Home > Economic policy > A bad move

A bad move

October 10th, 2008

The Rudd government has made its first big mistake in handling the financial crisis. The just-announced proposal to guarantee bank accounts up to $20 000 is worse than useless. Given that lots of people hold more than $20 000 in individual bank accounts, they have an obvious incentive to diversify, which means large scale withdrawals. The possibility of this turning into a run is far from remote. Turnbull’s suggestion of $100 000 is better, but the only serious option is an unlimited guarantee.

Update Some good news on this. Once we have a guarantee of $100K or more in place, the extra liability associated with an unlimited guarantee will be modest, while the gain in simplicity will be substantial, and the argument for exercising direct control over bank lending will be unanswerable. Of course, as a colleague pointed out in the course of email discussions on this point, the real problem is the banks’ reliance on overseas borrowing. I’ll be discussing some proposals on this before too long I hope.

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  1. Bingo Bango Boingo
    October 10th, 2008 at 14:53 | #1

    Is he mad? One day he says bank savings are safe, the next he comes out with a policy that very strongly signals they are nothing of the sort. People aren’t stupid: they will see the $20k limit and conclude that the government is afraid of being on the hook for the lot.


  2. rabee
    October 10th, 2008 at 15:03 | #2

    Who on earth is advising them? Well I know, but I won’t tell.

    It is surprising that while Australia has a wealth of great economists most of what we see on teevee are comments by a bunch of industry professionals who’s expertise in economics is questionable.

    It’s time for grown ups to take charge!!!!!

  3. TerjeP (say tay-a)
    October 10th, 2008 at 15:06 | #3

    Whilst they are handing out unlimited guarantees how about another guarantee that no child will live in poverty. At least the aspirational aspect of that promise was reasonable. Or maybe they could guarantee that my superannuation won’t fall in value this coming year. Or my house. Or that we won’t have another drought. Or that my kids won’t try drugs. Heck why not just offer a guarantee that life will be one huge big bed of roses.

  4. TerjeP (say tay-a)
    October 10th, 2008 at 15:07 | #4

    p.s. JQ is this a case of government failure?

  5. Joseph Clark
    October 10th, 2008 at 15:31 | #5

    I wouldn’t call academic economists “grown ups”.

  6. October 10th, 2008 at 16:45 | #6

    I agree John. Basic savings are not something the public ever agreed to hand over to the wide boys, and we’ll be taking some control over the entire sector back, thanks. Not as if we got any real interest on those accounts anyway. We sacrificed interest and rewards for security, and now we want that security.

    If people in Australia lose from their classic savings accounts the government will roll, it is that simple. NO ordinary people accept that they have taken any risk with that money.

  7. Mat
    October 10th, 2008 at 16:54 | #7

    Would limiting the garantee to $20,000 across all accounts owned by someone, minimise the risk of a run? Or is it too late for that now?

  8. tintin
    October 10th, 2008 at 17:05 | #8

    John, I agree. Rudd’s move is a gimmick and shows he has no understanding of how serious the current problem is. I see in today’s Wall Street Journal article “U.S. Weighs Backing Bank Debt” that the US may be forced into backing all U.S. bank deposits. At the mooment they only back deposits less than $250,000. Money simply moves to the safest haven. By failing to gaurantee the deposits of Australian Banks Rudd risks leaving them exposed to a funding squeeze. Large depositors will simply shop for the best protection – and that won’t be with Australian Banks.

    Rudd should deal himself out of the policy decisions on this one and seek some good advice.

  9. Ernestine Gross
    October 10th, 2008 at 17:16 | #9

    Quite right, Joseph Clark. At least some academic economists are more than merely ‘grown ups’.

  10. rog
    October 10th, 2008 at 17:20 | #10


    our future bankers

  11. Damocles
    October 10th, 2008 at 17:58 | #11

    “Given that lots of people hold more than $20 000 in individual bank accounts,…”

    They do?

    In demand accounts that can be drawn upon immediately?

    My principal concern about the Australian banking system at present isn’t a run – it’s the virtual extinction of the regional banking sector with St. George, BankWest and most likely suncorp being bought up by the majors.

