Quick — Ruddbank — good or bad?
Well, strictly speaking there is no Ruddbank; in fact, there’s no bank at all. The Australian Business Investment Partnership is merely a vehicle to combine Government and major bank funding to replace retreating foreign capital in commercial property projects.
Still — good or bad? Are we signing taxpayers up to bail out shonky developers and gouging banks, or ensuring the timidity of foreign banks doesn’t cause a vicious cycle of asset sales and propery devaluations?
Don’t ask economists or commentators. They’re as confused as the rest of us.
Nothing better illustrates where we are — or how we don’t know where we are — in economic policy terms than the reaction to the Government’s move to cover the possible retreat of foreign capital via a joint Government-bank investment vehicle.
The Australian has been running a campaign against it as well, getting housing finance guru Christopher Joye to have a go at it today, after right-wing economist Henry Ergas slated it on Tuesday. Despite the blatantly partisan nature of his columns, neither Ergas nor The Oz feel inclined to reveal that Ergas has been in the pay of the Federal Liberal Party, conducting Malcolm Turnbull’s own version of the Henry tax review.
Today The Oz also gets Ergas to explain how the Partnership may breach competition law.
Dead set, Henry? Really?
To borrow Michael Herr’s classic line from Apocalypse Now, charging someone with breaching competition law during a financial meltdown is like handing out speeding tickets at the Indy 500. Everything about the response of governments to the financial crisis has been anti-competitive. After forced mergers, large banks being allowed to consume smaller competitors and financial stability packages, it’s a little bit late to start pointing out that none of this is particularly pro-competitive.
Other commentators are rather more warmly-disposed toward it. Ian Harper backed the Partnership. The AFR’s Andrew Cornell called it “a prudent precaution.” Actually, therein lies the difficulty. Ruddbank is a pre-emptive move. Like most pre-emptive moves, if it works you’ll never be quite certain whether it was needed. Debate is focussed around whether what is being pre-empted deserves pre-emption.
Joye’s argument, to grotesquely simplify it, is that there is no threat to the housing property market from the commercial property market. Turnbull’s argument is somewhat blunter: who cares if the property market tanks — let developers and the big banks cope without taxpayer assistance. Similar arguments were advanced about the Wall St bail-out last year, you might recall.
Joye’s point is tempting, but after six months of discovering that things are far more interconnected than we’d thought, it’d be a hell of gamble to assume commercial property and residential property aren’t connected, particularly when there are plenty of economists eager to claim both markets are way over-valued and headed for big falls. It also doesn’t seem like the best time for Australian banks to get caught up in a round of major asset devaluations, regardless of the ethical or economic merits of doing so.
The lack of consensus reflects the fact that we seem to have become unmoored from economic orthodoxy. At the moment, any direction looks better than the one we’re going in.
The biggest issue in the global economy currently is how to fix up the financial system. In predicting worldwide gloom and doom overnight, the IMF emphasised that the first order or business was coordinated action to address the presence of bad assets on bank balance sheets in order to get credit flowing again. Any stimulus packages introduced before the financial system is fixed will only be relieving the symptoms of a more serious illness.
The debate about “balance sheet cleansing” swings between nationalisation, bad asset banks and zombie banks. And judging by the speed of the financial crisis, these are likely to be new-style zombies that sprint, rather than the old-school lumbering ones.
Australia doesn’t have this financial system malaise, but we’re in much the same boat as everyone else until the problem is fixed — unless we suddenly find a spare coupla hundred billion dollars to meet our investment needs for the next few years. David Bassanese in the AFR on Tuesday suggested that the Ruddbank idea might be an idea considered elsewhere — not so much to cure the infection of overvalued assets but as a vehicle for governments to unfreeze credit markets, in preference to wholesale nationalisation.
I referred previously to this sort of joint Government-private sector model as possibly giving us the worst of both worlds; the flipside of that is that, in combining the Government’s sovereign guarantee with private sector focus on profitability, such vehicles might indeed be the best way to get capital flowing again.
Seems like the economists have adopted that Chinese curse about living in interesting times.
Its kind of ludicrous to be handing out rescue packages to those who failed us. Rudd should be stipulating these are loans for repayment by recipients conforming to new fiscal reforms. Hey, Centrelink puts all sorts of conditions on tax dollars earned by and refunded to the masses and there’s no reason why Ruddibank should operate contrary to its precedents. Or does the private public partnership thingy over-ride common cents yet again?
JamesK, my first comment was probably a bit simple and misleading as well when looked at in the context of the bigger picture.
While there were indeed silly obligations for organisations covered by the CRA, the sub-prime crisis was the initial trigger for an inevitable real-estate bubble collapse, which was itself trigger for an inevitable global asset bubble collapse.
A systemic failure on many fronts has brought about this global crisis:
* Legislation like CRA forcing banks to take on excessive risks.
* Easy money policies from the US Federal Reserve – i.e. Greenspan trying to fix the bursting dotcom bubble, but inadvertantly creating a raft of new ones.
* Lack of regulatory oversight leading to a shadow finance system larger than the real one it was built upon.
* Corporate bonus schemes that reward risky behaviour like short term share price pumping instead of stable long-term growth.
* Mispricing of risk by credit ratings agencies.
* A huge interconnected web of opaque credit default swaps that are based on the premise of taking out fire insurance on a house down the street while being able to flick metaphorical matches in its direction through short selling.
* Gross imbalances in global trade – i.e the Smith family going into debt on China’s dime. The average American now owes the average Chinese US$4,000. We Aussies are also guilty of living beyond our means.
* Computerised trading algorithms that have complicated global money flows to the point where no one really knows what the hell is going on anymore. The crash of ’87 was thought to have been partly triggered by a cascading explosion of automatic computer trades.
There’s probably a few more that I’ve missed, but suffice to say, I wouldn’t disagree with some of the leaders around the world who have been calling for an overhaul of the global financial system, having lost faith in the current overseers. The G20 is probably the best place to work it out.
What is wrong with the Nationalisation solution? If you take the financial problem as being one that the markets cannot fix on their own terms, or within the terms of the free market ideology we have lived with for the past two decades, then why not an old fashioned nationalisation of the banking sector for just compensation? If the market value ends up being a peppercorn then that sounds just to me. Why do Crikey commentators creep around this? Why can’t anyone writing anywhere advocate there be a ‘times up, gentlemen’ call to the finance sector and demand a replacement of shareholders and top executives?
They should call it the Frank Lowy Bank, he has to refinance loans soon after his Westfield shopping centres lost value and wants to keep cash handy to buy up firesale bargains. He is also a big labor donor.
@Jared. I disagree with you strongly.
Greed did have much to do with this collapse in the form of loan repackaging as financial instruments and insurance selling on these financial ‘investments’.
But without doubt the Community Reinvestment Act was enforced more stringently under the Clinton administration to push banks into making mortgage loans to low-income people even if their credit didn’t check out.
The government threatened fines and other punishments for mortgage originators who didn’t preference “disadvantaged” borrowers. In conjunction, the government-sponsored entities Fannie Mae and Freddie Mac loosened their standards and became willing to buy virtually any mortgage, including the CRA-driven ones.
With federal pressure to make subprime loans, a willing buyer for all of the loans, artifically low interest rates, and hefty fees, the incentives were all aligned for private companies to make way too many loans to bad borrowers.
The government didn’t force this on mortgage companies, but they provided great incentives both as carrots and sticks .
Shouldn’t be surprising that the result was more of the actions that the government encouraged and less of the ones they constructed disincentives for.
Thus the Reserve, Clinton and Bush share the responsibility