones for the Australian economy.

One very obvious consequence of the efforts needed to contain the virus is that many normal activities are restricted or not permitted. This means that, for as long as these restrictions are in place, we don’t have the jobs and incomes that come from these activities. On top of this, there is a high level of uncertainty about the future, which means that many households and businesses are holding back their spending and investment.

The result of both the restrictions and the uncertainty is that over the first half of 2020 we are likely to experience the biggest contraction in national output and income that we have witnessed since the 1930s.

Putting precise numbers on the magnitude of this contraction is difficult, but our current thinking is along the following lines:

  • National output is likely to fall by around 10 per cent over the first half of 2020, with most of this decline taking place in the June quarter.
  • Total hours worked in Australia are likely to decline by around 20 per cent over the first half of this year.
  • The unemployment rate is likely to be around 10 per cent by June, although I am hopeful that it might be lower than this if businesses are able to retain their employees on lower hours. The unemployment rate would have been much higher than this without the government’s JobKeeper wage subsidy.

These are all very large numbers and ones that were inconceivable just a few months ago. They speak to the immense challenge faced by our society to contain the virus.

In terms of inflation, we are also expecting a significant decline in the June quarter. The large fall in oil prices, combined with the introduction of free childcare and the deferral or reduction in some price increases mean that it is quite likely that year-ended headline inflation will turn negative in June. If so, this would be the first time since the early 1960s that the price level has fallen over a full year. In underlying terms, however, inflation is expected to remain positive.

As the economic data roll in over coming months, they will present a very sobering picture of the state of our economy. There will be many reports of record declines in economic activity.

As Australians digest this economic news, I would ask that we keep in mind that this period will pass, and that a bridge has been built to get us to the other side. With the help of that bridge, we will recover and the economy will grow strongly again.

That bridge has been partly built with the help of Australia’s strong balance sheets – in particular, the strong balance sheets of our governments, our private banks and of the Reserve Bank.

Australia’s long record of responsible fiscal policy has allowed the government to use its balance sheet to help smooth out the income shock and to offer protection to those most affected. In doing so, it is making a major difference. The strong balance sheets of our banks are also helping. By offering payment deferrals and concessional terms, our banks are rightly acting as shock absorbers and helping the country through this difficult period. And as I will speak about in a few minutes, the Reserve Bank itself is using its balance sheet to keep funding costs low and credit available to both businesses and households. Without these strong balance sheets, we would have been in a more difficult position.

I would now like to turn to the speed and nature of the recovery.

We can be confident that our economy will bounce back and that we will see it recover. We need to remember that once the virus is satisfactorily contained, all those factors that have made Australia such a successful and prosperous country will still be there.

Inevitably, the timing and pace of this recovery depend upon how long we need to restrict our economic activities, which in turn depends on how effectively we contain the virus. So it is difficult to be precise and it makes sense to think in terms of scenarios. Consistent with this, the Bank will discuss some possible scenarios in the Statement on Monetary Policy in a few weeks’ time.

One plausible scenario is that the various restrictions begin to be progressively lessened as we get closer to the middle of the year, and are mostly removed by late in the year, except perhaps the restrictions on international travel.

Under this scenario we could expect the economy to begin its bounce-back in the September quarter and for that bounce-back to strengthen from there. If this is how things play out, the economy could be expected to grow very strongly next year, with GDP growth of perhaps 6–7 per cent, after a fall of around 6 per cent this year. There is though quite a lot of uncertainty around the numbers, with the exact profile of the recovery depending not only upon when the restrictions are lifted but also on the resolution of the uncertainty that people feel about the future.

It is harder to make forecasts about the unemployment rate given the uncertainty about how many employees will remain attached to their firm and whether people who are stood down will be looking for employment and thus be counted as unemployed. But it is likely that the unemployment rate will remain above 6 per cent over the next couple of years. With many firms delaying or cancelling wage increases, year-ended wage growth is expected to decline to below 2 per cent, before gradually picking up again. In underlying terms, inflation is expected to remain below 2 per cent over the next couple of years.

