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Who loves the smell of Ruddbank in the morning?
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Quick — Ruddbank — good or bad? Well, strictly speaking there is no Ruddbank; in fact, there’s no bank at all. The Australian Business Investment Partnership is merely a vehicle to combine Government and major bank funding to replace retreating foreign capital in commercial property projects. Still — good or bad? Are we signing taxpayers up to bail out shonky developers and gouging banks, or ensuring the timidity of foreign banks doesn’t cause a vicious cycle of asset sales and propery devaluations? Don’t ask economists or commentators. They’re as confused as the rest of us. Nothing better illustrates where we are — or how we don’t know where we are — in economic policy terms than the reaction to the Government’s move to cover the possible retreat of foreign capital via a joint Government-bank investment vehicle. The Australian has been running a campaign against it as well, getting housing finance guru Christopher Joye to have a go at it today, after right-wing economist Henry Ergas slated it on Tuesday. Despite the blatantly partisan nature of his columns, neither Ergas nor The Oz feel inclined to reveal that Ergas has been in the pay of the Federal Liberal Party, conducting Malcolm Turnbull’s own version of the Henry tax review. Today The Oz also gets Ergas to explain how the Partnership may breach competition law. Dead set, Henry? Really? To borrow Michael Herr’s classic line from Apocalypse Now, charging someone with breaching competition law during a financial meltdown is like handing out speeding tickets at the Indy 500. Everything about the response of governments to the financial crisis has been anti-competitive. After forced mergers, large banks being allowed to consume smaller competitors and financial stability packages, it’s a little bit late to start pointing out that none of this is particularly pro-competitive. Other commentators are rather more warmly-disposed toward it. Ian Harper backed the Partnership. The AFR’s Andrew Cornell called it “a prudent precaution.” Actually, therein lies the difficulty. Ruddbank is a pre-emptive move. Like most pre-emptive moves, if it works you’ll never be quite certain whether it was needed. Debate is focussed around whether what is being pre-empted deserves pre-emption. Joye’s argument, to grotesquely simplify it, is that there is no threat to the housing property market from the commercial property market. Turnbull’s argument is somewhat blunter: who cares if the property market tanks — let developers and the big banks cope without taxpayer assistance. Similar arguments were advanced about the Wall St bail-out last year, you might recall. Joye’s point is tempting, but after six months of discovering that things are far more interconnected than we’d thought, it’d be a hell of gamble to assume commercial property and residential property aren’t connected, particularly when there are plenty of economists eager to claim both markets are way over-valued and headed for big falls. It also doesn’t seem like the best time for Australian banks to get caught up in a round of major asset devaluations, regardless of the ethical or economic merits of doing so. The lack of consensus reflects the fact that we seem to have become unmoored from economic orthodoxy. At the moment, any direction looks better than the one we’re going in. The biggest issue in the global economy currently is how to fix up the financial system. In predicting worldwide gloom and doom overnight, the IMF emphasised that the first order or business was coordinated action to address the presence of bad assets on bank balance sheets in order to get credit flowing again. Any stimulus packages introduced before the financial system is fixed will only be relieving the symptoms of a more serious illness. The debate about “balance sheet cleansing” swings between nationalisation, bad asset banks and zombie banks. And judging by the speed of the financial crisis, these are likely to be new-style zombies that sprint, rather than the old-school lumbering ones. Australia doesn’t have this financial system malaise, but we’re in much the same boat as everyone else until the problem is fixed — unless we suddenly find a spare coupla hundred billion dollars to meet our investment needs for the next few years. David Bassanese in the AFR on Tuesday suggested that the Ruddbank idea might be an idea considered elsewhere — not so much to cure the infection of overvalued assets but as a vehicle for governments to unfreeze credit markets, in preference to wholesale nationalisation. I referred previously to this sort of joint Government-private sector model as possibly giving us the worst of both worlds; the flipside of that is that, in combining the Government’s sovereign guarantee with private sector focus on profitability, such vehicles might indeed be the best way to get capital flowing again. Seems like the economists have adopted that Chinese curse about living in interesting times. |
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11 Comments
Its kind of ludicrous to be handing out rescue packages to those who failed us. Rudd should be stipulating these are loans for repayment by recipients conforming to new fiscal reforms. Hey, Centrelink puts all sorts of conditions on tax dollars earned by and refunded to the masses and there’s no reason why Ruddibank should operate contrary to its precedents. Or does the private public partnership thingy over-ride common cents yet again?
JamesK, my first comment was probably a bit simple and misleading as well when looked at in the context of the bigger picture.
While there were indeed silly obligations for organisations covered by the CRA, the sub-prime crisis was the initial trigger for an inevitable real-estate bubble collapse, which was itself trigger for an inevitable global asset bubble collapse.
