|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
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
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
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.