Of course, there are other scenarios as well. On the optimistic side, the restrictions could be lifted more quickly, with the virus being contained. In that case, a stronger recovery could be expected, particularly in light of the very large monetary and fiscal support that is in place. On the other hand, if the restrictions stay in place longer, or they have to be reimposed, the recovery will be delayed and interrupted. In that case, the loss of incomes and jobs would be even more pronounced.

Whatever the timing of the recovery, when it does come, we should not be expecting that we will return quickly to business as usual. Rather, the twin health and economic emergencies that we are experiencing now will cast a shadow over our economy for some time to come.

It is highly probable that the severe shocks we are now experiencing will change the mindsets of some people and businesses. Even after the restrictions are lifted, it is likely that some of the precautionary behaviour will persist. And in the months ahead, we are likely to lose some businesses, despite best efforts, and some of these businesses will not reopen. There will also be a higher level of debt and some households might revaluate the risks of having highly leveraged balance sheets. It is also probable that there will be structural changes in the economy. We are all learning to work, shop and travel differently. Some of these changes will probably stay with us, requiring a rethinking of business models. So the crisis will have reverberations through our economy for some time to come.

The best way of dealing with these reverberations is to reinvigorate the country’s growth and productivity agenda. As we look forward to the recovery, there is an opportunity to build on the cooperative spirit that is now serving us so well to push forward with reforms that would move us out of the shadows cast by the crisis. A strong focus on making Australia a great place for businesses to expand, invest, innovate and hire people is the best way of extending the recovery into a new period of strong and sustainable growth and rising living standards for all Australians.

The Reserve Bank’s Policy Response

I would now like to change tack and turn to the Reserve Bank’s policy response.

To recap, that response has had five elements:

  1. a reduction in the cash rate to 25 basis points with forward guidance that the cash rate will not be increased until we are making sustainable progress towards our goals for full employment and inflation
  2. the introduction of a target for the yield on 3-year Australian government bonds of 25 basis points, and a preparedness to buy government bonds in whatever quantities are needed to achieve that target
  3. the introduction of a Term Funding Facility, under which authorised deposit-taking institutions (ADIs) have access to funding from the Reserve Bank for three years at 25 basis points, with additional funding available if ADIs increase lending to business, especially small and medium-sized businesses
  4. using our daily open market operations to make sure that there is plenty of liquidity in the financial system and using our bond purchases to promote the smooth functioning of the market for government securities
  5. modifying the interest rate corridor system so that balances held in Exchange Settlement Accounts at the Reserve Bank earn 10 basis points, rather than zero.

This is a comprehensive package and is an important part of that national effort to build the bridge to the recovery that I spoke about earlier. It was designed to keep funding costs low across the economy and ensure credit is available to businesses and households.

Following the announcement of the package, the yield on 3-year government bonds has declined and is now around the target level of 25 basis points, after having been around 50 basis points immediately prior to our announcement. Liquidity in the Australian government bond market has also improved substantially and this important market is working much better. Bid-ask spreads are still a little wider than they were a couple of months ago, but they have narrowed substantially recently.

To date, the Reserve Bank has bought around $47 billion of government bonds. We have bought bonds along the yield curve and bonds issued by the Australian government and by the states and territories. We have done this through daily auctions in the secondary market. The initial daily purchases were quite large – $4 and $5 billion a day. In those first days we were keen to underline our commitment to the target and we were also seeking to relieve some of the very severe dislocation in the government bond market at the time.

As conditions in the market have improved and the 3-year yield has settled around 25 basis points, we have scaled back our daily bond purchases – over recent days, the purchases have averaged around $750 million. We will scale up these purchases again if needed and we will buy bonds in whatever quantity is required to achieve our goals.

