The Politics of Australian Monetary Policy, or watch out or you will be bailing out Macquarie Bank when you go to Woolies.. Periodically, Australians overindulge their love of property, but never like this. The number of housing loans granted increased at twice the rate of population growth between 1896 and 1977 and then exploded after deregulation. Twenty years of falling rates and innovation in financial services has ensured not only massive but excessive investment in housing. Generally in Australia the price of the housing stock has risen as a response to strong demand from family formation and immigration especially when low interest rates allow easy borrowing both for builders and borrowers. The ratio of house prices to incomes is now at historically unprecedented levels, driven by easy credit, direct government grants to first home buyers and a taxation system that, via negative gearing, encouraged investment in real estate. Furthermore prices were pushed higher by a whole new layer of loan providers and a flood of cheap money that became available. Alan Greenspan's low rates made a generalised Anglo Saxon property bubble via the transmission system of the US dollar system unstoppable. The availability of credit had also been a function of the long term decline in US dollar denominated interest rates between 1980 and 2003, increasing innovation in financial services and massive credit creation in the investment banking sector. This tide of money has reached a peak and is now going out. The prospect of significant real falls in the price of credit going forward is close to zero, the possibility of very steep rises significant. The only bubble left is US Treasury bonds and the dollar system itself. If we want affordable housing as national policy all we need to do is let this bubble deflate. Sure there will be pain but as the sooner we deal with this mal-investment in housing the better. We probably need capital for productive investments in energy and infrastructure. Why then is the Reserve Bank working so hard behind the scene to sustain the unsustainable. To review:Financial engineering has unleashed an explosion of debt , made housing un affordable and transferred wealth to asset owners. Now that the bubble has reached its apogee, the Reserve Bank must not follow the examples of their UK and US brethren, we need to ask the question if it is sound policy to bail out the banks that enabled this scam. It is the duty of the Reserve Bank Board, within the limits of its powers, to ensure that the monetary and banking policy of the Bank is directed to the greatest advantage of the people of Australia and that the powers of the Bank ... are exercised in such a manner as, in the opinion of the Reserve Bank Board, will best contribute to: (a) the stability of the currency of Australia (b) the maintenance of full employment in Australia; and (c) the economic prosperity and welfare of the people of Australia. (d) the bailout of insolvent banks and property speculators even if it undermines (a) and the long term prospects for (c (Aug 07 onward) The announcement by the ANZ Bank that it had "securitised internally A$11.2 billion ($10.6 billion) of residential mortgage loans to give it access to liquidity is newspeak that it is taking advantage of a change late last year by the Reserve Bank of Australia that made mortgage securities eligible for repos. What the terms and conditions of these arrangements are is anyone's guess, the RBA refuses to disclose those details. It's popular with the banks, but. Reuters continues: "ANZ is the third bank to adopt the approach, following Westpac Banking Corp which earlier in the year converted A$10.6 billion of mortgages into securities that became repo-eligible with the Reserve Bank of Australia. Bank of Queensland followed suit in March with a A$500 million similar issue. Late last year, the RBA widened the type of assets it would accept as collateral in repurchase agreements to promote liquidity in financial markets. The new list of collateral included certain types of residential mortgage-backed securities. Issuance of RMBS in Australia has slumped to zero in 2008, from A$57 billion in 2007." translation: We can't sell them but the kind people at the RBA are helping. St George and Macquarie Securities have also followed this crazy trend to "securitisation not for sale" to investors but for passing to the kind people at the Reserve Bank repo window. Robert Gottliebsen also notes the scale of this bailout "Internal securitisation in Australia this year now stands at $50 billion, almost as much as the entire volume of RMBS sold to investors last year. Internal securitisation consists of converting mortgages into securities that become eligible for repurchase agreements with the Reserve Bank of Australia. Last year, the RBA widened the type of assets it would accept as collateral at its repo operations, including certain types of RMBS, to promote liquidity in financial markets." (this is, in the final analysis, nothing more than very generous loans on dodgy collateral for mates) The law of consequences in the free enterprise system has been repealed for bankers. At the repo rate current, our banks are having their annual fund raising requirements provided by the taxpayers at highly concessional rates without any public scrutiny. The real issue is that the securitisation model is kaput and forever busted and no matter how hard the Reserve Bank works they will not save it nor property prices, because the banks will keep the cash to deal with liquidity issues. If the RBA keeps handing out money on these terms, therefore, all that will have happened is that speculators, bankers and passive investors will have offloaded their risks to the Australian taxpayer by way of inflation and the impairment of the balance sheet of the RBA. Prime Minister Rudd and his treasurer should not be running off to the USA to learn the art of money printing from Ben Bernanke. Rather Mr Rudd and his treasurer should be making plans for the slow demise of the US dollar as the reserve currency and focus on rebuilding a monetary system that has a capacity to direct savings into productive investment. Otherwise citizens will have no alternative but to flee Aussie dollars into gold and silver and the equities of recession proof businesses. The Reserve Banks responsibility is to provide for a dynamic and vibrant economy, one with a capacity to respond to the great geopolitical changes and economic challenges ahead, not to freeze by fiat the current pattern of economic activity and put the most foolish players on what will quickly evolve, without a new political paradigm, into a whole new layer of permanent monetary life support for entities who claim they deserve big rewards as risk managers. We have reached an inflection point. Kevin McKern Ashfield Sydney. |