Kenneth Davidson has been one of the most consistent voices for sensible economic analysis in the Australian media for decades now (another I’d give a similar accolade to is Brian Toohey), and he’s written a brilliant piece in The Age and The Sydney Morning Herald on the specualtive bubble that is the Australian dollar.
Davidson lays out the causes and probable effects superbly in the length of a newspaper feature. The causes are that:
The bailout funds in the USA and UK in particular have cashed up financial institutions that don’t want to lend any more to mortgages (and have long ago forgotten how to lend to fund productive enterprises), so they’re looking for short term hot money gains;
The RBA’s flagging that it intends raising rates from 2-3% above rates in the USA and UK to possibly 4-5% above is a “sure thing” return on a currency that was already appreciating because of commodity sales to China;
This gives the hedge funds a sure fire double whammy gain:
borrow in the US or UK at 1% to buy $A and “invest” in floating rate bonds or shares (particularly in banks) and get a higher return (at least 2% better than the borrowing costs, and assured to rise); and
drive up the $A in the process, so that when you sell out, you get both a higher return and an appreciated currency in which it is denominated.
The most remarkable thing about this bubble is that the RBA’s “we’re raising rates now and we’re going to keep on doing it for a few months” messages are part of the cause, and yet they seem unaware of both the phenomenon and the dangers it poses. Davidson points out that Brazil, which is experiencing a similar commodity-driven currency appreciation bubble, is aware of the dangers and is doing something about it:
“The rising value of the Brazilian real and the Australian dollar against the US dollar has had a disastrous impact on both countries’ non-commodity export and import competing industries. Brazil’s popular and largely economically successful left-wing Government led by President Lula da Silva is meeting the problem head on. It has decided to impose a 2 per cent tax on all capital inflows to stop the real appreciating further.”
In the meantime, our RBA seems possibly even pleased that this short-term phenomenon is afflicting our manufacturing sector adversely.
Of course, like any speculative bubble, this has an end-game–and that’s when you think the rate rises have come to an end, sell out and watch the $A crash for those who are still holding it. Then the dollar (and Australian bank shares) will crash, and our economy will have acted as a dollar pump for the hedge funds.
Davidson also accurately notes that the RBA’s obsession with driving rates higher now is driven by the classic “fighting the last war” syndrome of believing that an outbreak of wage-driven commodity-price inflation is the main danger facing the Australian economy–just as it was in, oh, about 1973 (if you ignore private debt levels of course…).
He concludes that:
The world has moved on but the obsessive debate about wage inflation and union powers hasn’t. Since the beginning of the ’80s, the problem has been periodic bouts of asset price inflation. It is the biggest danger now.
Instead of controlling the unions, there should be control of financial institutions. The Australian dollar bubble and the incipient housing bubble should be micro-managed. Capital inflow could be dampened by a compulsory deposit of 1 to 2 per cent to be redeemed after a year to stop speculative inflow. Home ownership has become a tax shelter. The steam could be taken out of the rise in house prices if negative gearing was limited to new housing. This would obviate the need for higher interest rates that affect everyone.
It’s an excellent article–read it and pass it on. The more people who do read it, the higher it will rise in the newspapers’ online-indicators of reader interest, which will push it towards the top of the online page. And I’m heading out now to buy a paper copy of the SMH as well. Bravo, Kenneth Davidson.
The pooh-bahs running US and British hedge funds and the banks supporting them are more than capable of reading the minutes of the Reserve Bank of Australia board meetings and coming to the conclusion that RBA Governor Glenn Stevens is committed to pushing up the cash rate from the present 3.25 per cent to 4 to 5 per cent if necessary.
And they are already betting tens of billions of dollars on what has so far been a sure bet. These foreign financial institutions are up to their old tricks. After getting trillions of dollars out of their respective governments to avoid GFC-induced bankruptcy - which was largely engineered by their criminal greed - because they are ''too big to fail'', they are already using their influence to maintain ''business as usual''.
Why funnel the money gouged out of American and British taxpayers into lending to their national economies to maintain employment when there are richer pickings elsewhere? Two of those destinations are Brazil and Australia. Their resource-rich economies are still doing well compared with most other countries because they are riding in the slipstream of the strong demand for commodities from China and India.
Cash is pouring into these economies, not for development, but to speculate on the local currency and the sharemarket. The rising value of the Brazilian real and the Australian dollar against the US dollar has had a disastrous impact on both countries' non-commodity export and import competing industries. Brazil's popular and largely economically successful left-wing Government led by President Lula da Silva is meeting the problem head on. It has decided to impose a 2 per cent tax on all capital inflows to stop the real appreciating further.
Arguably, the monetary strategy adopted by Stevens has compounded Australia's lack of international competitiveness for our manufacturing and service industries, especially tourism. Since the end of 2008 our dollar has appreciated 27 per cent (as of last week). This means that financial institutions that invested money at the beginning of January are enjoying an annual rate of return on their investments of 35 per cent.
US and British commercial banks can borrow from their central banks at a rate less than 1 per cent. The equivalent RBA rate is 3.25 per cent and many pundits are forecasting the rate could go to 3.75 per cent before the end of 2009. This will increase the differential between Australian and British and US interest rates and make the scope for speculative profits even higher.
Since the beginning of the year, $64 billion has poured into Australia in the form of direct and portfolio (share) investment and foreign lenders have switched $80 billion of foreign debt payable in foreign currencies to Australian currency. Most of the portfolio investment ($41 billion) has gone into bank shares. Banks now represent 40 per cent of the value of shares traded on the stock exchange, and while shares in the big four bank shares have increased by about 80 per cent (as measured by CBA shares), the Australian Stock Exchange Index has risen by only 30 per cent.
Foreigners have shifted out of Australian fixed interest debt and into equities because as interest rates go up, the capital value of fixed debt declines. By driving up interest rates to curb inflationary expectations and the prospect of a housing price bubble the RBA is in far greater danger of creating a stock exchange asset price bubble as well as an Australian dollar bubble. Once foreigners believe interest rates have peaked, the bubbles are likely to be pricked as financial speculators attempt to realise their gains. This could lead to a stampede out of Australian denominated securities.