  12. tin tin
    October 10th, 2008 at 18:28 | #12

    #11. Yes. They do.

  13. Donald Oats
    October 10th, 2008 at 19:07 | #13

    About 15% of depositors hold more than $20K AUD in their account. They are comprised of a) the few who anticipated the coming crisis and shut their super accounts and/or cashed out their equities, b) some recent retirees, c) some rich people, d) recent lotto winners. Of course, there are a few among us who have little cash in the bank due to gold holdings.

    Seriously though, I agree with Prof JQ that the mixed signals sent by Rudd at this juncture in time do not bode well for either the banks or for Rudd; if a bank or banks go down due to a run, it will be forever known as Rudd’s Run…

  14. SJ
    October 10th, 2008 at 19:30 | #14

    I agree completely, John. I first heard it on the radio news at 6 pm, and thought exactly the same thing.

    He would have done better to have just kept his mouth shut.

  15. scott
    October 10th, 2008 at 19:54 | #15

    So what? Online trading systems already allow individuals to buy and sell their life savings as if it was a big internationally connected pokie machine anyway.

    I don’t Blame Kev. He hasn’t got a clue, like almost everyone else. Bring down the banks. I want a house!

  16. October 10th, 2008 at 20:09 | #16

    “Heck why not just offer a guarantee that life will be one huge big bed of roses.”

    That’s right, you can’t have a roses without the odd prick.

  17. observa
    October 10th, 2008 at 21:15 | #17

    “Is he mad?”
    No, he’s just good at the arithmetic-

  18. Donald Oats
    October 10th, 2008 at 21:49 | #18

    Wow Observa (#17), that certainly puts the impact upon governments that guarantee in stark highlight.

  19. October 10th, 2008 at 23:08 | #19

    Meanwhile back at tCrikey! noted economic thinker Bernard Keane has a a few words for us.

    “There is zero case for guaranteeing deposits.”

    So there you have it.

  20. Ubiquity
    October 10th, 2008 at 23:09 | #20

    Does a government elected by democratic process by default inherit the dilemma of moral hazard ? Keeping in mind generally the masses tend to be a little short sighted and will repond better (democratically) to gratuitous acts rather then far sighted more rational planning.

    The moral hazard in this case is of course confidence to keep your money in an insolvent bank because of the explicit government guarantee.

    I wonder how the $20000 guarantee came about. Was their an econometric model, was it all they could afford ( silly me they can print $), was it a democratically motivated populist vote to please 85% of the voters who have less then $20000 in their accounts, was it a poor attempt at imitating other western governments.

    The big question is of course “which is worse moral hazard or credit collapse”. Sadly $20000 dollar guarantee might be a vote winner but want stop the credit collapse. In fact it could make it worse.

  21. Ikonoclast
    October 10th, 2008 at 23:10 | #21

    I find Kevin Rudd very unconvincing. He is a politician, a salesman, a spruiker, a systems man, an apparatchik, a generic mangerialist, a Christian semi-fundamentalist and a capitalist in drag all rolled into one. I would prefer a genuine democratic soshulist (spelling changed to avoid the bug) but there is not one to be had.

    Kevin really does not understand what he is up against nor what he stands for. Like all politicians he understands populism, consensus grubbing and ideological fashion following but little else.

    Three months ago, Kevvie was a self-proclaimed “fiscal consevative”. The holy budget surplus was sacrosanct and he would, if asked, have rejected nationalisation of anything, ever. The magical guiding hand of the free market would always point the way to the promised land, at least on earth. Now, Kevvie is not so sure. He is waiting to see which way blow the winds of ideological fashion and political expediency.

    I think in general our modern political class have no essential intellectual core. They have a very inadequate grounding in philosophy, history and science. They have not thought properly about espistemology and thus do not appreciate the operative differences between knowledge and belief.

