Bad policy always gets greeted with claps and cheers. Really bad policy usually gets thunderous applause on the yellow brick road to hell.. We’re witnessing government policy about to be enacted that I reckon will end up costing us 10% of GDP within the next decade. The guarantee wrap the government announced is still a work in progress but it looks as though the major part of the policy guaranteeing all deposits held with Australian financial institutions will go ahead. If you were ever looking around for an example of moral hazard there it is in stark clarity. In fact it’s the biggest example of moral hazard we will ever see in lifetimes unless of course the government decides to guarantee the asset side of bank balance sheets as well 😉
The money markets this week saw a large amount of deposits leaving the branches and subsidiaries of foreign banks which could leave quite a hole in the $100 billion deposit base thee firms used to hold as they are not guaranteed.
Does anyone at the top echelons in the government apparatus know any recent economic history? The US S&L crisis was created as a result of S&L’s having deposit insurance .The consequence of this actions was that they almost all pursued reckless lending practices in the full knowledge that they wouldn’t lose any deposits (as the US government was there as a door stop).
We now have the spectacle of a tiny credit union having a better credit rating than BHP, which has next to no borrowings. This is truly mind-boggling in its sheer stupidity and reckless behavior.
One or two lefty economists (I call them anti-economists) have suggested that reckless lending can be mitigated through stronger regulation. This is absolute bullshit of the worst order. The most highly leveraged financial institutions in modern history have been government owned or government influenced entities. Fred and Fannie were leveraged at 135:1, as there was an an implicit government guarantee. Worst still their assets were 100% concentrated in one asset class. It’s not unheard of to see government owned banks in Europe leveraged 50:1.
If anyone believes this government would prevent banks from the risky asset concentration I would love to see how he or she square the circle with the doubling of the new homeowners credit that was also part of the package to “save the economy”. Does anyone actually believe the government would prevent banks from lending to homeowners because of concentrated risk being created in bank balance sheets? It’s a preposterous idea.
There’s also no way the guarantee will be removed in three years time as that sort of thing is like an octopus wrapping itself around the victim. It will be next to impossible to remove as it will quickly become an integral part of the capital market and its removal could cause a default.
No, the only time the guarantee will be removed is when the losses become so big that the government won’t be able to hold back the water.
Here’s my gentleman’s bet. This action will cost the country 10% of GDP as a result of reckless lending. That will be our crash.