It appears that Kevin Rudd is abiding by the principle: if squandering the first $10 billion of taxpayers’ funds doesn’t succeed, try, try again. And so it has come to pass, the Federal Government is planning to contribute a further $2 billion of taxpayer dollars to “shore up” the commercial property sector and the Big Four banks.
The timing of the proposed plan is somewhat strange. In a week where Victoria and South Australia have virtually ground to a halt amid crumbling transport and power infrastructure, the Prime Minister has been devising a plan to provide guarantees worth billions to banks to replace foreign funding for private owners of existing and partly completed commercial property.
As Crikey predicted back in October, Labor’s $10 billion plasma and pokies package failed to achieve its aims. Unless of course, those aims were to increase turnover at NSW gambling outlets by $500 million. Even Gerry Harvey, whose Harvey Norman store benefited from parents spending their $1000 cheques on plasma televisions, claimed last week that the stimulus package was a “dud”. The rationale behind RuddBank appears to be even more misguided.
The basis of a free market economy and the associated notion of “moral hazard” is that investors and debt providers are encouraged to take calculated risks. If those risks are successful, the investor or bank will earn an above market reward — if unsuccessful, they risk losing their capital or facing poor returns on their investment. This principle ensures that capital is invested in a relatively efficient manner. When the government interferes in the operation the market to prevent any loss from crystallising, there are two results.
Firstly, innocent people (in this case, taxpayers), who didn’t take foolish risks are forced to hand over money to those who invested in over-priced commercial property or banks who lent them the funds to take those risks (in this case, foreign banks).
Second, a situation is created whereby irresponsible risk-taking is encouraged, or where poor bank lending practices are rescued by the taxpayer.
Proponents of RuddBank argue that the scheme is not designed to “bail-out” commercial property investors or the large banks (despite the scheme being proposed by NAB’s Ahmed Fahour). For example, Property Council of Australia chief executive, Peter Verwer, told the Financial Review that “the threat is if foreign banks withdraw you get a whole bunch of unwilling sellers. That is to say, the withdrawal of foreign debt artificially distorts the Australian marketplace.”
Verwer’s argument is self defeating. There were no complaints when a flood of cheap money from foreign banks caused the value of properties to artificially inflate over the past decade. And who is to say the deflation is artificial at all — more likely, it is a rational response to escalating vacancy rates and what appears to be gross oversupply of commercial office-space in the major capital cities. Further, as Henry Ergas acknowledged, “should [a drastic fall in the value of commercial property] threaten the adequacy of banks’ capital base, the right policy response is to facilitate the banks’ recapitalisation, rather than artificially propping up the price of one particular kind of asset. Directly facilitating recapitalisation would be far more transparent and far less distorting of the pattern of asset prices in the economy as a whole.”
Then there’s the claim submitted by Ian Harper of Access Economics, that “if there is a major collapse in asset prices in the commercial property market, that could feed through into domestic housing … given the exposure of the domestic banks to housing … that is what we’re trying to avoid at all costs.”
Harper’s argument is baffling. Firstly, as Christopher Joye accurately pointed out in The Australian, commercial and residential property “share no real commonalities other than those overarching macroeconomic factors that invariably influence all asset classes. [With] the correlation between the returns to the Australian housing market and listed commercial property trusts during the past 26 years has been distinctly negative (i.e., when one moves up the other is likely to move down).”
Second, leaving aside the flawed correlation between commercial and residential property, since when is it the job of a government to artificially prop up the value of any over-priced asset, even one as ubiquitous as residential housing? Given that Australian housing is, on an income-price basis, the most expensive in the world, the last thing the government should be doing is spending taxpayer dollars ensuring that residential property remains ensconced in a debt-inflated bubble. And if the Government is going to be providing guarantees for multiple forms of bank lending, perhaps they can demand some sort of executive restraint. For, example, the proponent of RuddBank, Ahmed Fahour, has earned more than $13 million in the past few years.
In essence, what RuddBank involves is a transfer of wealth from the taxpaying poor to the commercial property owning rich as well as the big four banks (who receive a guarantee to take over foreign lenders debt positions). Coincidentally, commercial property owners, including Westfield, Stockland, Leighton, Multiplex, Babcock & Brown and Meriton, happen to be large donors to the Labor party. In its most recent Federal and NSW election campaigns, Labor received more than $3 million from property developers.
If the arbitrary Plasma ‘n Pokies redistribution wasn’t enough, Kevin Rudd is now turning himself into a modern day Sheriff of Nottingham.