With conditions more settled at the moment, our plan for the immediate future is to schedule any bond auctions we conduct for three days each week – Mondays, Wednesdays and Thursdays. That does not mean that we will necessarily purchase bonds on each of these days. Whether or not we do so will depend upon the yield on 3-year government bonds and on market functioning. It is likely, though, that for the foreseeable future we will be purchasing semi-government securities weekly. As is the case now, we will announce our intentions at 11.15 am. If conditions warrant it, we will return to daily bond purchases.

I would like to restate that we are buying bonds in the secondary market and we are not buying bonds directly from the government. One of the underlying principles of Australia’s institutional arrangements is the separation of monetary and fiscal policy – that is, the central bank does not finance the government, instead the government finances itself in the market. This principle has served the country well and I am confident that the Australian federal, state and territory governments will continue to be able to finance themselves in the market, as they should.

While we are not directly financing the government, our bond purchases are affecting the market price that the government pays to raise debt. Our policies are also affecting the price that the private sector pays to raise debt. In this way, our actions are affecting funding costs right across the economy as they should in the exceptional circumstances that we face. But our actions should not be confused with the Reserve Bank financing the government.

Another element of the recent package was the Term Funding Facility. Around $3 billion of the initial allowance of $90 billion has already been drawn under this facility, with around 35 institutions participating so far. The knowledge that ADIs have access to this scheme over coming months has reduced any concerns there might have been about possible future liquidity strains. In doing so, this scheme has supported confidence that Australia’s ADIs will be able to access the liquidity needed to support their customers. It has also contributed to the low cost of borrowing new funds at fixed interest rates for businesses and households.

The drawings under this facility, combined with the bond purchases and the Reserve Bank’s open market operations, have resulted in the balances held in Exchange Settlement Accounts increasing substantially. At the beginning of March these balance stood at around $2½ billion. Today, they stand at $83 billion. On the other side of the Reserve Bank’s balance sheet, there are increased holdings of government bonds, purchased both outright and under repurchase agreements in our daily open market operations.

The very large increase in the balances in Exchange Settlement Accounts has affected the operation of the cash market. The number of transactions in this market has declined as fewer institutions need to borrow settlement balances each day. The cash rate has also drifted below 25 basis points and today is at 15 basis points. Both of these changes are consistent with experience in other countries and have not come as a surprise to us.

The increase in liquidity in the financial system has also resulted in the spread between the bank bill swap rate (BBSW) and the overnight indexed swap rate (OIS) falling significantly. At the three-month horizon this spread is now around zero, which has further reduced funding costs for both the banking system and for the non-bank lenders. The increased liquidity in the system also means that the Bank’s daily open market operations are now on a smaller scale and we have adjusted the frequency of the longer-term operations. We will continue to adjust these operations as required to support the liquidity of the system.

So that is where we are four weeks after the announcement of our policy package.

This package, combined with the government’s fiscal policies and the work of the banks and many businesses, is building that strong bridge that I have spoken about. Our monetary response is keeping funding costs low across the economy and credit available. The fiscal response is providing significant support to both jobs and incomes. Businesses are also helping their employees by keeping them on where they can and the banks are supporting their customers with more flexible terms. Together, these efforts are helping the Australian economy through a difficult period and positioning us well for the recovery.

Thank you very much for listening. I am here to answer your questions.

So, Australia will have 10% unemployment (and another 5% unemployed on DoleHider) before it has a housing bust. Usually unemployment comes after.

This is Phil Lowe’s mission if he chooses to accept it. To prevent Australian house prices from crashing with the tsunami of jobless even as:

  • no more rate cuts;
  • immigration is stuck in reverse;
  • bank’s are tightening lending standards and sorely challenged on capital;
  • ScoMo pursues a novel ‘tax cut in place of stimulus’ agenda.

This message will self-destruct in five seconds.

David Llewellyn-Smith
Latest posts by David Llewellyn-Smith (see all)

Comments

  1. Time for a TV satire, a week in the life of Phil Lowe.

    Day 1.
    Wakes up, prints some money. Take a dump, print some money before taking a shower. A spot of breakfast, printing some money while waiting for the toaster … etc.

