Turnbull government ducks its first tough decision. For all the cheering of the Turnbull government’s response to the Murray Inquiry into the financial system and its voter-friendly crackdown on big credit card transaction surcharges, the toughest decision was ignored. That was the present arrangement allowing superannuation funds to engage in limited recourse borrowing. Crikey gave it a mention and it popped up elsewhere — but usually with accompanying cheers about “a win” for self-managed super funds. The original decision to not ban this type of borrowing was taken by Josh Frydenberg in his old role as Joe Hockey’s helper. But of more importance to the decision was the close relationship Frydenberg had with Peter Costello, the former treasurer and author of the decision to allow super funds to borrow.

Costello was also mentor to the current Assistant Treasurer, Kelly O’Dwyer, who succeeded Costello in the Melbourne seat of Higgins. Rational decision-making on a ban — a decision the Murray Inquiry, the Reserve Bank, APRA and ASIC all want — was always going to fail given that web of political self-interest. That’s regardless of the fact that the original borrowing decision has helped grease the upsurge in property spruiking to self-managed super funds and other raids on the hard-earned money of prudent people. — Glenn Dyer

Murray got it right. In its final report, the Murray Inquiry nicely framed the benefits of not allowing super funds to borrow:

“The GFC highlighted the benefits of Australia’s largely unleveraged superannuation sector. The absence of borrowing enabled the superannuation sector to have a stabilising influence on the financial system and the economy during the GFC. Continuing to restrict leverage in the sector will be important for mitigating future risks. The Inquiry recommends limiting borrowing in superannuation funds.”

The report said the ban was needed to prevent the unnecessary build-up of risk in the superannuation system and the financial system more broadly. The Reserve Bank and APRA’s prudential supervision of this increasingly risky area is being made harder by poor record-keeping and inadequate management of investor lending by the banks. Buried in the minutes of the RBA’s October 6 meeting was this stunning admission: “In relation to lending for housing, members noted that the data on the split of lending to owner-occupiers and investors were of questionable quality at present.”

If the RBA and APRA have found it hard to get accurate data (but know there is a growing problem, after all they have forced ANZ and NAB to reclassify $50 billion of owner-occupier home loans as investor loans in the past year), how could the Turnbull government make a decision to continue with something that is full of risk, in a situation where risks in property are rising? By allowing super funds, especially self-managed funds, to continue borrowing (even if it is limited recourse), the Turnbull government is adding to those risks and undermining the stability of the economy, however small they might be. By allowing funds to continue borrowing for three more year puts it all on the regulators and makes their efforts unnecessarily harder. Nice one, Malcolm, a tough decision fluffed. — Glenn Dyer

Why there won’t be a RBA rate cut, #1.  Meanwhile, the chorus of rate cut Hennies Penny from Goldman Sachs, UBS, Credit Suisse and others who have confidently asserted that the Reserve Bank will be forced to cut interest rates, starting at its Melbourne Cup Day meeting next month went flat yesterday with the release of the October 6 RBA board meeting minutes. The chorus of rate cut calls has risen since Westpac’s gouging last week with its 0.20% lift in all mortgage rates (on top of the 0.30% rise for investors earlier), with many claiming a cut was needed “to restore housing affordability”. But a look at the board meetings makes clear there are two reasons why there won’t be a rate cut (and possibly no more unless the sky falls in in China). The first and most dramatic was the summary of last Friday’s Financial Stability Review, which every member of the rate rise choir and their accompanying chorus in the business media have ignored — the rising level of risk in the financial system from the housing boom (and the emerging surge in lending to commercial property):

“Domestic sources of risk to financial stability in Australia continued to revolve mainly around developments in local property markets. In the context of recent developments in the housing market and household credit, members discussed the findings from the enhanced scrutiny of housing lending practices undertaken by APRA and the Australian Securities and Investments Commission since the end of 2014 …This scrutiny and related work had shown that investor activity was considerably higher — and lending standards in some parts of the market weaker — than had originally been thought. Members further observed that the risks in commercial property and the property development sector were rising.”

So why would a central bank throw more fuel on that increasingly risky fire with another interest rate cut? That’s a question unasked (or ignored) by many in the financial markets. — Glenn Dyer

Why there won’t be a rate cut, #2: The second reason against a rate cut is just as compelling — it’s the RBA’s belief the economy is doing OK, even though the June quarter GDP was weak and the economy remains sluggish. But it is rebalancing and transitioning from the resources investment boom.

“This rebalancing was being increasingly supported by the depreciation of the Australian dollar, which had led to a noticeable increase in net service exports over the past year. Non-mining investment was estimated to have picked up a little in the June quarter and had risen modestly over the past year. Over the same period, profits of non-mining companies had kept pace with nominal GDP. Survey measures of business conditions had increased to be further above their long-run averages, notably in the household and business services sectors.”

— Glenn Dyer

Peter Fray

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