With the announcement of the Government’s guarantee of savings to unlimited amounts, the stock market had its largest bounce in a decade. They have protected a run on banks (and of course, the issue was never those with $100,000 in savings, but thousands with one or two thousand: it’s why the original cap of $10 000 made sense).
The guarantee is of course is a good thing. The Opposition has, rightly, supported it. Australian savers know that, in a repeat of 1891, they will not be instantly broke. This is the first time individual savings have been so protected, but hopefully the government will extend the guarantee beyond its initial three years. But…
Australians aren’t great savers. Where is the issue going to come from? Borrowings. Particularly credit card borrowings. What happens if one of the major card suppliers (companies such as Visa, American Express, Mastercard, et cetera) goes broke? Worse, what if one of the foreign banks or companies which provide credit cards goes to the wall – (again, companies like Citibank, Deutsche, Lloyds, et cetera). Creditors would run to get their money, and many of those, faced with having to pay their rather large debts, would find themselves in serious financial and possibly legal trouble. It is possible that this recession will be a repeat of the 1890s in Australia (1873 in Europe and the US), but with both a property crash, and a credit melt-down as its hallmark.
Covering debt is problematic for the government. It can reward those who’ve got into trouble through poor management, and punish those who’ve saved. The Australian government can’t (and shouldn’t) guarantee a foreign bank or financial institution. Yet, what we are looking at here is otherwise relatively well off people facing bankruptcy because they may be faced with finding thousands (sometimes tens of thousands) of dollars to be paid immediately, and with no ready cash, or further credit to hand.
I suggest that the government sets up a scheme in which the money is loaned to debtors caught in this situation, to be paid off to the government at the same terms and same interest rate (or maybe a small — no more than 0.25%) premium. It would ensure that economic stability is not threatened by a credit crash, but still ensure that debtors’ obligations are met. This scheme does not reward the greedy or the bludgers, nor does it punish those who didn’t enter into the cycle of debt. Such a scheme may cost nothing. But in the most catastrophic case, the government could make sure that the worst of the blow is softened.
D L Lewis teaches history at several institutions of higher learning. Currently, he has no credit card debt.
I agree with Andy
These small credit card loans given out via the banks are some of its strongest assets (returning between 15-21%). When a bank falls, these will be the first things to be sold off to other banks, and other banks will be willing to buy them up. For the credit card holder, it will be business as usual (except they will be paying interest to the new bank). Look at RAMS. When they were in trouble, they didn’t demand people pay up their mortgages, they just sold themselves to Westpac.
Stick with the history, Dave.
Let me see if I get how bank guarantee works. Money is taken from the poor (via taxes, printing, and weakening of the dollar) and given to the wealthy so the wealthy supposedly will have enough money to lend back (at interest) to those who have just been robbed. Is that how it goes?
Taken a look at the classic 1960’s Mary Poppins film. It’s a great moral story with a subtext about banking. I has a great bank run scene started by a small boy who wants his tuppence back. Ambac (ABK) was in the guarantee business. It kept guaranteeing more and more stuff. Profits soared. All it took to collapse Ambac was sinking asset prices. If the stock market takes a further beating the guarantees will be worthless. No matter if it’s Ambac or governments with printing presses doling out worthless promises. Only money backed by gold or silver is a credible guarantee. The US constitution demands the dollar to be gold and silver backed. Look what’s happened when it was decoupled by Nixon. The crazies on the Wall Street asylum hijacked the economy and the currency with derivatives, naked shorts, SIVs, CDOs and an alphabet of garbage.
David Lewis may have no credit card debt, but I doubt he also has an in-depth understanding of the credit-card industry. “What happens if one of the major card suppliers (companies such as Visa, American Express, Mastercard, et cetera) goes broke?” Well, not much. Visa and Mastercard are franchises, the debt is issued by a bank (such as Westpac, NAB etc). Amex is mostly a charge-card operation with the charges payable once a statement is issued. Low credit exposure.
If issuing banks (especially foreign banks) were to go under, a credit-card debtor would be in the same situation as now (possibly better off).
David Lewis seems to be solving a problem that doesn’t exist.