    Is there any problem these clowns don’t think they are able to fix by printing money. Why are they even employed, can’t we get a machine to do it. Probably an old ventilator would do it if programmed to print money for every exhalation cycle.
    Do they believe the BS in the speeches they give …

    • If you cannot believe your own BS, you obviously don’t belong to a central bank. You must work harder.

    • happy valleyMEMBER

      You did not point that Captain Phil’s is a champagne breakfast each and every day – Cristal champagne and caviar.

    • Just think, he gets paid a million bucks a year to do something a monkey could do.

      I’d take the monkey, personally – far better taxpayer value as all it would require is some simple board and lodging and a regular supply of bananas

  2. Seems like some people formerly living on inomes might need to sell houses soon, fortunately those benefiting from RBA activitiy may be secure enough to buy houses and rent them back to the income earners after all this is over?

    Phew, there I was worrying they didn’t have a plan.

    A bridge to nowhere? Sounds nice.

      • The RBA will probably use newly printed QE money to buy houses to keep prices high.

        Before you say “never”, remember the Bank of Japan is using QE to buy stocks.

        The RBA will end up owning much Australian real-estate and be the biggest landlord. They’ll become even more of a big Australia supporter to keep a good flow of tennants.

        • I wouldn’t be that surprised

          Or it may be done via the government buying “public housing “ stock funded by RBA bond purchases
          (Of course they will overpay)

        • In Ireland the Government bought up toxic Commercial Real Estate under a scheme called NAMA. I won’t be surprised if they do it here. Perhaps the RBA will become Australian’s largest landlord. A title previously held by Reusa and Nathan Birch.

    • That’s certainly what happened in the US post-GFC. But they’re a funny bunch over there – always swinging for the fences. We’re a bit more reserved I think.

    • Bridge building.. like over the river kwai. Great thing about public service. The bridge only has to last for your tenure. Is fine if your Super is DB.

    • We have to stop houses being sold to renters. Please for the love of god, don’t let it happen.

  3. I need to revisit it in more detail, but heard Nouriel Roubini in passing discussing an inflationary depression brought about by policy makers in some economies because of a failure to take into account supply disruption etc. It wasn’t base case though.

    Got me thinking about the recent Australian supermarket experience of goods not being available at any price. Sure they blame it on supply chain, but for many goods its been a solid 8 weeks and not yet recovered. Admittedly made worse by said retailers not adjusting prices, which are actually required to affect market behaviour. Where is the so virtue in having empty shelves?
    Everyone following central bankers now, who sure as hell don’t want price discovery.

    • Empty shelves have been commonplace in Sub–Saharan Africa and the good old USSR. These shelves fill perhaps once a month – for about half an hour. For an hour if you are lucky.

      Socialism = virtue
      Capitalism = vice

      Or so they say. New normal?

    • Manufacturers are more then likely holding out for price increases, Woolies and Coles have been pushing down the suppliers prices for a long time.
      I expect to see “Item not Available” a lot more and longer.
      Also even though an item is supposedly ” Made in Australia” it could depend on Chinese inputs, precusors etc.

      • truthisfashionable

        I don’t think I could blame the suppliers if they take their once in a generation chance to push prices back up against the duopoly.. Although the risk is disappearing altogether from the shelves and replaced by some home brand with a fancy label.

    • This talk of deflation winds me up badly — my grocery bill has gone through the roof as a result of supply chain disruptions, No wonder my credit card bill has barely budged despite being house-bound.

      And the price of petrol is irrelevant because it just reflects lockdown and few are using it anyway — just wait till the lockdown ends and the roads fill up again.

      The supply chains with China are the key — they were suffering from huge wage inflation, so the whole cheap goods era was fast coming to an end anyway. Huge debts and rising cost of goods – the Depression we have to have.

    • Of course he could. It’s trivial.

      He’s already got a facility to lend to banks at 0.25%. He can dial it up from the “initial” $90b to $900b if he feels like it. A phone call to APRA to do the needful, and prices can be rising at 10%, no worries.