With unemployment expected to continue to rise, and the level of unemployment disguised by growing numbers of workers being forced to work part-time, there is little chance of the underlying inflation rate, already below 2 per cent, increasing as a result of a wages break-out. The last wages breakout (leaving aside the explosive growth in executive salaries in the past three decades) occurred in 1979.
The world has moved on but the obsessive debate about wage inflation and union powers hasn't. Since the beginning of the '80s, the problem has been periodic bouts of asset price inflation. It is the biggest danger now.
Instead of controlling the unions, there should be control of financial institutions. The Australian dollar bubble and the incipient housing bubble should be micro-managed. Capital inflow could be dampened by a compulsory deposit of 1 to 2 per cent to be redeemed after a year to stop speculative inflow. Home ownership has become a tax shelter. The steam could be taken out of the rise in house prices if negative gearing was limited to new housing. This would obviate the need for higher interest rates that affect everyone.
Kenneth Davidson is an Age senior columnist.
Showing posts with label smh. Show all posts
Showing posts with label smh. Show all posts
31 October 2009
19 September 2009
Self-righting markets and other shibboleths
The global financial crisis has revealed major weaknesses in conventional economics. Economists will need to face up to these if their discipline is to recover its reputation and relevance.
Many of these shortcomings arise from the belief that markets and economies are inherently stable. That is, the market system is self-righting. It's usually in ''equilibrium'' (balance) and, should some external event push it into disequilibrium, this sets off a process that returns the system to equilibrium quickly and easily.
Economists hold to this belief for various reasons. One is that it makes economics nice and neat, providing simple explanations and predictions (the predictions may not be very accurate, but who's counting?). It makes it easier to conduct economic analysis using maths rather than words, which makes academic economists feel scientific and intellectually high-powered.
But the belief in self-righting markets also fits nicely with the political philosophy of libertarianism - the supremacy of freedom of the individual, the minimal need for governments and taxes.
And it suits business interests, who want maximum freedom to make a buck in any way they see fit.
One of the many implications of the belief that markets are inherently stable is that there's no such thing as a business cycle. The economy is almost always at full employment because supply creates its own demand.
But surely, you may object, the whole discipline of macroeconomics is the study of how to stabilise the economy as it moves through the business cycle. Well, it used to be. Increasingly, however, it's been about trying to prove that governments are incapable of influencing the course of the macro economy and that what seems to be a cycle of deficient or excessive demand isn't really.
One notion is that the ups and downs are caused by people taking a bit of time to adjust to new advances in technology. Another is that unemployment is voluntary. Workers are so well off that when they consider the wage rates they're being offered are insufficient they take an unpaid holiday.
To the extent that some academic economists still believe in the existence of the business cycle, they study the concrete factors that cause it - the ups and downs in business inventories, for instance - not the more ephemeral, psychological factors such as optimism and pessimism, greed and fear.
But if the business cycle doesn't exist then it surely must also be the case that sharemarket crashes and financial crises don't happen.
Once again, you may think that the evidence of crashes and crises is readily apparent from the historical record. It is, but the dominant stream in academic economics has become adept at ignoring it.
Although on the one hand the study of economic history has fallen out of fashion in university economics courses, on the other some academics have sought to prove that the Dutch Tulip Bubble of 1624 and the South Sea Bubble of 1720 were really examples of wrong-headed government intervention in markets, not market failure.
Do you see what all this means? It means academic economists tend to focus their attention on what happens when everything is going right - when markets are in equilibrium - and give little thought to the circumstances in which things could go wrong.
Now do you see why so few economists could see the global financial crisis coming? They didn't see it because they weren't looking for it.
(Even those who now contrive to believe that the problems we've seen in the past year and more were caused by faulty government intervention in markets, rather than any fault on the part of markets themselves, weren't warning that these interventions could lead to disaster. No, markets were getting their way and the anti-government brigade was content that all would be well.)
This is the charge made by David Colander, of Middlebury College in Vermont, and six other American and European academics in a much-quoted paper, The Financial Crisis and the Systemic Failure of Academic Economics, that's come to be known as the Dahlem report.
One implication of this is that, despite its pretensions to the contrary, economics isn't very scientific. Like the rest of us, economists suffer from what psychologists call ''confirmation bias'' - they look for evidence that confirms their prior beliefs.
They tend to interpret evidence in ways that favour their beliefs. They remember evidence that goes their way and forget evidence that doesn't. We all do this, it's part of our lack of rationality - and economists are just as irrational as the rest of us.
In contrast, the scientific method involves trying to falsify your hypothesis, not confirm it.
Milton Friedman argued in a famous paper that it didn't matter if a model was built on unrealistic assumptions (such as human rationality). What mattered was whether the model led to accurate predictions.
You wouldn't believe it, but there are still economists who draw comfort from this pragmatic doctrine. You say economics produces inaccurate predictions? Not that I've ever noticed, it doesn't.
Another consequence of the assumption that markets always work well is that economists put a lot of effort into arguing for the removal of small inefficiencies caused by government intervention - restrictive shopping hours, for instance - while academics do little to study or help prevent the gross inefficiencies caused by having thousands of workers lying idle as a result of financial crises and recessions.
Now, economists are terribly defensive people and they'll be able to think of exceptions to every charge I've made. It's true that not all academic economists doubt the existence of the business cycle or asset-price bubbles. There are even some who study our lack of rationality. And economic practitioners, including econocrats, don't all share the extreme views of the academics.
But what I've described is the dominant view prevailing among academic economists. Behavioural economists, for instance, are a fringe minority. And it's surprising how much influence the doctrines of the high priests have on the beliefs and behaviour of practitioners.
The trouble with economics is that the conventional theory has come adrift from the real world and taken on a life of its own. The answer is for academic economics to become less theory-driven and more empirical.
There needs to be a lot more emphasis on testing theories against empirical evidence - and looking for falsification - and on simply seeking to identify empirical relationships and regularities.
With enough of these, economists could search for new theories to explain those relationships. But we also need more study of how markets and economies come unstuck.
Ross Gittins is the Herald's Economics Editor.
Ads by Google
http://www.smh.com.au/business/selfrighting-markets-and-other-shibboleths-20090918-fvb3.html
Many of these shortcomings arise from the belief that markets and economies are inherently stable. That is, the market system is self-righting. It's usually in ''equilibrium'' (balance) and, should some external event push it into disequilibrium, this sets off a process that returns the system to equilibrium quickly and easily.