    They are so proud of being “conviction politicians” and “having strong beliefs”. However, mere conviction and belief are worthless when you are dealing with real quantities, real events and real phenomena. Only a study of science (empirically verifiable physical phenomena) and history (empirically verifiable behaviours of humans under various conditions) can yield useable information and form a basis for predictions and actions based on a working understanding of cause and effect.

    Both Bush and Blair defended even those certain actions of theirs which they later conceded to be incorrect on the basis that they had “believed” they were doing the right thing at the time. This is extraordinary when you think about it. Would we accept the same excuse from a bungling surgeon or airline pilot? The only basis for any serious action in the real world is knowledge not belief.

    If you don’t know but only believe then you should treat it as an hypothesis, test it further and seek for more verifiable information. The place for conviction and belief is in personal religion observance not in politics.

    And you know what? Kevvie ought to ponder that.

  22. Socrates
    October 10th, 2008 at 23:11 | #22

    I follow JQ’s logic that this is not the solution but, after reading Observa’s link I must ask: what is? Seriously, does anyone have a view on what is the solution here? It is time for academic economists to make some suggestions, since it seems plain that those in government and private finance don’t kow how to fix it.

  23. Damocles
    October 10th, 2008 at 23:33 | #23

    “I find Kevin Rudd very unconvincing. He is a politician, a salesman, a spruiker, a systems man, an apparatchik, a generic mangerialist, a Christian semi-fundamentalist and a capitalist in drag all rolled into one. I would prefer a genuine democratic soshulist (spelling changed to avoid the bug) but there is not one to be had.

    Kevin really does not understand what he is up against nor what he stands for. Like all politicians he understands populism, consensus grubbing and ideological fashion following but little else.”

    Have you met him?

    Have you spoken to anyone who worked for him?

  24. Jill Rush
    October 10th, 2008 at 23:49 | #24

    It is hard to know the impact until the details are known. As it looks to be a way of shoring up support from the majority of people, with limited impact on the budget, it will reassure. If it is limited to one account per person, administratively, then any movement in funds would be limited to those who are insecure with their bank. Most people will be worried but have no idea if their account is safe or not and therefore stick with their institution.

    Many people with a cash account for super will be protected by the super fund spreading risk across a range of banks. Those who are most likely to have large cash funds are probably moving the cash around frequently anyway chasing the best interest rate.

    The announcement having been made just before the weekend, may not have as much impact as anticipated above. It is a big risk, but just watching, whilst the majority of people lose their cash reserves is a bigger risk, and better to get such a policy out there before it is needed than look like announcements are the result of panic.

  25. tin tin
    October 10th, 2008 at 23:52 | #25

    Observa, Donald Oats and Socrates, did you read the article sent by observa at all? It’s one of the poorest bits of analysis I’ve seen. Have another read and a bit of a think.

    Here’s a more reasonable analysis using Australian data. Bank assets in Australia as at July 2008 were 2,322 billion or just under 200% of GDP. Mortgage, personal and commercial loan assets (ie, loans to you and me) represent about 1,463 billion. Liabilities were 2,191 billion. This leaves the Australian Banking sector with about 131 billion in equity. Suppose the banking sector suffers a cumulative default rate of 5% on its mortgage assets outstanding. If you think this estimate is too conservative, consider that according to the Mortgage Banker’s Association of America 1.2% of US residential mortgage loans outstanding are in foreclosure as at June this year. This is a record figure and it may go higher, but my point is it’s lower than my 5% assumption. The historical average is closer to 0.2%. Now of these mortgages that default assume that the recovery rate is 70 cents in the dollar. This leaves a net loss of equity to the banking sector of about 50 billion dollars. This is less than half the 131 billion they already have in equity. With their current record profits this equity position is growing daily. What would be the cost of the Rudd government guaranteeing deposits under this scenario? The answer is zero. That’s right, absolutely nothing. Sure the banks will probably need to raise capital for regulatory purposes and they may need to go to the government to do it, but as long as the bank’s losses do not exceed their equity position, the ‘net’ cost to the government is zero. Under the assumption of a 70 cents in the dollar recovery rate, mortgage defaults could reach a whopping 13% before the Rudd government would begin to incur losses from a deposit guarantee. Imagine that.