A systemic failure on many fronts has brought about this global crisis:
* Legislation like CRA forcing banks to take on excessive risks.
* Easy money policies from the US Federal Reserve - i.e. Greenspan trying to fix the bursting dotcom bubble, but inadvertantly creating a raft of new ones.
* Lack of regulatory oversight leading to a shadow finance system larger than the real one it was built upon.
* Corporate bonus schemes that reward risky behaviour like short term share price pumping instead of stable long-term growth.
* Mispricing of risk by credit ratings agencies.
* A huge interconnected web of opaque credit default swaps that are based on the premise of taking out fire insurance on a house down the street while being able to flick metaphorical matches in its direction through short selling.
* Gross imbalances in global trade - i.e the Smith family going into debt on China’s dime. The average American now owes the average Chinese US$4,000. We Aussies are also guilty of living beyond our means.
* Computerised trading algorithms that have complicated global money flows to the point where no one really knows what the hell is going on anymore. The crash of ‘87 was thought to have been partly triggered by a cascading explosion of automatic computer trades.
There’s probably a few more that I’ve missed, but suffice to say, I wouldn’t disagree with some of the leaders around the world who have been calling for an overhaul of the global financial system, having lost faith in the current overseers. The G20 is probably the best place to work it out.
What is wrong with the Nationalisation solution? If you take the financial problem as being one that the markets cannot fix on their own terms, or within the terms of the free market ideology we have lived with for the past two decades, then why not an old fashioned nationalisation of the banking sector for just compensation? If the market value ends up being a peppercorn then that sounds just to me. Why do Crikey commentators creep around this? Why can’t anyone writing anywhere advocate there be a ‘times up, gentlemen’ call to the finance sector and demand a replacement of shareholders and top executives?
They should call it the Frank Lowy Bank, he has to refinance loans soon after his Westfield shopping centres lost value and wants to keep cash handy to buy up firesale bargains. He is also a big labor donor.
@Jared. I disagree with you strongly.
Greed did have much to do with this collapse in the form of loan repackaging as financial instruments and insurance selling on these financial ‘investments’.
But without doubt the Community Reinvestment Act was enforced more stringently under the Clinton administration to push banks into making mortgage loans to low-income people even if their credit didn’t check out.
The government threatened fines and other punishments for mortgage originators who didn’t preference “disadvantaged” borrowers. In conjunction, the government-sponsored entities Fannie Mae and Freddie Mac loosened their standards and became willing to buy virtually any mortgage, including the CRA-driven ones.
With federal pressure to make subprime loans, a willing buyer for all of the loans, artifically low interest rates, and hefty fees, the incentives were all aligned for private companies to make way too many loans to bad borrowers.
The government didn’t force this on mortgage companies, but they provided great incentives both as carrots and sticks .
Shouldn’t be surprising that the result was more of the actions that the government encouraged and less of the ones they constructed disincentives for.
Thus the Reserve, Clinton and Bush share the responsibility
Government certainly has a role to help credit to begin to move but much of this problem arose because governments interfered in the private sector and the prudent management of risk was set aside to attain social goals, most notably the desire to help groups, who might not otherwise be able, to own their home. The desire to help the marginalised to have their own home is not a bad thing, but not by giving loans to those with no or uncertain employment and no savings or assets.
When the dust settles, the prudent management of risk is going to be the big lesson from all of this. Those money boxes they used to give the kids to encourage them to save weren’t such a bad idea.
1st point: Call me ignorant about economics but would it have been necessary to have a Ruddbank if as ML said both bank and non bank lenders had got the same level of guarantee? Cost just as much. So no flight from property trusts etc to banks?
2nd: Am I right to think global recovery depends alot on the US markets and consumption returning to ‘normal’? In which case that depends alot on the USA diplomacy replacing a big chunk of what Stiglitz (?) calls the $3 trillion bill in Iraq. That is substituting external military industrial expenditure with domestic budget/stimulus. That will take a while if at all.
3rd: Am I also right to think this is a “bad one … epochal” as per Stephen Long ABC World Today 27 Jan 09. Like a human body depression - doesn’t that tell us indeed we are living wrong? Personally I still quite like the view that the standard growth fetish political economy has hit the ecological wall in a variety of ways, and is a long way from synthesising this new reality.
I don’t exactly mean capacity to further grow but rather largish number of folks actually voluntarily withdrawing their social license to the growth fetish ideal.
So just like the web causes structurally less economic activity in some ways, also alot of smart people in the inner city of the west aren’t buying the boomer lifestyle as wise, and then there is climate policy saying wrong way go back etc. These all suggest to me a political economy splitting away from traditional material consumption patterns. In Australia 10% core vote Green these days. And if they live a reasonably green life then that’s got to be affecting the domestic economies.
Which is all a long way around of saying pump priming is good money after bad, in denial even. Better to allocate it to big green infrastructure job generators.