Economists hold to this belief for various reasons. One is that it makes economics nice and neat, providing simple explanations and predictions (the predictions may not be very accurate, but who's counting?). It makes it easier to conduct economic analysis using maths rather than words, which makes academic economists feel scientific and intellectually high-powered.
But the belief in self-righting markets also fits nicely with the political philosophy of libertarianism - the supremacy of freedom of the individual, the minimal need for governments and taxes.
And it suits business interests, who want maximum freedom to make a buck in any way they see fit.
One of the many implications of the belief that markets are inherently stable is that there's no such thing as a business cycle. The economy is almost always at full employment because supply creates its own demand.
But surely, you may object, the whole discipline of macroeconomics is the study of how to stabilise the economy as it moves through the business cycle. Well, it used to be. Increasingly, however, it's been about trying to prove that governments are incapable of influencing the course of the macro economy and that what seems to be a cycle of deficient or excessive demand isn't really.
One notion is that the ups and downs are caused by people taking a bit of time to adjust to new advances in technology. Another is that unemployment is voluntary. Workers are so well off that when they consider the wage rates they're being offered are insufficient they take an unpaid holiday.
To the extent that some academic economists still believe in the existence of the business cycle, they study the concrete factors that cause it - the ups and downs in business inventories, for instance - not the more ephemeral, psychological factors such as optimism and pessimism, greed and fear.
But if the business cycle doesn't exist then it surely must also be the case that sharemarket crashes and financial crises don't happen.
Once again, you may think that the evidence of crashes and crises is readily apparent from the historical record. It is, but the dominant stream in academic economics has become adept at ignoring it.
Although on the one hand the study of economic history has fallen out of fashion in university economics courses, on the other some academics have sought to prove that the Dutch Tulip Bubble of 1624 and the South Sea Bubble of 1720 were really examples of wrong-headed government intervention in markets, not market failure.
Do you see what all this means? It means academic economists tend to focus their attention on what happens when everything is going right - when markets are in equilibrium - and give little thought to the circumstances in which things could go wrong.
Now do you see why so few economists could see the global financial crisis coming? They didn't see it because they weren't looking for it.
(Even those who now contrive to believe that the problems we've seen in the past year and more were caused by faulty government intervention in markets, rather than any fault on the part of markets themselves, weren't warning that these interventions could lead to disaster. No, markets were getting their way and the anti-government brigade was content that all would be well.)
This is the charge made by David Colander, of Middlebury College in Vermont, and six other American and European academics in a much-quoted paper, The Financial Crisis and the Systemic Failure of Academic Economics, that's come to be known as the Dahlem report.
One implication of this is that, despite its pretensions to the contrary, economics isn't very scientific. Like the rest of us, economists suffer from what psychologists call ''confirmation bias'' - they look for evidence that confirms their prior beliefs.
They tend to interpret evidence in ways that favour their beliefs. They remember evidence that goes their way and forget evidence that doesn't. We all do this, it's part of our lack of rationality - and economists are just as irrational as the rest of us.
In contrast, the scientific method involves trying to falsify your hypothesis, not confirm it.
Milton Friedman argued in a famous paper that it didn't matter if a model was built on unrealistic assumptions (such as human rationality). What mattered was whether the model led to accurate predictions.
You wouldn't believe it, but there are still economists who draw comfort from this pragmatic doctrine. You say economics produces inaccurate predictions? Not that I've ever noticed, it doesn't.
Another consequence of the assumption that markets always work well is that economists put a lot of effort into arguing for the removal of small inefficiencies caused by government intervention - restrictive shopping hours, for instance - while academics do little to study or help prevent the gross inefficiencies caused by having thousands of workers lying idle as a result of financial crises and recessions.
Now, economists are terribly defensive people and they'll be able to think of exceptions to every charge I've made. It's true that not all academic economists doubt the existence of the business cycle or asset-price bubbles. There are even some who study our lack of rationality. And economic practitioners, including econocrats, don't all share the extreme views of the academics.
But what I've described is the dominant view prevailing among academic economists. Behavioural economists, for instance, are a fringe minority. And it's surprising how much influence the doctrines of the high priests have on the beliefs and behaviour of practitioners.
The trouble with economics is that the conventional theory has come adrift from the real world and taken on a life of its own. The answer is for academic economics to become less theory-driven and more empirical.
There needs to be a lot more emphasis on testing theories against empirical evidence - and looking for falsification - and on simply seeking to identify empirical relationships and regularities.
With enough of these, economists could search for new theories to explain those relationships. But we also need more study of how markets and economies come unstuck.
Ross Gittins is the Herald's Economics Editor.
Ads by Google
http://www.smh.com.au/business/selfrighting-markets-and-other-shibboleths-20090918-fvb3.html
15 September 2009
There will be no recovery until debt tumour is excised
YOU have just come from your annual medical check-up, where your doctor assures you that you are in robust health.
Walking jauntily down the street, you bump into a practitioner of alternative medicine. He takes one look and declares: "You have a serious tumour. It must be removed or you will die."
You ignore him as you always have. One day later, a stabbing pain cripples you. You call your doctor, who initially refuses to send an ambulance because he knows you are well. Only when you lapse into a coma does he send one. Initially the doctor waits for you to revive spontaneously. But as your pulse starts to weaken, reluctantly he calls a retired doctor who has experience of a similar inexplicable malady in the distant past.
She prescribes massive doses of tranquillisers, painkillers, vitamins, and oxygen - all substances that had been removed from the medical panoply due to recent advances in medical theory.
After a year of expensive medical treatment, you return to health, and are released from intensive care. As you stride from the hospital, you bump into the practitioner of alternative medicine. "But they haven't removed the tumour," he declares.
One shouldn't have to spell out the details of such an analogy, but in times of widespread denial, it is necessary.
You are the economy; the tumour is a massive accumulation of private debt; your doctor is neoclassical economics; and the retired colleague is a so-called ''Keynesian'' economist (who doesn't know it - since her medical textbooks were poorly written - but she's actually following another economist called Paul Samuelson, not Keynes).
