Should bankers or Australians get RBA “monopoly money”?

Rentier HQ at the AFR, governed by “businessomics” doyen Michael Stutchbury, is in no doubt who should get the free “monopoly money”. It is not you:

…using monetary policy to support the economy should not be confused with “funding” any level of fiscal policy stimulus by issuing Monopoly money.

…As Reserve Bank governor Philip Lowe told a parliamentary committee last month, modern monetary theory is actually designed to return to when budget policy was the main policy instrument for managing the business cycle. As Lowe recalled, the history of using an inherently politicised policy instrument that way was not good.

The current crisis is, by definition, an extreme case. Monetary policy already has been pushed beyond its useful limit, and risks destabilising the economy by inflating asset prices, as it did in Australia after the 1987 sharemarket crash. Reining in that asset price boom led to Keating’s recession we had to have.

While monetary policy is exhausted, there is no “neoliberal” reluctance in the Reserve Bank, nor the Keynesian-tinged Treasury, to call for massive amounts of temporary government spending to hold the economy together during the pandemic shutdown. Australia’s modest levels of government debt by international standards makes that possible, even for a capital-importing and commodity-exporting country.

At the parliamentary hearing, Lowe told Greens leader Adam Bandt that the government should and could readily fund its spending spree by borrowing in the market. The governor rightly reckoned that leaning on the central bank to conjure up the Monopoly money would amount to MMT “financial trickery”.

What Stutch does not mention (given banks are big advertisers) is that the RBA is already pouring tens of billions of “monopoly money” into the banks. Indeed, it recently increased its capability to do so to $200bn. During the pandemic panic, the RBA launched the Term Funding Facility (TFF) which charges only 0.25% and is already displacing their private wholesale funding at a terrific clip:

At the rate that the Morrison Government is cutting fiscal spending, the great likelihood is that TFF capacity will have to be doubled again in due course so that the banks can keep swapping wholesale funding that costs 1-2% for free RBA “monopoly money”. That is the only way that their margins can support further mortgage rate cuts.

Don’t get me wrong. We need to cut the cash rate below zero to drive down the Australian dollar to have any hope of recovery, not to mention rebalancing away from Chinese exports. But all of this “monopoly money” for banks doesn’t do that and it raises a whole bunch of questions in political economy terms such as:

  • Why are the banks allowed free public “monopoly money” to make private profits?
  • Bank liabilities and risk is effectively being nationalised so where is the equivalent equity stake for taxpayers?
  • Why is it a great idea to give banks “monopoly money” to provide more and cheaper mortgages to massively indebted households that will kill productivity via higher lands costs etc? But it’s not OK to give it to the government to invest it in useful stuff like productivity-enhancing infrastructure?

Make no bones about it. The RBA is already rapidly heading back to 1970s monetary policy with the only difference being that a private cartel benefits rather than the government or populace. The notion that it is independently setting a price for debt is done. There is no price. Every RBA meeting these days amounts to one simple question: “how much public “monopoly money” shall we give the banks today to fund more mortgage crack?” Going that way ensures it will never hike rates again.

Sure, mortgage holders will benefit as the banker’s monopoly on “monopoly money” enables them to cut mortgage rates further. But, higher house prices and household debt are only going to make inequality and secular stagnation worse. If we do need to offer banks “monopoly money” to lower mortgage rates then it should be while tightening macroprudential policy so that the easing is used to deleverage households as smoothly as possible. Then the lower yield structure is all shoved into a lower AUD. The mushrooming China decoupling makes this ever more important.

But APRA is not going to do that. It doesn’t even consider its role in such matters, given it is broken away from the RBA. Which is why the two regulators desperately need to be slammed back together.

The AFR under Stutch asks none of these questions. Indeed, it explicitly shuts them down via a small army of RBA cockroaches whose only job is to sustain access. In Stutch’s “businessomics” paradigm all private ownership is all good, all of the time. Even when it is an oligarchic bailout rife with moral hazard, rent-seeking, and rorting of public funds that is clearly contrary to the national interest.

Houses and Holes
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  1. All of this kerfuffle and confusion about the RBA, what its role should be, what it should be doing right now, the confusion about “printing money” and the vast array of dodgy acronyms misses the point.