    (This all assumes each bank behaves identically to the average of course)

  26. Joseph Clark
    October 11th, 2008 at 00:07 | #26

    tin tin,
    The situation doesn’t call for this kind of reasonable analysis; it calls for panic, paranoia, conspiracy theories, and grand political narratives. Get with it.

  27. tin tin
    October 11th, 2008 at 00:15 | #27

    Joseph Clark #26, I have plenty of conspiracy theories that will invoke panic, paranoia and fear in even the bravest of souls. Out of respect for the fragile financial markets I will refrain from posting them.

    But alas, I have no grand political narratives.

  28. Ikonoclast
    October 11th, 2008 at 00:18 | #28

    Re number 23; Not sure what you mean. There is not a politician is this world who is a good person or even a useful person. They play the image game and are justly judged by the image.

  29. tin tin
    October 11th, 2008 at 00:30 | #29

    John, here’s a thought – why doesn’t the Rudd government get involved in some of this exotic financial derivatives engineering and offer retail depositors the opportunity to buy insurance on their deposits? Say at a rate of around 25 to 50 basis points per annum and backed by the government. The premium could be deducted out of the customer’s monthly interest payments and sent to the RBA. Who knows, Rudd and Co. may even make some money out of it.

  30. LuxuryYacht
    October 11th, 2008 at 01:31 | #30

    Didn’t the Chifley government fall when it tried to nationalise the banks?

    I like tin tin’s idea at #29. I wonder what the actuarial models say would be a premium that would properly underwrite such a scheme? Maybe more than 25-50 basis points, but I am just stabbing here.

    It’s funny how Steve Keen from the University of Western Sydney keeps looking more and more like a seer as time goes on! Not long ago he was dismissed as “chicken little”. Now the sky is falling and he appears to be on an “I told you so” tour!

  31. El Mono
    October 11th, 2008 at 02:36 | #31

    While i do not really knwo the process leading to this guarantee of $20 000. Though shouldn’t it be the RBA/ APRA who push for or advise on these policies?

  32. iain
    October 11th, 2008 at 06:58 | #32

    Will the 20k transfers (which are already happening) even out? The CBA may be worst hit as it has the biggest deposit base. But I don’t know the stats for deposit distributions above 20k. Presumably this is reasonably well distributed? Does anyone know?

    An alternative is that a small bank has a higher distribution of +20k accounts (unlikely?) and the 20k transfers all flow to the big four. Without any flow coming the other way – as people with 80-100k just diversify amongst the big four.

  33. rog
    October 11th, 2008 at 07:20 | #33

    Krudds pathetic fiddling is just another sign of the failure of central banks and government control of the monetary system. The very fact that all the models failed to predict the crisis and all the bailouts/nationalisations have only exacerbated the loss of confidence should be sufficient evidence of govt failure.

  34. Ikonoclast
    October 11th, 2008 at 08:19 | #34

    The question is this. Is it market failure or government failure? I would argue it is both. It was in the first instance a failure of governemnt to fail to properly govern society and regulate markets (government failure). It was a failure also of the market, which left to have its own head, lost it and ran amuck.

    The mainstream economists (corporate economists attached to corporations, government spin departments and tame-cat economic schools) failed to predict this. The maverick or independent thinking economists did predict this set of problems. Steve Keen has been sounding the warnings for many years as has JQ in many respects.

    Deep down it is simply a failure to think. People are too busy following intellectual fashions. They are afraid to think and express individual dissenting opinions. This is because dissenters are marginalised by being shunned, ridiculed and passed over for positions and promotions.

    This is how the corporate and political system enforces a rigid uniformity of views. The price paid for this (by society as a whole) is that the people who call it on the empirical facts are ignored and society races headlong to consensus disaster.

  35. jquiggin
    October 11th, 2008 at 08:40 | #35

    Certainly rog, governments have failed to do their job for the past thirty years or more, since the advent of financial deregulation in the 1970s. But I think we can be confident, they’ll be back at work from now on.