      The question is – does he want to? Or is he happy for prices to fall on his watch?

      The China virus has given him an out. Will he use it?

      • Exactly he has an out now can blame house price falls on virus and say his focus is on supporting jobs etc.

        Will he use it though, no idea but hopefully

          • Ooooh, what a plot twist!

            For those playing at home it is useful to consider different time horizons separately.

            In the short term – cheaper land = fewer jobs.

            In the longer term – cheaper land = many more jobs*.

            *This not just because cheaper land will make other businesses more competitive. Even in basic residential building, you can expect much more building to happen if land is cheaper. …People don’t choose to live in creaky 70yo dumps because they like ‘em. They live there because they can’t afford to knock down and rebuild, not after paying for the land.

          • Jumping jack flash

            Interesting.
            And a lot of the time these jobs are paid for from additional debt attached to the houses, enabled by the debt causing the house prices to grow.

            Debt growth and by extension house price growth is essential so whether or not to enable it is not the question. I think the question is how much can he push the entire economy into “cargo cult” territory before any important people notice – if indeed any important people care anymore.

      • Yes, but how can he make borrowers credit-worthy? Or create additional numbers of eligible borrowers? Or turn negative sentiment into positive sentiment? There are limitations to what monetary policy can do.

          • More borrowers are credit worthy at 5% unemployment than at 10% unemployment. Maths also.

          • Yes, it is true, there are a few moving parts.

            I would also note that 10% unemployment is likely a short run thing, whereas 1% rates could be a long run thing….

          • Borrowing at 0% is still impossible unless you have a job. And those who are worried about job security wouldn’t borrow at -1%.

            #NotMaths

          • Jumping jack flash

            Borrowing at 0% will be impossible anyway.
            The banks borrowing the money at 0% to lend to you at 1% is entirely possible.
            The banks being paid to take free money from the government/RBA at 0% and then lending it out at 1% is also entirely possible.

          • Jumping jack flash

            It depends on risk.
            There is no risk. the system has been carefully designed to hide the risk. All risk that can’t be hidden is completely ignored.

            The banks just need to believe in their own system, and come to the realisation that there is no risk, then everyone can borrow as much as they like, as long as they spend it on houses.

            The houses rise in price proportionately as the debt is added to them, the buyer pays just the interest, and then the house is sold for the new, higher value at the end of the term, or if the buyer can’t pay the interest.

        • I don’t need an out, thanks.

          I’m not pushing some sort of dogmatic line. I call things as I see them.

          Sometimes I’m wrong – I don’t mind being wrong.

        • Jumping jack flash

          All of these measures would have been required within the next 10 years give or take.
          The debt wasn’t growing fast enough to cover the interest repayments and the economy was shrinking. The debt hadn’t been growing quickly enough ever since 2006 which was peak debt growth, but definitely not fast enough for the past 7 years.

          On average the economy was stagnant, but the actual economy comprised of the everyday plebs buying things and whatnot, that was definitely shrinking. Retail was slowly collapsing, interest rates at historical lows, debt growth in the gutter…

          certainly all of this stimulus would have been required.

    • mikef179MEMBER

      What I think most people don’t understand is that the “mum-and-dad” property investors ARE the plebs. The government really doesn’t care about them at the end of the day. It’s just the elite insiders that are the protected class.

      Can the government print to infinity? Of course, there is no physical reason stopping them. Will they? No. They will get as close to the line as they possibly can, but they won’t step over it. Insiders will be warned beforehand when they have reached it. I think last year was the final chance for insiders to “get out while you still can, because we can’t prop this thing up much longer”.

      What they don’t want, is to destroy the Australian economy by going beyond the line, beyond the point of no return. Because what is the point of that? You can’t profit off of that and your investments will be destroyed in real value as well. There’s just no point.

      So betting on the government to constantly prop up the property investor plebs, thinking that they are some kind of protected class, is folly.

