Banks Had Backs To The Wall

Garnaut Says Australian Banks Were Insolvent

It’s Ross Garnaut talking about his new book on the 2008 crash. I think it’s probably accurate. He was on the 7:30 Report tonight but the interview isn’t up on the site yet. I would have linked to it, but the ABC hasn’t done their bit… yet

Garnaut’s new book, The Great Crash of 2008, marks the first rejection of Kevin Rudd’s interventionist tendencies from the intellectual architects of the Hawke-Keating government’s pro-market reforms of the 1980s.

It comes as Reserve Bank governor Glenn Stevens effectively shifted the central policy challenge to managing a rekindled export demand boom from China for the next half decade and beyond. This is the upshot of Stevens’s decision to press the button on a series of interest rate hikes that will likely take the official cash rate back to “normal” 5-6 per cent levels during the next 18 months.

It’s a declaration of confidence that Australia is hitched to a China-driven Asian growth engine that has decoupled from the financially crippled US and European economies. China’s economy, Stevens said, was “very strong”. In Australia, economic confidence had recovered. The high level of business investment was not weakening as much as feared.

Moreover, a medium-term investment wave in mining and energy projects was “strengthening”.

Worryingly, underlying inflation remained above the bank’s 2-3 per cent target zone and housing prices were rising “appreciably”. Investors were becoming more prepared to take risks and sharemarkets had “recovered significant ground”. Stevens confirmed that the Reserve Bank was about to revise up its two-month-old economic forecasts. These predict growth will recover to 2.25 per cent by the end of next year. The new forecasts will tip “close to trend” growth by then. That means at least 3 per cent and a V-shaped downturn and recovery much shallower than the Treasury’s budget forecast in May, let alone what it reckoned would have happened without the budget stimulus.

The more the fall out continues from the GFC, the more we’re told two different versions of what is wrong with the way it was handled. One school says ‘moral hazard’ and thinks the stimulus packages funded out of government debt were grossly wrong. The other side thinks that we’re barely in any kind of economic shape, thanks to the speed and quantity of the money spent and that we should at least see through the administration of the stimulus packages as originally planned.

It’s a quandary of sorts because it depends on how important you think the long term is over the short term, and governments being governments, they looked after the short term at the probable expense of the long term. The ‘moral hazards’ for having bailed out these bank are now with us. All these banks except Lehman Brothers essentially didn’t have to take their punishment for the bad debts they laid. In the long term, you don’t know what this is going to do to the banking sector because they might all equally think, “hey, the government will bail us ALL out if we ALL fuck up together, because collectively, we’re too important to fail.

And there’s more than some truth to that. Even though we got to avoid the mass collapse of various industries at once together with the cessation of international trade and death of service sectors and tertiary industries outright – all thanks to the stimulus packages – you also get the feeling that it was strictly to preserve the status quo at all costs because the alternative was a replay of the Great Depression.

Which, in passing, brings me to Third World Debt. One of the things that was being argued in the late 1990s and early parts of this decade was that we should cancel third World Debt. The argument against has always been the ‘moral hazard’ argument. Yet today it occurs to me that if we’re willing to wade into ‘moral hazards’ ourselves in order to get ourselves of the hook, we no longer have any kind of moral high ground to be preaching about ‘moral hazards’ to these poorer countries. Seriously.

Going back to the Four Big Banks, and I have to say I’m looking at all this with a bit of alarm. As I noted last week, the shares in the banks are almost back up to where they were in 2007 before things went topsy-turvy. Yet, Ross Garnaut is saying these banks were insolvent on the day the GFC kicked in with full effect.

Doesn’t it seem a little odd to you that people are rushing to buy these shares? Maybe they’re the ones thinking, “these banks are TOO BIG to fail! I can’t lose.” Isn’t that  exactly the ‘moral hazards’ galore Ross Garnaut was warning us about? And with all the acquisitions these banks are now making, isn’t it possible that these Big Four Banks are repeating their folly having waved goodbye to deep risk?

If the Government is willing to break up Telstra because it’s a monopoly, there’s something to be said for breaking up the Big Four, exactly because they’re the Big Four.

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