    Why should the banks have a monopoly on operating deposit accounts at the RBA?

    It would be nice if a few people could at least have a stab at answering that question.

    What is the justification?

    How does giving private banks a monopoly over operating accounts at the RBA achieve anything?

    Even if you are a supporter of pointy heads running the economy for the greater good and hate the idea of the grubby little plebs having the right to open and operate deposit accounts at the RBA what is the argument against allowing at least other financial sector entities access to RBA deposit accounts?

    We are talking about deposit accounts that pay zero interest and are by definition are risk free.

    The foundation of a public monetary system is the central bank balance sheet so why not use it ?

    The current approach of limiting access to a bunch of dimwit bankers is just absurd especially when we can see the economic constipation that results.

    Its funny how we can happily talk about every other public policy that doesn’t work but simply refuse to talk about the elephant in the room.

    Every Australian should have the right to open and operate a deposit account at the RBA and there is a good argument for allowing at least some local corporations the right to do so as well to break the monopoly of our dopey banks.

    Sure this would mean the banks lose their power to create money but SO WHAT ?

    It is not as though they have been covering themselves in glory for the last 40 years.

    • If anyone could open an RBA account, the government guarantee on banks could be removed entirely at which point the public would come to understand the difference between a custodial account (one that is completely free from the risk of the holder defaulting) and an investment account.

      While that would be a very good thing, the likely first consequence would be a run on the banks as anyone struggling to manage the $250,000 guarantee cap had an easy alternative. That would push the banks’ gearing ratios higher than their already stratospheric 70+ times making it ever more clear how inherently risky is their funding structure.

      So, it’s not going to even be discussed in open forum let alone enacted.

      But even if it were enacted and what I suggested above didn’t happen, it’s not obvious to me that it would help since it isn’t the price of borrowing that’s the problem, it’s the fact that no one can think of anything to do with borrowed money than invest it in property.

      •  it isn’t the price of borrowing that’s the problem, it’s the fact that no one can think of anything to do with borrowed money than invest it in property.

        And this is the nub of the issue entirely, for Australia.  There is absolutely nothing worth investing in while Australians are amongst the most expensive people in the world, Australian energy costs are amongst the most expensive in the world, and Australian land costs are amongst the most expensive in the world – except for those few things in which Australia has a monopoly or near monopoly or a monopoly of convenience (see iron ore), or for those things where global demand happens to outstrip supply, and Australia happens to be a supplier.  Beyond that there is absolutely no rational reason for any large scale global investor in capacity to look at Australia as a location from which to realise investment or to service demand for whatever it is they do [for there will always be a superior alternative].  For local potential producers or suppliers of anything the market will always be inside Australia, and outside Australia will mean fierce competition, where inside Australia the funding will be more readily available for real estate speculation, and the likely risk/return equation (backed by overt government support for real estate speculation) always pointing to real estate speculation too.

        Unless the government is serious about addressing the cost of Australians, the energy they use, and the land on which they do whatever it is they do, they are not serious about ‘investment’ (in the real sense of the word) in anything .  In the parallel universe in which government economic policy seems to unfold the best which could be said is that it may be encouragement to ‘invest’ in the debt/population Ponzi bubble Australia now is, but when even that path is taken the potential investor needs to (at some point one assumes) start thinking about the most heavily indebted people on the planet, living in the world’s most expensive houses, with the world’s most precarious competitive position, sustained by the remnants of a commodity boom which was once destined to last a thousand years and only lasted a couple of years, the main driver of which is a one party state with strategic interests simply not compatible with Australia’s or Australians, which our government is showing increasing signs of decoupling from.   

        For this very reason the alleviation of the debt of Australians (to Australian banks, via mortgages) thorough tax deductability, from the bottom up, makes sense.  It minimises (in the first instance) the prospect of a current account deficit blowout on imported junk, it gets to the banks (reducing their debt and the time duration profile of their lending books, while firming the collateral side).  It supports spending by the largest number of Australians.  It should be tapered so as to disincentivise speculative real estate plays, particularly by the seemingly wealthy, and most readily made available to ordinary Australians (not companies, organisations, trusts etc nor to any claimant of tax deductions beyond a certain level).