The alternative medicine practitioner follows Hyman Minsky's financial instability hypothesis (based on what Keynes actually did say - as well as the wisdom of Joseph Schumpeter and, in whispers, Karl Marx).
The collapse of Lehman Brothers is the moment you slip into a coma, and the day the doctor takes you off life support and declares all is well … is next month.
The final reason for me being a bear is that I am that practitioner of alternative medicine. Minsky's financial instability hypothesis has been ignored by conventional economists for reasons both ideological and delusional. A small band of "post-Keynesian" economists, of whom I am one, have kept this theory alive.
According to Minsky's theory, capitalist economies can and do periodically experience financial crises (something believers in the dominant neoclassical approach to economics vehemently denied until reality - in the form of the global financial crisis - slapped them in the face last year).
These financial crises are caused by debt-financed speculation on asset prices, which leads to bubbles in asset prices. These bubbles must eventually burst, because they add nothing to the economy's productive capacity while simultaneously increasing the debt-servicing burden the economy faces.
When they burst, asset prices collapse but the debt remains. The attempts by both borrowers and lenders to reduce leverage reduces aggregate demand, causing a recession.
If the economy survives such a crisis, it can go through the same process again, with another boom driving debt up even higher, followed by yet another crash. But ultimately this process has to lead to a level of debt that is so great that another revival becomes impossible, since no one is willing to take on any more debt. Then a depression ensues.
That is where we were in 1987. The great tragedy of today is that naive neoclassical economists like Alan Greenspan and Ben Bernanke allowed this process to continue for another three or more cycles than would have occurred without their rescues.
Last year they did it again - only with methods they would have disparaged a mere year earlier (rational expectations macroeconomics, a modern neoclassical fad, preaches that government intervention cannot influence the level of economic activity at all - yet another belief that reality has recently crucified). This time, while the rescue has worked, the recovery they expect afterwards cannot happen - because there is almost no one left who will willingly take on any more debt.
This time, there is no re-leveraging way out. The tumour of debt has to be removed.
Steve Keen is associate professor of economics at the University of Western Sydney.
http://www.smh.com.au/business/there-will-be-no-recovery-until-debt-tumour-is-excised-20090914-fnug.html
Walking jauntily down the street, you bump into a practitioner of alternative medicine. He takes one look and declares: "You have a serious tumour. It must be removed or you will die."
You ignore him as you always have. One day later, a stabbing pain cripples you. You call your doctor, who initially refuses to send an ambulance because he knows you are well. Only when you lapse into a coma does he send one. Initially the doctor waits for you to revive spontaneously. But as your pulse starts to weaken, reluctantly he calls a retired doctor who has experience of a similar inexplicable malady in the distant past.
She prescribes massive doses of tranquillisers, painkillers, vitamins, and oxygen - all substances that had been removed from the medical panoply due to recent advances in medical theory.
After a year of expensive medical treatment, you return to health, and are released from intensive care. As you stride from the hospital, you bump into the practitioner of alternative medicine. "But they haven't removed the tumour," he declares.
One shouldn't have to spell out the details of such an analogy, but in times of widespread denial, it is necessary.
You are the economy; the tumour is a massive accumulation of private debt; your doctor is neoclassical economics; and the retired colleague is a so-called ''Keynesian'' economist (who doesn't know it - since her medical textbooks were poorly written - but she's actually following another economist called Paul Samuelson, not Keynes).
The alternative medicine practitioner follows Hyman Minsky's financial instability hypothesis (based on what Keynes actually did say - as well as the wisdom of Joseph Schumpeter and, in whispers, Karl Marx).
The collapse of Lehman Brothers is the moment you slip into a coma, and the day the doctor takes you off life support and declares all is well … is next month.
The final reason for me being a bear is that I am that practitioner of alternative medicine. Minsky's financial instability hypothesis has been ignored by conventional economists for reasons both ideological and delusional. A small band of "post-Keynesian" economists, of whom I am one, have kept this theory alive.
According to Minsky's theory, capitalist economies can and do periodically experience financial crises (something believers in the dominant neoclassical approach to economics vehemently denied until reality - in the form of the global financial crisis - slapped them in the face last year).
These financial crises are caused by debt-financed speculation on asset prices, which leads to bubbles in asset prices. These bubbles must eventually burst, because they add nothing to the economy's productive capacity while simultaneously increasing the debt-servicing burden the economy faces.
When they burst, asset prices collapse but the debt remains. The attempts by both borrowers and lenders to reduce leverage reduces aggregate demand, causing a recession.
If the economy survives such a crisis, it can go through the same process again, with another boom driving debt up even higher, followed by yet another crash. But ultimately this process has to lead to a level of debt that is so great that another revival becomes impossible, since no one is willing to take on any more debt. Then a depression ensues.
That is where we were in 1987. The great tragedy of today is that naive neoclassical economists like Alan Greenspan and Ben Bernanke allowed this process to continue for another three or more cycles than would have occurred without their rescues.
Last year they did it again - only with methods they would have disparaged a mere year earlier (rational expectations macroeconomics, a modern neoclassical fad, preaches that government intervention cannot influence the level of economic activity at all - yet another belief that reality has recently crucified). This time, while the rescue has worked, the recovery they expect afterwards cannot happen - because there is almost no one left who will willingly take on any more debt.
This time, there is no re-leveraging way out. The tumour of debt has to be removed.
Steve Keen is associate professor of economics at the University of Western Sydney.
http://www.smh.com.au/business/there-will-be-no-recovery-until-debt-tumour-is-excised-20090914-fnug.html
20 July 2009
The GFC a consequence of our loss of true professionalism; ethical behaviour ~ Gittins
True professionalism squashed in the stampede
Ross Gittins
July 20, 2009
There's one glaring contributory cause of the global financial crisis that no one wants to think about - much less talk about - because the obvious solution is so distasteful.
It's simply this: in the modern, mercenary world, paying someone to give you "independent" advice is a contraction in terms. The conflict of interest is obvious.
If someone's paying you to give them advice, the temptation to give them the advice they want to hear so as to ensure you retain their business is overwhelming.
The problem arises when the law requires companies to pay to obtain advice for the benefit of other parties who aren't paying for that advice and have no direct relationship with the provider of the advice.