  36. chrisl
    October 11th, 2008 at 08:43 | #36

    Hey Ikon
    Those last two paragraphs could equally apply to climate science, especially the phrase “consensus disaster”
    “Deep down it is simply a failure to think”
    Paul Keating had some sage advice on this to Kevin Rudd a while back.
    Thinking is good.

  37. chrisl
    October 11th, 2008 at 08:56 | #37

    jquiggin “But I think we can be confident, they’ll be back at work from now on.”
    Or perhaps not.
    My daughter just recieved an email from her bank to say(without applying) she was eligible for a $1000 overdraft.
    With a competitive interest rate and a small quarterly loan service fee.
    From little things, big things grow.

  38. observa
    October 11th, 2008 at 09:57 | #38

    OK tin tin, have it your way. Rudd is mad as a hatter for not guaranteeing the obvious. When I sold my carefully constructed share portfolio back in July and started buying Perth Mint gold warrants at around $9.60(delivery of 1/100th fine oz in 5 yrs), the old man’s blue chip portfolio was sitting at $104k. At market close yesterday that pensioner’s portfolio was worth $74k while PMGW sellers were asking $14.10, with settlements at $14.05. Unlike me he needs the dividends and hence the different approaches. At 88, he may yet run out of assets and dividends to supplement that single pension and shouldn’t rely on any increase of the latter soon, by all accounts.

    I don’t think you understand what a limited guarantee of $20k deposits really means. It’s all very well talking about snapshot nos of deposit account balances, but that snapshot changes in the blink of an eye. I was a minnow in the building industry and regularly wrote cheques for $40-50k and received more. Just picture any enterprise, their weekly payroll, suppliers and subcontractors, etc. Your local supermart even? Imagine the local servo taking your EFTPOS and credit cards all week until they write the cheque for the next tanker just to put you in the picture here. Don’t try and intimate to these people they probably need to have as many accounts as shrinking banks in the bloody country and more outside as well, but not in Icelands.

    It’s the overall level of debt and credit which is the problem world-wide now-
    not some snapshot of day to day deposits. Massive deleveraging (really money supply contraction) is going on as cash strapped players struggle to keep afloat of that mountain of debt. They’re selling assets now at a pace that’s got stock markets in freefall in case you haven’t noticed. Oz RE is next cab off the rank faster than Rudd can buy $4bill worth of ‘AAA’ mortgages to add to ‘competition’. Sweet Jesus! Why on earth would anyone flog AAA contracts that pay monthly capital and interest on the knocker, in the current investment environment?

    Got news for you Kevin. Take that $4bill, along with any Future Fund dough, or any funny money you can roll off the printing press and buy gold with it before those ME and Asian SWFs beat you to it son. That’s the best thing you can do for all our long term futures now boyoh. In fact I’m not going to ask you nicely any more, I’m going to get positively hysterical about it, lest we’re all freaking doomed as Zimbabwean millionaires you Peabody oxymoron-

  39. Donald Oats
    October 11th, 2008 at 10:57 | #39

    Could the day come that regular Aussies learn to darn socks rather than buy a new pair? Boy, would that be a shock to the system.

    Like you, Observa, I reluctantly cashed out of a nice portfolio quite some time ago. Even back then, some of the talking heads on pay-TV and in the “Wealth” magazines were saying to the poor punters to sit tight, the bottom is in sight, just a temporary drop, yadda yadda yadda. VIX now has a record of 75, and on paper today my diversified portfolio would be ashes. Systemic risk trumps all.

    For those who believe its not timing the market but time in the market, please consider this: from the 1929 peak, the Dow took until 1954 to revisit that watermark. Anyone want to wait 35 years for capital gain to work its magic?

  40. Ian Gould
    October 11th, 2008 at 11:40 | #40

    “There is not a politician is this world who is a good person or even a useful person.”

    Again, what are you basing this on?

    Do you actually know any politicians?

