The blogosphere talks about the economics and the politics of Kevin Rudd’s guarantee on bank deposits.

Bank account guarantees. 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. — Quiggan

Financial crisis: Will it hit defence spending? We are in the economic equivalent of a rolling national security crisis. That’s an interesting turn of phrase from the Prime Minister. Presumably this was Rudd’s attempt to communicate the scale and urgency of the problem, though it’s also a reminder that threats to national security aren’t always physical. The government has committed itself to maintaining 3% growth in the defence budget to 2018, but there might be some nervous officers on Russell Hill today as they contemplate the future. — The Interpreter

Rudd makes the right call, but things missing. The announcement addresses some of the bigger problems facing the Australian market: cash deposits, and mortgages, but it seemingly ignores two areas: non-mortgage finance and non-bank finance. Backing up deposits means that there won’t be a drain on cash at hand to lend, but it doesn’t fully address the roll-over issues facing banks on external debt instruments used for domestic borrowing (the wholesale funding guarantee does in part), and it doesn’t address to a large extent business finance. We’ve got to presume that borrowing capacity will reduce, and the flow on to that will be lower business growth. Maybe the Government’s largess is incapable of going that far.– Duncan Riley

Rudd trumps Turnbull on deposits. Last week, Opposition Leader Malcolm Turnbull was spruiking “his” idea of guarantees on bank deposits up to A$100,000. From a a free-market investment banker, it was pure political populism. Kevin Rudd’s proposal means that he has not only trumped the Opposition by including credit unions and building societies; but also ensures that he cannot be out-trumped on the $-amount. Late this afternoon, Mr Turnbull said that “Mr Rudd and I are very much of the one mind on these measures“. This is just a “me, too” statement: he knows Kevin Rudd out-flanked him on this issue, and doesn’t want to be left behind. — Truepolitik

Peter Fray

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