The most glaring example is the role of the credit rating agencies, whose failure to provide genuinely independent advice contributed greatly to the financial crisis. They gave AAA credit ratings to sliced-and-diced mortgage-backed securities that were actually quite risky (because they included the mortgages of subprime borrowers) and ended up worth a fraction of their face value.
How could such amazing dereliction happen? It happened because it's left to the company that issues the securities to pay the rating agencies to award the rating that potential investors rely upon when deciding whether or not to buy the securities.
It seems clear that in an environment where everyone in the financial markets was getting in for their not-inconsiderable cut, the rating agencies yielded to the temptation to grant unjustified ratings to insistent customers.
They had no contractual relationship with the intended users of their supposedly independent ratings, but an all too real commercial relationship with the issuer buying the rating.
That's how so many Australian local councils ended up doing their dough. They were permitted to invest only in the safest AAA investments, and a bunch of dodgy securities were given AAA ratings thanks to excessive devotion to the profit motive.
When you think about it, you realise the commercial world has many examples of the law requiring companies to buy "independent" advice for the benefit of shareholders, investors, other creditors and other "stakeholders".
Next most obvious is the requirement that public companies have their financial accounts externally audited. No doubt in time we'll see loads of litigation against auditors who gave their clients unqualified audit reports right up to the time they collapsed.
Then there are the supposedly independent expert reports provided for company prospectuses. There are the reports of remuneration consultants that directors use in judging the (invariable) inadequacy of executive salaries, which they often claim as independent advice.
There's even company directors themselves. In theory they represent the interests of the shareholders, protecting them from the self-interest of executives.
But they have no real relationship with the amorphous mass of shareholders. Rather, all their contact is with the executives who, in reality, often appoint them - and probably often organise the advice on which the directors' own remuneration is determined.
You can see the same problem with the independent expert advice given in court cases. Such experts get paid to give their advice - no doubt well paid.
Can you imagine how much time lawyers would put into shopping for the right expert advice? The elaborate process by which potential expert witnesses signal the likely tenor of their advice?
It's remarkable how little public discussion there is of this patently obvious problem: that advice one party buys for the benefit of other, absent parties can't be independent of the interests of the party wielding the cheque book.
But it's not hard to guess why there's so much reluctance to face up to this anomalous arrangement: the obvious solution to the problem is unattractive to all sides.
It's clear the party that pays for the independent advice - the party that has the commercial relationship with the provider of the advice - must itself be independent of the party whose affairs are being reported on.
And it's obvious who the independent payer must be: the government (or some government agency). Governments could recoup the cost of obtaining the advice by levying a fee on the party being reported on (which is already responsible for bearing that cost under the present arrangements).
You can imagine how much enthusiasm there'd be for such a reform among either the reported-on or the reporters. Let the government get directly involved? Never.
And in the present anti-government environment it's hard to imagine the politician who'd be keen to expand the role of the public sector in such a way.
So it looks likely that, by tacit consent of the vested interests, we'll go on pretending that independent advice can be bought, and continue to provide shareholders, investors and others with false security.
But it's interesting to ponder how such a practice could have built up in the first place. How could it ever have been imagined that independence could be paid for?
I think it could have been imagined in a former, less mercenary era, when "professionalism" meant something very different from what it means today.
Today, to be professional means either to be paid rather than amateur, or it means being highly competent at your job.
In the old days, it meant putting the interests of your client ahead of your own interests. (Everyone who wasn't a professional was just "in trade".) What a quaint notion. Who today would delude themselves that they didn't care all that much about what was in it for them?
In the old days it wouldn't have been so hard to believe that auditors and credit raters - who considered themselves to be a moral cut above the rest of us, not much short of judges - were capable of keeping the interests of shareholders and other investors ahead of their desire to preserve a harmonious relationship with their client.
What changed? We all became a lot more money-hungry. Even in the time I've been in journalism it has become more commercially motivated.
Why have we become more mercenary? I believe it's an unintended consequence of micro-economic reform, or "neo-liberalism". We deregulated and privatised in an effort to increase competition in markets, thereby inducing greater economic efficiency.
It's worked a treat. Competition is more intense in most markets, the economy is more efficient and as a community we're a lot more prosperous than we were.
But in turning up the competitive heat we got people more focused on the monetary prizes and crowded out non-commercial motives and norms of accepted behaviour such as true professionalism.
One day we'll have to face up to the consequences of our reduced emphasis on ethical behaviour.
http://business.smh.com.au/business/true-professionalism-squashed-in-the-stampede-20090719-dphn.html?page=-1
Ross Gittins
July 20, 2009
There's one glaring contributory cause of the global financial crisis that no one wants to think about - much less talk about - because the obvious solution is so distasteful.
It's simply this: in the modern, mercenary world, paying someone to give you "independent" advice is a contraction in terms. The conflict of interest is obvious.
If someone's paying you to give them advice, the temptation to give them the advice they want to hear so as to ensure you retain their business is overwhelming.
The problem arises when the law requires companies to pay to obtain advice for the benefit of other parties who aren't paying for that advice and have no direct relationship with the provider of the advice.
The most glaring example is the role of the credit rating agencies, whose failure to provide genuinely independent advice contributed greatly to the financial crisis. They gave AAA credit ratings to sliced-and-diced mortgage-backed securities that were actually quite risky (because they included the mortgages of subprime borrowers) and ended up worth a fraction of their face value.
How could such amazing dereliction happen? It happened because it's left to the company that issues the securities to pay the rating agencies to award the rating that potential investors rely upon when deciding whether or not to buy the securities.
It seems clear that in an environment where everyone in the financial markets was getting in for their not-inconsiderable cut, the rating agencies yielded to the temptation to grant unjustified ratings to insistent customers.
They had no contractual relationship with the intended users of their supposedly independent ratings, but an all too real commercial relationship with the issuer buying the rating.
That's how so many Australian local councils ended up doing their dough. They were permitted to invest only in the safest AAA investments, and a bunch of dodgy securities were given AAA ratings thanks to excessive devotion to the profit motive.
When you think about it, you realise the commercial world has many examples of the law requiring companies to buy "independent" advice for the benefit of shareholders, investors, other creditors and other "stakeholders".