  41. observa
    October 11th, 2008 at 12:15 | #41

    That was essentially this Austrian convert’s dilemma Donald but I’ve largely solved it, with no need for tin tin’s middle man insurance now. If you own RE outright with no debt the market value is academic. Not so if you bought recently and are highly geared and that’s a big problem, threatening any fiat money deposits in the bank now. When Swan threw away that $20k guarantee line a while ago, the threat was obvious. Time for the O’s household to go for gold money after some sensible deductibles and guaranteed deposit arrangements.

    $13K nett outlay on solar to the grid and meter with a 25 yr, 10% risk free after tax return with that $9.5k Govt clawback and mandated consumer cross subsidy. Maintain $20k interest bearing deposit tranches for yours truly, MrsO, my dad and her pensioner mum, and now $5k off MissO’s HECS debt and $5k for MasterO in a home saver account to take advantage of more generous clawbacks. No silver spoon in their mouths as they can’t access that for frivolous consumption but some sensible intergenerational transfers are clearly in order if the next generation is to appear sooner rather than later. Now MasterO is subcontracting full time as a sparky, he is largely the company owner with another $20k deposit base.(I’m strictly a semi-retired problem solver for the tim tams and filtered coffee ladies these days) The rest is gold money with the Perth Mint, backed by the WA Govt. For $29.95, tax deductible, I can turn that back into fiat money requirements at the click of a mouse from SWOT central nowadays.

    Just one of Kev’s ‘working families’ doing their bit to keep the ship of state afloat in tempestuous seas. We’re an infinitesimal part of the mainstay of this country that will see it through all the shrieking, wailing, breast beating and moaning to come. Nevertheless, I can think of better constitutional marketplace compasses to steer us by but that’s not my call. Aye aye cap’n Kev!

  42. Fred Argy
    October 11th, 2008 at 15:31 | #42

    As far as I am aware, banks need to pay the Treasury a fee to get their deposits guaranteed. Why doesn’t Rudd offer to all our banks deposit insurance – but subject to a fee? Why should the banks get a free ride?

  43. jquiggin
    October 11th, 2008 at 15:43 | #43

    I agree Fred, but the important thing is to get the guarantee up ASAP.

  44. Smiley
    October 11th, 2008 at 16:49 | #44

    An alternative is that a small bank has a higher distribution of +20k accounts (unlikely?) and the 20k transfers all flow to the big four. Without any flow coming the other way – as people with 80-100k just diversify amongst the big four.

    I’m certainly in that demographic. I bank with Bendigo and Elders Rural. I think I’ll go with the smaller Queensland institutions such as Suncorp and BoQ. Anything but the big banks.

    But just think about all the extra paper work this creates and the additional user id and password I’ll have to keep safe somewhere not to mention the security token that I’ll have to purchase if I want online access. What a mess.

  45. October 11th, 2008 at 17:04 | #45

    Before your respondents say anything further they should read: http://www.theaustralian.news.com.au/story/0,25197,24477635-5013408,00.html

  46. jquiggin
    October 11th, 2008 at 17:39 | #46

    Ad Astra. The author of the piece seems to think deposit insurance is already in place and the debate is over whether to lift it. This is quite wrong, and the rest of the argument collapses once this is realised.

    By proposing to introduce deposit insurance, the government has effectively withdrawn the previous implicit guarantee. The question now is what form of deposit insurance should replace it.

    As regards the need to avoid panic, I think this horse has already bolted. Members of my family are already asking me what they should do and whether their money is safe. I’d like the answers to be “Nothing” and “Yes”, but that’s not the case with a limited guarantee.

  47. rog
    October 11th, 2008 at 18:20 | #47

    There is an oft quoted truism that once bankers have to explain their credit they lose it. Now that politicians, ever captive to populism, have become the nations bankers we can look forward to a run on confidence.

  48. October 11th, 2008 at 19:14 | #48

    jquiggan- it’s not that easy to dismiss anyone who has another take on this matter.

    What do you say to the statement in the article “Finally, if Turnbull had bothered to ask before he shot his mouth off, he would have realised that 85 per cent of Australian bank depositors have less than $20,000 and more than 95 per cent less than $50,000. Why, one could ask, is there a need to impose a guarantee of $100,000 to protect a tiny minority of bank customers while risking a massive loss of confidence in the banking system?”