The blame game on sub prime loans needs a fair bit more political economy perspective I think.
You can talk about Clinton, Bush affirmative action pushing poor folks into the home capital game of monopoly but there’s a weakness about that analysis common I suspect to well off folks. Namely where were the millions of poor folks to live? The human right to shelter. So you can say they were bad loan prospects but they still needed shelter. Then Shane Oliver on 7.30 last night said the USA had a mountain of empty houses looking for customers.
And then it’s not real political economic analysis to quarrantine this policy issue of shelter from other calls on the US federal budget … like the crushing pressure of the military industrial complex. So market solutions, even pseudo market solutions, would have been a very cute and appealing path of least resistance on shelter.
Then weave in the cannon fodder for the armed forces recruitment is from that same strata of society - the poor neighbourhoods. Well it’s a sort of quid pro quo of the right wing of politics and their allies in business, to the left wing poor folks to buy them off with shelter.
That’s what I call a real political economy analysis of sub prime. It may not be exactly right but my intuition it’s bigger than just securitisation of bad loans on a systemic basis. Could be but there have to be macro drivers beyond individual greed for everyone to suspend scepticism across swathes of society.
There is endless confusion in the media reports about what to do with the dollops of government money being handed out to save the economy, but there seems to be a near consensus that handing out money is a right and good thing to do. Surely the central question is whether it will, or can, actually work. If not then, not going gently into that good night aside, then there is no justification for ruining the federal government along with the private sector.
On the numbers alone there is simply no way the commonwealth can replace the amount of money taken out of circulation by tightening credit markets in addition to peoples desire to get in on the new craze sweeping the nation - saving. There is, therefore, no way that asset prices can be propped up, consumption prodded back to ‘normal’ levels or the assorted bubbles in shares, housing, commercial real-estate re-inflated. We should be demanding the government give it a rest, already and save its money for when it might be useful. It might be useful, for example, when 7% of the population need unemployment benefits, or can’t afford private schools, can’t maintain a car or return to the public hospital system in unexpected droves.
John James, unfortunately you have been misled regarding the cause of the sub-prime crisis and global economic calamity.
The Community Reinvestment Act legislation in America didn’t force mortgage companies to offer loans for no money down, or to throw underwriting standards out the window, or to encourage mortgage brokers to aggressively seek out new markets. Nor did the CRA force the credit-rating agencies to slap high-grade ratings on packages of subprime debt.
The toxic debt was amassed due to predatory lending practices (largely by agencies outside the scope of the CRA legislation), and the reason these bad loans blew out of all proportion was because credit-rating agencies scrawled AAA ratings on the debt so they could sell them to suckers all over the world as prime investments. Suckers like Wingecarribee Shire Council, who too late realised they’d bought a grenade with the pin pulled out.
On top of the sub-prime fiasco, the big brains at the Wall Street investment banks had thrown all concept of risk out the window. Bear Stearns had a leverage ratio of 33 to 1, while Lehman Bros. borrowed hundreds of billions of dollars in short-term debt in the capital markets to buy tens of billions of dollars of commercial real estate at the top of the market. AIG dived into the credit default swaps business despite their inherent risk - Warren Buffet labelled them years ago as “financial weapons of mass destruction”.
The western financial system became a highly leveraged and unsustainable pyramid scheme due to wreckless short term bonus pumping by the honchos, and severe lack of oversight by regulators. If anything, this crisis has shown the risks posed by leaving our investments in the hands of wealthy white men.
The critics of Ruddbank don’t deal with what I suppose to be its key element, i.e. making sure that current developments don’t end up as skeletons against the skyline with massive winding down and liquidation costs and loss of employment for a skilled workforce. Looked at that way it is a no-brainer unless one is an extremist “creative destruction” advocate without much emphasis on the creative and much on retribution. Besides, keeping up bank profits in Australia is good for tax revenue and almost essential for most super funds. What is most needed is incentives to recruit the spending, preferably investing, of private money as soon as possible. What about adding a percentage to the CGT cost base for investments made before September (say)? What about temporary relief from GST on cooked foods at chosen times of the year to keep restaurants and related small businesses going with a splurge of just a little reserve of discretionary disposal cash (granny at Christmas etc.)? And an investment allowance of 50 per cent as in the US, instead of a measly 10 per cent would be a huge incentive if it was for investment in 2009.
Nick’s enthusiasm for nationalisation ignores the value of keeping up bank profits but also the great difference between our banking sector and almost every other country’s. What politicians and bureaucrats does he know who might run a banking industry better than competitive private business people with no security of tenure and much at stake? A spread of private errors with commercial punishment offers a much better prospect than a clod-hopping march to the kind of disaster that Iceland and some
Eastern European countries have arrived at in their banking sectors (without much help from tenured public sector functionaries as far as has been reported generally).