      • Jumping jack flash

        “You can’t profit off of that and your investments will be destroyed in real value as well.”

        I profit immensely if someone borrows 10million debt dollars for a property I paid 1million for and hands them all over to me.

        Hyperinflation is all good if it caused by debt dollars.
        Remember debt is still classified as a liability.
        (The truth is that it is much worse than that because the debt costs *extra* money.)

        If the hyperinflation was caused by newly printed money handed out directly to the people then it would be on the “wrong” side of the balance sheet, and it would be terribly bad.

  4. Immerse yourselves in this fabulous Grant Williams (of Real Vision fame) Presentation titled “Down Under Pressure”. Made a year ago at a major US investment conference. He hits every nail on the head and then some. Now add Corona. Then tell me house prices and the banks are safe in the face of this. Just to make the point, focus on the banks, now levered 20:1. They have no capital buffers to ride this out. The slide at 27:30 is gobsmacking.

    C’mon Peachy. Tell us we’re all so very wrong.

    https://ttmygh.com/videos/
    “Down Under Pressure”

  5. “Just find a better paying job so you can afford a house.” Can’t remember who said that but that should fix it.

  6. migtronixMEMBER

    “We can be confident that our economy will bounce back and that we will see it recover. We need to remember that once the virus is satisfactorily contained, all those factors that have made Australia such a successful and prosperous country will still be there.”

    Now let me tell you how we’re going to trash all previous notions of prudence and macro economics.

    • so we’ll continue selling dirt and houses to Chinese so we can leverage and go deeper into the debt to buy the existing properties from each other – great plan from a great economist

    • migtronixMEMBER

      ” – that is, the central bank does not finance the government, instead the government finances itself in the market. This principle has served the country well and I am confident that the Australian federal, state and territory governments will continue to be able to finance themselves in the market, as they should.

      While we are not directly financing the government, our bond purchases are affecting the market price that the government pays to raise debt

      Paging flawse

      • Well, I reckon it is time to abolish the ATO and start funding all the government programs with freshly minted AUD.

        • Jumping jack flash

          Just pay tax directly to the bank. All the money in the economy originates from there anyway.

  7. phil looks like a mega nerd

    that scrub was probably washed by jocks behind the wagga wagga hungry jacks every thursday

  8. Watched Phil on Four Corners talking about the response to the crisis – he seemed to be having a great time. Just grinned his way through the whole interview.

    • Each fortnight about $26K is paid into his bank account and that will not change whilst he keeps peddling his pro-housing policies. No wonder he’s smiling.

      • happy valleyMEMBER

        I think that you are short selling our Captain Phil, who would no doubt value deeply his self respect and worth.

        Like Captain Glenn, isn’t he is one of the highest paid CBers in the world, if not the highest paid.? For the June 2019 year, Captain Phil’s fortnightly pay was base salary of $350,000 (annual $911,000) and total remuneration of $408,000 (annual $$1.06 million), per the detail in the RBA Annual Report.

        And of course, when he’s done with the RBA gig, the after life will no doubt be fulsome? Didn’t Captain Glenn end up as a non-exec director of Macquarie Bank and probably other gigs, to help fill his retirement years?

    • frag outMEMBER

      His mouth was saying things his face and eyes were reluctant to say or agree with. At times it was as if he was attempting to convince himself as much as the interviewer.

  9. happy valleyMEMBER

    Unfortunately, Captain Phil seems to suffer from another of those smirks like that of SFM, such that you sometimes doubt what he is saying when the smirk is in operation? It seemed to be on display a bit in that 4 Corners report on Monday night on the WuFlu?

    And having shafted savers and retail depositors for years (following in the fine footsteps of Captain Glenn), why am I now not surprised to see that Captain Phil has supposedly said he doesn’t think bank dividends need to be banned in the current environment?

    The Captain has apparently declared that the capital levels of our banks are strong and dividend payouts are important for boosting the income of investors.