    And with your penetrating insight, surely you can reassure your own family.

  49. philip travers
    October 11th, 2008 at 21:51 | #49

    Oh!Dear me! The real world does often have in it buildings that are called banks ,gold mines,fiat or paper money and increasingly computer programmes for almost everything including accountancy.Yet,if you had the required fragments of gold to support your 20 thousand $ plastic paper as electronic recording,you cannot put the gold into the account directly,or anything that is close to the traditional hedges against a bust!? I mean what the bloody hell is a recorded electronic number as as a figure in a bank account on a bloody computer!?Not that I have gold etc.,but why is it that pawnbrokers have more power than banks to regulate survival in a transactional world!?And cop this!Did you read about the American cop who couldn’t kick anyone out of their houses,because he didn’t really know if they owed money or whatever!?One thing Government can do to make sure a financial crisis doesn’t destabilise communities,is simply have a universal Law and a Tribunal overseeing it,that if large numbers of people go bankrupt,and were house owners paying it off or in mortgage debt,the Banks have to allow people the right to be caretakers of the property they are living in.That Caretaker mode of living,may then simply mean,people can still find work and survival generally,in locales they have been in for sometime.The right to caretaker status should be matter of simple negotiation,government supported,and financial institution accepted.New buyers will need to be tolerant,and negotiate meaningfully with these circumstances.Also the real world has floods fires,earthquakes tsunamis ,mudslides and even burst water mains leaving big holes in roads. 20 thousand$in the bank is too small a protected amount,and doesn’t allow for gifts in money or kind,under distress caused by disaster! And would it cover a insurance policy on house and contents!?Protecting the humanity that works at Banks is also required,and if a crisis is here,many retired pensioners have already worked in financial institutions,back on the payroll acting for government as well as Bank,seems a likelihood like an overdue bill!

  50. observa
    October 12th, 2008 at 01:10 | #50

    “..85 per cent of Australian bank depositors have less than $20,000 and more than 95 per cent less than $50,000”
    Yeah but it’s the other 5% the rest need and have to worry plenty about upping and leaving. Still there is the growing problem of where they’re going to up and leave to I suppose. A deposit in need is a friend indeed perhaps. You’d have to say with the dollar drop and levelling out, most of the flighty OS dough has likely flown already although that could be famous last words when you recall it was worth around 46cUS a few years ago.

    Slap a 12 month moratorium on dividend payments on all the savings banks so they can book build. Then there’s the looming problem of RE defaults. Since price rises aren’t a forseeable problem for the next few years it might be an opportune time to allow mortgagees to access their super to increase housing equity. This would be quarantined of course upon any house sale and rolled back into super. This helps solve the RE debt overhang and also the lack of safe investment opportunities for super funds at present. The Govt has moved toward this direction with those first home buyer accounts that have to go into super if not used for house purchase.

  51. observa
    October 12th, 2008 at 01:31 | #51

    Silly me! Of course you can’t have everyone pulling their super funds for home equity at once(not with the current stock market) but those current super contributions and returns are problematic now. Allow future super contributions to go into home equity with special hardship withdrawal provisioning for those under mortgage stress and possible default. That would help to minimise mortgage losses for the banks and save taxpayer funds to boot.

  52. Bingo Bango Boingo
    October 12th, 2008 at 01:50 | #52

    “As regards the need to avoid panic, I think this horse has already bolted. Members of my family are already asking me what they should do and whether their money is safe.”

    Same here, John. My advice has been keep all the cash in NAB/CBA/ANZ/WBC accounts, and if the appetite for risk is truly nil, then spread it equally amongst the four. Encouragingly the inertia is such that many of them simply could not be bothered re-structuring their affairs in such a way.


  53. TerjeP
    October 12th, 2008 at 05:50 | #53

    The following charts suggest that US banks are now quite well stocked with cash.


    Does anybody have anything comparable for Australian banks?

