A bad move

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.

59 thoughts on “A bad move

  1. 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.

  2. “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.


  3. 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.

  4. 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.

  5. 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).

  6. 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?

  7. 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.

  8. 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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