    That’s right Captain – excess franking credit “refund” leaners are the only people who count in a banker’s world, apart from one’s own pay?

    I hope that the Captain does not get an unpleasant surprise about those capital levels, just as he did (but now long forgotten?) about the moral bankruptcy of our banks, the surface of which festering rot was only scratched in the banking RC – that’s the problem of living in an ivory tower?

  10. DreadnotMEMBER

    “I would like to restate that we are buying bonds in the secondary market and we are not buying bonds directly from the government. One of the underlying principles of Australia’s institutional arrangements is the separation of monetary and fiscal policy – that is, the central bank does not finance the government, instead the government finances itself in the market. This principle has served the country well and I am confident that the Australian federal, state and territory governments will continue to be able to finance themselves in the market, as they should.

    While we are not directly financing the government, our bond purchases are affecting the market price that the government pays to raise debt. Our policies are also affecting the price that the private sector pays to raise debt. In this way, our actions are affecting funding costs right across the economy as they should in the exceptional circumstances that we face. But our actions should not be confused with the Reserve Bank financing the government”.

    Two paragraphs to attempt to convince everyone that Treasury Bonds are inter-mediated by a broker with large chunks bought back by the RBA, with a fat margin for the investment banks and that is not funding the government!!

    • Can someone explain to me :

      When banks exchange reserves for bonds , can they then sell those bonds to private nonbank entities ?
      If so , does that not convert reserves —> reserves plus an equal deposit

      Eg NAB exchanges $10,000 in reserves for $10,000 worth of bonds
      I have a retail account with Westpac and I buy the bonds from NAB
      In order to do this my $10,000 deposit at Westpac is transferred to a deposit account at NAB
      Westpac also transfers $10,000 of reserves to nab to facilitate this payment
      The original $10,000 of reserves at NAB has been converted by bond purchase and then sale into $10,000 of reserves PLUS a $10,000 deposit which is somehow both an asset and a liability for NAB ?

      On a related issue, if NAB holds a government bond do the coupon payments accumulate as reserves ? Or as usable deposit (eg the government has to spend into a private account to make the interest payments )?

      • DreadnotMEMBER

        Banks must hold certain types of regulatory capital defined by the Basel accord. Deposits are a banks liability and are ‘not used’ for loans. I am not sufficiently knowledgeable to answer your queries but lookup Professor Perry Mehrling, Elastic Money System and other lectures.

  11. Display NameMEMBER

    Apparently Scomo not only has tax cuts for the big end of town, but less regulation as well. Because that has worked so well in Banking, Building, Education, Energy,…

    ScoMo is clearly just someone else’s useful idiot. Doing the bidding of his key stake holders no doubt. No one can believe tax cuts at the big end will encourage investment when aggregate demand has fallen off a cliff.And less regulation? How about we start by enforcing what regulation we have. Clean out our regulatory institutions of captured ideologues and put in people who have an eye for the best interests of the country.

    Because sometimes the best interests of the average tax payer are not the the same as the best interests of a globalist plutocrat.

  12. “It is highly probable that the severe shocks we are now experiencing will change the mindsets of some people and businesses. Even after the restrictions are lifted, it is likely that some of the precautionary behaviour will persist. And in the months ahead, we are likely to lose some businesses, despite best efforts, and some of these businesses will not reopen. There will also be a higher level of debt and some households might revaluate the risks of having highly leveraged balance sheets. It is also probable that there will be structural changes in the economy. We are all learning to work, shop and travel differently. Some of these changes will probably stay with us, requiring a rethinking of business models. So the crisis will have reverberations through our economy for some time to come.”

    Careful, Phil. You were actually making sense there for a while. Did the work experience kids slip those paragraphs in?

  13. TailorTrashMEMBER

    If houses get in trouble banks get in trouble so he will try hard to keep the illusion going
    Some thing occurred to me the other night as I watched Scomo saying he did not want to step in and save Virgin as it would set a precedent for the government having to bail out private companies . So are the banks not private companies and will this precedent be applied to them ?