  54. jquiggin
    October 12th, 2008 at 06:49 | #54

    BBB, that’s exactly the advice I’ll be giving if this goes through. I’m still hoping for a change of mind on this.

  55. MH
    October 12th, 2008 at 07:12 | #55

    There is a very sizeable proportion of the populace who have no savings other than their house and a meager superannuation fund, this group, the great majority are now effectively stuffed. So are all the self funded retirees, part super and part pension group plus your standard pensioner. A quick run around on the weekend with many and various revealed some very frightening retirement portfolio losses, destroyed superannuation investments and a pall of gloom amongst all. These are all older or just retired members of our community who are being busted out as we talk. No wonder the Federal Government is now holding off on a pension review at this rate it will be everyone qualifiying.

  56. gthorpe
    October 12th, 2008 at 08:58 | #56

    Re 55: Self funded retirees –
    Lets see, a full Age Pension for a 65 year old couple, fully captialized, has a realistic value of less than $400,000.
    Superannuation receives assistance from lower tax rates. A long term matured $750,000 super account will have some $280,000 of its value attributable to preferential tax treatment.
    So this “self funded” retiree has already received 80% of a full Age Pension. If they lose it, come back and get a proper Age Pension, so the cost to the government has been more than a full Age Pension.
    I find the term self-funded a little inaccurate, more fully funded with a net (not a safety net, because Blind Freddy could always see it was going to be used as part of the main game).

  57. observa
    October 12th, 2008 at 09:57 | #57

    Let’s not get into the medical and retirement storm clouds looming with demographics. It’s the immediate economy now stoopids! In that sense it’s facile to talk about numbers of deposit accounts with certain figures that Govts must guarantee. We all need to understand that you can only get a snapshot statistical picture of that out of the banks’ computers and they’ve changed in the time it takes to print and read the data.

    Overall those deposits hinge on the continual flows of all those economic transactions continuing at reasonable historical levels. If unemployment and mortgage defaults, etc begin to seriously impact those flows (snapshots at any one time)the total deposit base is at risk with deleveraging. It’s simply the quick reverse of the long slow fractional reserve banking that got them there in the first place. That’s the problem for authorities world wide now. Essentially to guarantee all depositors is to largely provide an implicit guarantee to all ‘bad’ debt. Bad being the operative word here and it is a moving feast depending on the overall economic performance. Whilst most of the margin callers on the stock markets are probably long gone now, we’re biting deep into the negatively geared portfolios now, with the negatively geared RE investors getting very nervous right now. Their current and future payments are what’s guaranteeing the everchanging deposit base now, in the absence of any Govt bailout of last resort. That’s what the furrowed brows on finance and Treasury officials is all about now.

    It’s like this. Imagine the servo that brings in $100k tanker of petrol every 2-3 days and faces a $20k guarantee on his deposits. Does he sell $20k worth on EFTPOS and online credit until he reaches the magical $20k and shuts the pumps off until he can pay for and deliver another $20k worth? He might be able to time the runs and pay the extra cost but what about his supplier?

  58. MH
    October 12th, 2008 at 10:04 | #58

    re 56 – A pension has no capital value as it is funded out of consolidated revenue, year in year out and hence is a straight bottom line cost to the federal budget. The long term matured super account you refer to is a fairy story trotted out by the self interested self seeking fee grubbing charlatans that have passed for financial advisers in this country. The average accumulated figures in this country are dismal (less than $100,000) and especially dismal for women who have breaks out of the paid work force. Most pensioners are women and most pensioners are poor not grasping individuals having a second bite at the revenue pot after having exhausted their bountiful retirement savings with the aim of getting their hands on some free government cash.

  59. rog
    October 12th, 2008 at 10:48 | #59

    Govt pensions are paid out of taxes placed on economic activity whilst super funds engage directly in the economy for revenue – both are inextricably linked to economic growth. Most super funds need to be viewed long term – if you go year to year returns can be lumpy.

    I think Buffett said that growth over the 20th century was only 5.3% compounded and it was mathematically impossible to have higher rates and those who promise double digit figure were misleading to say the least.

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