With the announcement of the Government’s guarantee of savings to unlimited amounts, the stock market had its largest bounce in a decade. They have protected a run on banks (and of course, the issue was never those with $100,000 in savings, but thousands with one or two thousand: it’s why the original cap of $10 000 made sense).
The guarantee is of course is a good thing. The Opposition has, rightly, supported it. Australian savers know that, in a repeat of 1891, they will not be instantly broke. This is the first time individual savings have been so protected, but hopefully the government will extend the guarantee beyond its initial three years. But…
Australians aren’t great savers. Where is the issue going to come from? Borrowings. Particularly credit card borrowings. What happens if one of the major card suppliers (companies such as Visa, American Express, Mastercard, et cetera) goes broke? Worse, what if one of the foreign banks or companies which provide credit cards goes to the wall – (again, companies like Citibank, Deutsche, Lloyds, et cetera). Creditors would run to get their money, and many of those, faced with having to pay their rather large debts, would find themselves in serious financial and possibly legal trouble. It is possible that this recession will be a repeat of the 1890s in Australia (1873 in Europe and the US), but with both a property crash, and a credit melt-down as its hallmark.
Covering debt is problematic for the government. It can reward those who’ve got into trouble through poor management, and punish those who’ve saved. The Australian government can’t (and shouldn’t) guarantee a foreign bank or financial institution. Yet, what we are looking at here is otherwise relatively well off people facing bankruptcy because they may be faced with finding thousands (sometimes tens of thousands) of dollars to be paid immediately, and with no ready cash, or further credit to hand.
I suggest that the government sets up a scheme in which the money is loaned to debtors caught in this situation, to be paid off to the government at the same terms and same interest rate (or maybe a small — no more than 0.25%) premium. It would ensure that economic stability is not threatened by a credit crash, but still ensure that debtors’ obligations are met. This scheme does not reward the greedy or the bludgers, nor does it punish those who didn’t enter into the cycle of debt. Such a scheme may cost nothing. But in the most catastrophic case, the government could make sure that the worst of the blow is softened.
D L Lewis teaches history at several institutions of higher learning. Currently, he has no credit card debt.