        I know that sound to praying for the tooth fairy of economic policy, but for a nation run by a bible bashing bigot who heads a gang of frauds in power which has preached ‘budget deficit’ concern for yonks while only ever blowing said deficit out of the water, and now finds itself needing to stuff cash into orifices, it is about as plausible as anything else on offer, and offer better outcomes for more people than most.

        • “There is absolutely nothing worth investing in while Australians are amongst the most expensive people in the world, Australian energy costs are amongst the most expensive in the world, and Australian land costs are amongst the most expensive in the world.”

          Since those assertions are easily supported with facts, it’s amazing that so few people know them and even less care.

          It’s a proper problem.

      • Michael,

        “… the likely first consequence would be a run on the banks as anyone struggling to manage the $250,000 guarantee cap had an easy alternative…”

        There would be no run on the banks as the RBA accounts pay no interest.

        Plus the deposit accounts at the banks would be fully reserved….though they would also pay no interest.

        If people want a return they will need to invest and take some risk.

        As for nothing to invest in when asset prices punting is the only game in town, I agree, but there will be no change to that state of affairs without dismantling the debt peddler /asset price pumping centre of the monetary system which is driving unproductive distortions through the economy.

    • Practically they dont want to run a retail bank, call centers, core banking systems and help desks. They are not setup to do it and would require wholesale change to achieve it.

  2. The money should only be made available to banks via the accounts of ordinary Australians…..

    On behalf of ‘Bullshit Australia’ – subject to discussion and approval of the brethren and luminaries I propose..

    ‘Tax deductability of mortgage payments up to the value of 20 thousand dollars per annum, for households with a pre tax income of less than 160k per annum, on family homes worth less than 1 million.’ And ‘tax deductability of rental accomodation for families with a houshold income of less than 160 thousand to a limit of 20 thousand dollars’……

    That ought to please the real estate lobby and the punterariat, and assist the banks…….(The trickle up effect)

  3. The edifice is beyond rotten. All we need now is a big volcano or solar cooling to kick off a global famine to properly kick off revolution and war. Then the 4 horsemen will be together again!

  4. Instead of giving money away, we should used the money to support a strategic industry : like building a rare earth processing plant (and the corresponding radioactive waste dump) so we’re not completely reliant on China on rare-earth.

  5. Australians.

    Labour MP: The pandemic reinforces the case for a Universal Basic Income

    According to a recent opinion poll 84% of people support the introduction of UBI

    UBI is gaining increasing support among politicians including within the Labour party and I am encouraged by Keir Starmer’s cautious welcome to consider UBI

    27 September 2020

    Labour take poll lead over Tories for first time since Boris Johnson became PM
    A survey finds 55% of voters think Sir Keir Starmer is ready to lead the country

  6. Jumping jack flash

    “If we do need to offer banks “monopoly money” to lower mortgage rates then it should be while tightening macroprudential policy so that the easing is used to deleverage households as smoothly as possible.”

    Deleverage? Not on your life. Deleveraging would mean deflation.
    We need more leverage. We need more people who are eligible for larger piles of debt than they have ever been eligible for before.

    80K salary, no problems, you’re eligible for a million.
    100K salary? 2 million.
    130K household income? 5 million for you.

    I wasn’t kidding when I said months ago that the median house price in Sydney would need to be 10 million by 2050 to maintain the expected rate of capital gain. How we going to get there? Certainly not by deleveraging. Certainly not through responsible lending laws.

    Now get out there and start buying houses and push up the values to lock in the LVR and abolish the risk, ready for the next round of debt.

    Give the money to the banks to lower mortgage rates. Lower the eligibility criteria. Set up a UBI. Get people eligible for the required amounts of debt to attain the debt growth rate we need!

    Joshy boy will do his part and tear down the archaic responsible lending laws which don’t apply in the New Economy.

    Once the debt growth reaches the critical point to become self-sustaining there is absolutely no risk. In fact all that “responsible lending” guff prevents us reaching the critical point and contributes to increasing risk.
    This is exactly the reason why we need(ed) to cut the interest rates every few months to keep everything going and the debt expanding at that completely inadequate rate.
    This is exactly why we need probably somewhere just under a trillion dollars of stimulus to make up for the missing debt growth over the past decade or more, and simulate and substitute for the required amount of debt growth we need right now to get this debt economy humming again like it was in 2006!