Next most obvious is the requirement that public companies have their financial accounts externally audited. No doubt in time we'll see loads of litigation against auditors who gave their clients unqualified audit reports right up to the time they collapsed.
Then there are the supposedly independent expert reports provided for company prospectuses. There are the reports of remuneration consultants that directors use in judging the (invariable) inadequacy of executive salaries, which they often claim as independent advice.
There's even company directors themselves. In theory they represent the interests of the shareholders, protecting them from the self-interest of executives.
But they have no real relationship with the amorphous mass of shareholders. Rather, all their contact is with the executives who, in reality, often appoint them - and probably often organise the advice on which the directors' own remuneration is determined.
You can see the same problem with the independent expert advice given in court cases. Such experts get paid to give their advice - no doubt well paid.
Can you imagine how much time lawyers would put into shopping for the right expert advice? The elaborate process by which potential expert witnesses signal the likely tenor of their advice?
It's remarkable how little public discussion there is of this patently obvious problem: that advice one party buys for the benefit of other, absent parties can't be independent of the interests of the party wielding the cheque book.
But it's not hard to guess why there's so much reluctance to face up to this anomalous arrangement: the obvious solution to the problem is unattractive to all sides.
It's clear the party that pays for the independent advice - the party that has the commercial relationship with the provider of the advice - must itself be independent of the party whose affairs are being reported on.
And it's obvious who the independent payer must be: the government (or some government agency). Governments could recoup the cost of obtaining the advice by levying a fee on the party being reported on (which is already responsible for bearing that cost under the present arrangements).
You can imagine how much enthusiasm there'd be for such a reform among either the reported-on or the reporters. Let the government get directly involved? Never.
And in the present anti-government environment it's hard to imagine the politician who'd be keen to expand the role of the public sector in such a way.
So it looks likely that, by tacit consent of the vested interests, we'll go on pretending that independent advice can be bought, and continue to provide shareholders, investors and others with false security.
But it's interesting to ponder how such a practice could have built up in the first place. How could it ever have been imagined that independence could be paid for?
I think it could have been imagined in a former, less mercenary era, when "professionalism" meant something very different from what it means today.
Today, to be professional means either to be paid rather than amateur, or it means being highly competent at your job.
In the old days, it meant putting the interests of your client ahead of your own interests. (Everyone who wasn't a professional was just "in trade".) What a quaint notion. Who today would delude themselves that they didn't care all that much about what was in it for them?
In the old days it wouldn't have been so hard to believe that auditors and credit raters - who considered themselves to be a moral cut above the rest of us, not much short of judges - were capable of keeping the interests of shareholders and other investors ahead of their desire to preserve a harmonious relationship with their client.
What changed? We all became a lot more money-hungry. Even in the time I've been in journalism it has become more commercially motivated.
Why have we become more mercenary? I believe it's an unintended consequence of micro-economic reform, or "neo-liberalism". We deregulated and privatised in an effort to increase competition in markets, thereby inducing greater economic efficiency.
It's worked a treat. Competition is more intense in most markets, the economy is more efficient and as a community we're a lot more prosperous than we were.
But in turning up the competitive heat we got people more focused on the monetary prizes and crowded out non-commercial motives and norms of accepted behaviour such as true professionalism.
One day we'll have to face up to the consequences of our reduced emphasis on ethical behaviour.
http://business.smh.com.au/business/true-professionalism-squashed-in-the-stampede-20090719-dphn.html?page=-1
16 July 2009
"Economists are often dimwits:" Yessirree!
The old saw that they know the price of everything and the value of nothing is well illustrated here. David Marr deconstructs the Productivity Commmission report on book publishing.
DON'T for a moment accuse the productivity commissioners of being philistines. They know it's not all about money. They recognise there's something Australian books do for us all that the market can't price. Not much, but something. It's the little extra they call the "unpriced externality component of the cultural benefits" of Australian publishing.
Dreadful jargon. They mean what the nation gets out of each of us individually buying and reading an uplifting work of Australian literature. And the conclusion they reach in their hefty report is that the market should no longer pay for this extra something as it has for years by restricting book imports.
The commissioners aren't singing psalms to the "externalities" of a vibrant national literature. They see negatives everywhere. We're too prone, for instance, to hog the cultural benefits for ourselves. "Most of the cultural value" generated by "hundreds of thousands of titles purchased and read in Australia each year", they say, will be "internalised" by the readers.
No net gain to the nation.
Hacking away at most of the arguments advanced by the authors, publishers and booksellers who support the present system, the commissioners ask themselves some big questions. Do Australian books, they wonder, really do Australia much good? "Even where books do contain ideas that have a wider influence on society, determining whether this influence translates into benefits for society can be contentious."
Very true.
These questions aren't, perhaps, the natural work of productivity commissioners. The strain shows. "While the aggregate cultural value of literature may be substantial," they write, "the cultural value of each book will vary, depending on matters such as category and genre, specific content and idiom."
Helpfully, they sketch what beneficial national literature looks like: writing that helps "diffuse social norms" in the interest of more "predictable or trustable" human behaviour. "The reading of books of cultural value may help individuals to feel more connected to, and to be more productive within, particular social groups or the wider society."
Gawd. They're the worst fears of Aust. Lit. confirmed.
Yet that's the stuff they argue deserves some sort of public support, not through a publishing industry that's prosperous because of a modest market rort, but through some kind of public subsidy. Yet their enthusiasm to get rid of the old isn't matched by any great clarity about the future.These arrangements are to be determined, but not by them.
This never-ending stoush is far from over. One side issue to emerge yesterday: the strange lack of confidence in both scrutiny and competition shown by the Productivity Commission's decision to sit tight on its 240-page report all day yesterday until 3 o'clock. This, a spokesman told the Herald, was to achieve market neutrality between TV, radio and newspapers. He wasn't joking.
http://www.smh.com.au/news/entertainment/books/book-report-a-jumble-of-garble/2009/07/14/1247337127083.html
DON'T for a moment accuse the productivity commissioners of being philistines. They know it's not all about money. They recognise there's something Australian books do for us all that the market can't price. Not much, but something. It's the little extra they call the "unpriced externality component of the cultural benefits" of Australian publishing.
