John Quiggin

There seem to be some curious political responses on fiscal policy in todays papers …. if accurately reported.

Maybe I had to many drinks at the RSL for lunch but did Treasuer Andrew Fraser really tell the Courier Mail that Qld would look to cut spending on a slowing economy?

A credible move, too. I like the three year time limit.

Well called john, and called early

The question is this. Why didn’t Rudd come to that decision in the first place? Is he poorly advised, does he have no ideas of his own that last longer than 48 hours or is it both?

“Why didn’t Rudd come to that decision in the first place?”

Because $20K was being worked on for months, and it’s only this week’s hyper meltdown that upped the ante.

Next stop, guarantee the lending by all banks in the world to all Australian banks. That should (a) lower their borrowing costs down to the risk free government rate, and (b) take the worry out of lending to Australian banks.

Spiros, That’s obviously right, but it’s disappointing that those advising Rudd couldn’t work out that any scheme that had been worked on for months was almost certain to be out of date now.

The TV news suggests a borrowing guarantee is part of the deal. I’m checking this.

Its hard to see that Rudd is not panicking and the market will respond accordngly

“it’s disappointing …”

Yes, but the $20K deal would have been worked out by the government, banks, RBA, APRA, Treasury and my maiden aunt. You can imagine the i dotting and t crossing to get in in place. The announcement day was set for Friday. And then on Friday we had the mother of all meltdowns. You can’t change these things in real time. Rudd did well to change to change it in 2 days.

I have a naive question. Does not a sudden government guarantee of all bank deposits turn a fractional reserve system into a full reserve system? I am not saying at this point that this is a good thing or a bad thing. (I suspect it’s necessary at this point.) I simply want to understand the seeming paradoxes here.

The kind of full reserve system it creates is, as it were, a sort of bottomless-pit full reserve. Yet at the same time, the commercial banks are still presumably held to a fractional reserve system by the reserve’s governance of commercial lending practices. Or am I looking at this the wrong way?

My first comment here if I may presume to intrude:

I suspect I would have preferred something along the lines: all Australian resident taxpayers’ deposits will be guaranteed.

I got the impression, when Ireland guaranteed deposits, whenever it was during the last tumultuous month, that UK citizens moved massive amounts to Irish banks, creating huge potential problems for Ireland.

One way you could quarantine things in Australia is to protect only accounts where an ATO TFN had been quoted.

Sounds bureaucratic?: sure. Sounds like a device to stop opportunism and a possible unintended consequence?: definitely. Sounds self-serving when we are meant to be rah-rahing for international co-ordination? maybe but probably not.

My worst fear is that our PM is asking Alister Jordan for his advice. This would be an excellent time for Jordan to take his 4-weeks annual leave.

So what’s a “bank” in this context?

Australian-owned and domiciled savings banks?

Other Australian ADIs such as credit unions and building societies?

Merchant banks like Babcock & Brown or MacQuarie?

How about the foreign borrowing of offshore brccnhes of Australian banks – like the NAB’s Irish and English assets or ANZ’s Asian assets?

How about foreign subsidiaries in Australia like Bankwest?

“One way you could quarantine things in Australia is to protect only accounts where an ATO TFN had been quoted”.

For conscientious reasons I never supply this. This is partly influenced by my history of faulty data matching; I wouldn’t want my TFN to be applied to one of the other people with my name and date of birth, or vice versa.

I’m wondering if this internationally coordinated response should not have also included some judicious closing days for share markets, even say a two week holiday while governments deliberate in a little more time their response. We suspend trading when something affecting information, or lack of, affects an individual listing. Why not a holiday directive for those seized by market hysteria or is it too late now with Main Street credit involved?

Ikonoclast Says:

I have a naive question. Does not a sudden government guarantee of all bank deposits turn a fractional reserve system into a full reserve system?

No, it does not. Going to a full reserve system would require a massive reduction in the monetary base, i.e., a massive reduction in liquidity. Nothing like that is being proposed.

Conversely, some people are worried that the guarantee creates a moral hazard by potentially reducing the reserve fraction to zero, which could entail a massive increase in the monetary base. Again, nothing like that is being proposed.

How about if an Australian bank takes over a distressed foreign bank – is its associated borrowing automatically covered?

Still sounds like capitalizing the profits and socializing the losses.
The banks’ share prices have been one of the largest beneficiaries of the bubble. It is possible that their share prices are inflated because of the bubble, and that the tenfold increase in their price over the past 10 years should not have occurred.
To support the banks’ share prices at an inflated level is not good business, is not good economics and is an unnecessary burden on us.
When their share prices are reasonable (ie about the level the government was paid for the Commonwealth Bank) let the government start thinking about offering support. When they are bankrupt let the government step in, because only then will there be no bonuses, no rorting and no late revelations of other disasters.

Banks sp are conservative compared with their earnings

I love sunset clauses. The notion that todays legislation will automatically go away unless made to stay after contemplation in different times is a powerful check on excess.

Can somebody clarify whether the $20k guarantee will be permanent or whether it fades away also? If it is permanent then presumable inflation will be chipping away at it for years to come.

Now that all institutions are AAA it will be interesting to see how high depositor rates might rise as the lenders compete for the retail $

Is it possible that with their customers’ savings now secured, the banks have an incentive to take more risky positions in the broader market?

John, I notice that Australian banks (and subsidiaries of foreign banks) will have to pay a fee – to be determined by Treasury – which will cover the guarantee. This means we will both get our way.

I guess that now that the risk has been taken out of the equation wee are now in very different waters – today everybody loved the merchant banks