Most of the press gallery, business commentators and Labor politicians were very quick to criticise shadow finance spokesman Barnaby Joyce last week after his comments regarding banks (Joyce suggested divestiture powers); the US (which, according to Joyce, might default on its debt); and China (foreign government-owned bodies shouldn’t be allowed to buy Australian assets). Joyce’s claims were dubbed “extreme” and from the “reactionary fringe” while Opposition leader Tony Abbott and shadow Treasurer Joe Hockey were quick to distance themselves, noting that Joyce’s views were “not coalition policy”.
While much of what Joyce says is not worth taking much notice of, last week was one of the few instances where he made a valuable contribution (albeit in a less than articulate manner) to debate — to mindlessly criticise his comments is very much a case of playing “the man, not the ball”.
The chances of the US defaulting on its debt remain highly unlikely. At the moment, the US (for better or worse), is still the world’s “default” currency. That means the US is able to effectively pay its debt (which is denominated in US dollars) by simply printing more US dollars. While this wouldn’t necessarily be a good thing for the US citizens, especially the middle class (which, like in Weimar Germany or Zimbabwe, would witness a virtual wipe-out of their net worth), therefore a “default” (of the kind witnessed in Russia in 1998 or Argentina in 2002) is still a long shot. However, given the US debt is approaching $US12 trillion (about 83% of GDP), or $US40,000 for every man, woman and child — such a default is not impossible.
Last September, Tim Backshall, chief strategist at Credit Derivatives Research, noted “the price (of credit default swaps implies) that the US was more likely to default on its obligations than Japan, Germany, France, Quebec, the Netherlands and several Scandinavian countries.”
If the US were to default, the apocalyptic scenario mooted by Joyce is not completely beyond the realms of possibility.
While he didn’t express it especially well, his point made sense, Joyce noted that a US default will have an effect on Australian because “there will be only one way Australia will be able to keep funds here and that is by putting up interest rates, which will therefore bring real costs back to households”.
In fact, what Joyce was effectively implying is no different to recent warnings given by the IMF. According to the global fund, “a key remaining vulnerability [to Australian banks] is the roll-over risk associated with sizable short-term external debt. Banks’ wholesale funding (domestic and offshore) accounts for about 50% of total funding, of which about 60% is offshore.”
If foreign funding dries up, the Australian economy (and especially the over-inflated housing sector) will be in all sorts of trouble. In fact, it was this fear that led to the federal government using taxpayer money to guarantee banks wholesale funding in October 2008.
In addition to his comments on the United States economy, Joyce was also criticised for his comments with regards to Australian banks, when he claimed:
You don’t even have to break them apart. You have to suggest to them that those powers could be in place to do that if they are not more diligent in how they respect the Australian community … Sometimes these powers are like a Sword of Damocles and they keep people in check because they know the government has the capacity to influence how they do business if they get out of control.
While his claims were maligned — arguably, his suggestion didn’t go far enough — instead of threatening divestiture powers, the government should be acting to ensure that Australian banks (like their American and British counterparts) are not “too big to fail”. That may mean splitting off their retail and wholesale arms or creating smaller, regulated banks. Last year, taxpayers were forced to guarantee deposits held in the Big Four retail banks. The rationale for that decision was that any of the banks were “too big to fail”. It is logical to ask — if a bank is too big to fail and is receiving taxpayer assistance (as well as operating in a highly regulated market) shouldn’t we require these institutions to divest assets to ensure that taxpayer guarantees are not required?
In fact, Joyce wasn’t the only one making such suggestions. Few of the “experts” who quick to criticise the Nationals senator would dare accuse the highly respected former chairman of the US Federal Reserve, Paul Volcker, of being an “extremist”. But funnily enough, Volcker made similar comments during a speech on the weekend with regards to Goldman Sachs and other US financial institutions. Volcker claimed that:
[The] Government safety net [which is similar to what is enjoyed by Australian banks] should not be extended beyond the core commercial banking business … they can do trading and do anything they want, but they shouldn’t have access to the safety net …
I’m very interested in using this crisis as a way to avoid the next one…this isn’t any time to go back to business as usual.
Volcker effectively suggested that banks such as Goldman Sachs should be forced to divest their risky proprietary trading arms (which last was responsible for 90% of the bank’s pre-tax earnings) if they wish to access discounted government funding. At the moment, (as Joyce accurately pointed out), the federal government has been very happy to stand behind banks through the provision of taxpayer-funded guarantees, but it has been been unwilling to prevent abuses of market power, excessive risk taking or runaway executive remuneration.
Deputy Prime Minister Julia Gillard accused Joyce of making “erratic and irresponsible statements” — but would she say the same to Volcker and the IMF?