Dreadful jargon. They mean what the nation gets out of each of us individually buying and reading an uplifting work of Australian literature. And the conclusion they reach in their hefty report is that the market should no longer pay for this extra something as it has for years by restricting book imports.
The commissioners aren't singing psalms to the "externalities" of a vibrant national literature. They see negatives everywhere. We're too prone, for instance, to hog the cultural benefits for ourselves. "Most of the cultural value" generated by "hundreds of thousands of titles purchased and read in Australia each year", they say, will be "internalised" by the readers.
No net gain to the nation.
Hacking away at most of the arguments advanced by the authors, publishers and booksellers who support the present system, the commissioners ask themselves some big questions. Do Australian books, they wonder, really do Australia much good? "Even where books do contain ideas that have a wider influence on society, determining whether this influence translates into benefits for society can be contentious."
Very true.
These questions aren't, perhaps, the natural work of productivity commissioners. The strain shows. "While the aggregate cultural value of literature may be substantial," they write, "the cultural value of each book will vary, depending on matters such as category and genre, specific content and idiom."
Helpfully, they sketch what beneficial national literature looks like: writing that helps "diffuse social norms" in the interest of more "predictable or trustable" human behaviour. "The reading of books of cultural value may help individuals to feel more connected to, and to be more productive within, particular social groups or the wider society."
Gawd. They're the worst fears of Aust. Lit. confirmed.
Yet that's the stuff they argue deserves some sort of public support, not through a publishing industry that's prosperous because of a modest market rort, but through some kind of public subsidy. Yet their enthusiasm to get rid of the old isn't matched by any great clarity about the future.These arrangements are to be determined, but not by them.
This never-ending stoush is far from over. One side issue to emerge yesterday: the strange lack of confidence in both scrutiny and competition shown by the Productivity Commission's decision to sit tight on its 240-page report all day yesterday until 3 o'clock. This, a spokesman told the Herald, was to achieve market neutrality between TV, radio and newspapers. He wasn't joking.
http://www.smh.com.au/news/entertainment/books/book-report-a-jumble-of-garble/2009/07/14/1247337127083.html
20 February 2009
Don't mention the debt
Our overseas borrowing is the great unspoken. It is the one subject assiduously avoided in public by Kevin Rudd, Malcolm Turnbull, Ken Henry, APRA, the Reserve Bank and the big banks. They probably even gloss over the matter when chatting privately among themselves.
It is Australia's Ponzi scheme. Bernie Madoff goes to Bondi. We keep getting those foreign dollars in while sending plenty out, but never quite as much, hoping no one will blow the whistle lest the whole game end.
Same deal in the US, though far more menacing.
Our economy, like the US, UK and many in the developed world, is a chronic current account deficit nation, splashing year-in year-out on the national credit card and hoping the global bank keeps increasing the limit.
What is the limit? We don't know that, yet. Yet surely it must be tested one day.
And in light of the recent developments in the US and particularly in Austria and Eastern Europe, that day may arrive sooner rather than later. It is as close as a foreign lender or two saying, no thanks, we've got enough of that, can't take any more.
Batt man
Let's put the Federal Government's stimulus package in perspective. Kevin Rudd reckons $42 billion will stimulate the economy through the hard months ahead, which it will to a point.
Crying Whitlam and Khemlani, Malcolm Turnbull reckons the package is simply more dollars borrowed from tomorrow to fund us today, which it is. It could be better spent.
Some will dissipate in dingy pokie parlours and in a frenzy of pink batts which, once domestic capacity is reached and the foreign pink batt players have sorted every house in the country, will leave a couple of barren pink batt factories.
To get to the point, fiscal stimulus is better than nothing. It will have some effect. Still, as a vision for the economic future it is akin to staring wistfully at the kitten in the room while ignoring the rogue elephant glowering behind it.
Looking at the numbers, according to the Australian Bureau of Statistics we have about 21,374,000 or so people living in this country. Our combined national debt (taking all government, personal, private and business debt into account) is $2.32 trillion ($3.4 trillion including equity) as of September last year - and growing. A falling Aussie dollar makes it more expensive to repay, or roll over.
Each and every Australian then, including babies, accounts for foreign borrowings of nearly $110,500 dollars. If we use the same method to calculate what the cost of Prime Minster Rudd's ``stimulus package'' is to the nation, we end up with a cost of nearly $2,000 per head.
Inching to the edge
To put it another way, says macroeconomic consultant Mark Beavan, Kevin's rescue package is increasing the nation's net debt by little more than 1%.
''Malcolm might happily forget that while his former government colleagues were steering the good ship Australia, the nation's total debt soared from a mere $700 billion in 1997 up to $3.2 trillion by the close of their term. An increase of 387%''.
Deregulation brought growth alright. But there is a yin for every yang. The Opposition may well brag that it left office with zero debt - zero government debt that is - as the upshot of policy was to lump it onto the consumer.
That is something the nation has to live with for a long time. In the meantime, it will do the sovereign credit rating no favours.
''In the fluid deregulated markets, the government (past and present) didn't think for a second about regulating the extent and rate at which the nation got itself into debt,'' says Beavan.
''It is too hooked on the drug of national economic growth for economic growth's own sake and refuses to allow the dream of many Australians (who still believe that housing prices can only go up) to be punctured along with our economy''.
Inflating house prices
Beavan believes that if all that debt were stripped away, irrespective of land shortages, property prices would be half to two-thirds of what they are today. ''If homebuyers don't have money on loan from the banks, then they could not afford to pay the higher housing price - so the price would have to fall or the market would stagnate''.
''Why did we not index the rate of debt growth (15% per annum compounding for the last 12 years straight) to that of the country's economic growth (less than 3% when the debt is stripped out)? Surely a lending system predicated on genuine national economic growth would be a far more practical solution?''
If governments had constrained debt growth, bank profits could not have kept growing at 15% a year. Or executive salaries at 30% for that matter. (Not to mention state stamp duty revenues.)
Bank binge
It is no coincidence that the banks' profit numbers match the growth in national debt.
As the banks have racked up their record profits they have come at a price, but that price is yet to be crystalised. Anecdotal evidence suggests loan-to-valuation ratios of 90% are still on offer so the banks are keen to keep the residential mortgage-growth dream alive.
Against the backdrop of consumer debt at 174% of GDP (down slightly from its record high of 176.9% last May) is the spectre of banks not being about to roll their wholesale funding offshore.
On the ABS numbers for September (the December lot will be interesting), there is $654 billion of net debt owed to overseas parties - banks and others who have problems of their own.
The December quarter numbers will show a sharp increase over September. In little over two months the Aussie banks have run wild with the government guarantee on wholesale funding, raising some $50 billion - or half of their estimated $120 billion in wholesale funding needs for the year.
The average size of borrowings is up threefold and the rush is widely put down to the view that there is a fair risk of global credit markets icing over once more. Better soon than never is the gameplan.
The pricing of the issues has improved since the guarantee was brought in and overall the demand for Australian bank paper is a vote of confidence in the banks and the system. Indeed, racked up against the sorry state of most western banks, our banks are killing it.
Wipe-out
A report from Boston Consulting group released last night estimated the global financial crisis has wiped some $US5.5 trillion from the market value of the world's banks, equivalent to 10% of global GDP.
The banking industry's market value fell $US4 trillion by the end of 2008, and shed a further $700 billion in the first three weeks of this year.
While US banks drop like flies and UK banks lapse into the hands of government, they are still producing loan growth before bad loan write-downs, and profits of $4 billion-plus per year.
Look no further than Westpac's $1.2 billion in cash earnings for the December quarter delivered yesterday. Revenue growth remained strong. Westpac, along with the rest of the Big Four are still pumping out the loans. Chief Gail Kelly conceded consumer delinquencies were on the rise, but the quantum is yet immaterial.
Thanks to the other government guarantee, the deposit guarantee, the banks have prevailed at the expense of non-bank institutions following a flight to safety last year. Bulking up their deposit-bases has also protected them, delivering far greater domestic funding.
Another 'D' word
Still, the worst is to come. The level of unemployment will largely determine the degree of mortgage defaults. Meanwhile, the great unspoken, the national debt, will continue to remain unspoken.
The monthly RBA bulletin was released today. A couple of countervailing trends: outstanding balances on credit cards were up from $44.7 billion to $45.2 billion, while growth in personal loans is down.
According to Professor Steve Keen, who keeps a close watch on Australia's debt situation (and is particularly bearish on the economy) these figures are evidence of people being cautious on taking on new debt but sufficiently hard-up they are not paying down their credit cards.
When it comes to indebtedness, on Keen's numbers Australia ranks third behind the UK (with household debt to GDP at an astounding 240%) and the US (180%). Australia's ratio has come back to 174.2% now. It is still way too high.
And it should be borne in mind asset values have been declining, so debt to equity ratios are going through the roof.
All this makes for a monumental challenge for the Government and the big banks.
Both have managed the crisis reasonably well until now but the cycle is likely to deteriorate from here and the big unknown is the potential for a foreign debt crunch.
mwest@fairfax.com.au
BusinessDay
It is Australia's Ponzi scheme. Bernie Madoff goes to Bondi. We keep getting those foreign dollars in while sending plenty out, but never quite as much, hoping no one will blow the whistle lest the whole game end.
Same deal in the US, though far more menacing.
Our economy, like the US, UK and many in the developed world, is a chronic current account deficit nation, splashing year-in year-out on the national credit card and hoping the global bank keeps increasing the limit.
What is the limit? We don't know that, yet. Yet surely it must be tested one day.
And in light of the recent developments in the US and particularly in Austria and Eastern Europe, that day may arrive sooner rather than later. It is as close as a foreign lender or two saying, no thanks, we've got enough of that, can't take any more.
Batt man
Let's put the Federal Government's stimulus package in perspective. Kevin Rudd reckons $42 billion will stimulate the economy through the hard months ahead, which it will to a point.
Crying Whitlam and Khemlani, Malcolm Turnbull reckons the package is simply more dollars borrowed from tomorrow to fund us today, which it is. It could be better spent.
Some will dissipate in dingy pokie parlours and in a frenzy of pink batts which, once domestic capacity is reached and the foreign pink batt players have sorted every house in the country, will leave a couple of barren pink batt factories.
To get to the point, fiscal stimulus is better than nothing. It will have some effect. Still, as a vision for the economic future it is akin to staring wistfully at the kitten in the room while ignoring the rogue elephant glowering behind it.
Looking at the numbers, according to the Australian Bureau of Statistics we have about 21,374,000 or so people living in this country. Our combined national debt (taking all government, personal, private and business debt into account) is $2.32 trillion ($3.4 trillion including equity) as of September last year - and growing. A falling Aussie dollar makes it more expensive to repay, or roll over.
Each and every Australian then, including babies, accounts for foreign borrowings of nearly $110,500 dollars. If we use the same method to calculate what the cost of Prime Minster Rudd's ``stimulus package'' is to the nation, we end up with a cost of nearly $2,000 per head.
Inching to the edge
To put it another way, says macroeconomic consultant Mark Beavan, Kevin's rescue package is increasing the nation's net debt by little more than 1%.
''Malcolm might happily forget that while his former government colleagues were steering the good ship Australia, the nation's total debt soared from a mere $700 billion in 1997 up to $3.2 trillion by the close of their term. An increase of 387%''.
Deregulation brought growth alright. But there is a yin for every yang. The Opposition may well brag that it left office with zero debt - zero government debt that is - as the upshot of policy was to lump it onto the consumer.
That is something the nation has to live with for a long time. In the meantime, it will do the sovereign credit rating no favours.
''In the fluid deregulated markets, the government (past and present) didn't think for a second about regulating the extent and rate at which the nation got itself into debt,'' says Beavan.
''It is too hooked on the drug of national economic growth for economic growth's own sake and refuses to allow the dream of many Australians (who still believe that housing prices can only go up) to be punctured along with our economy''.
Inflating house prices
Beavan believes that if all that debt were stripped away, irrespective of land shortages, property prices would be half to two-thirds of what they are today. ''If homebuyers don't have money on loan from the banks, then they could not afford to pay the higher housing price - so the price would have to fall or the market would stagnate''.
''Why did we not index the rate of debt growth (15% per annum compounding for the last 12 years straight) to that of the country's economic growth (less than 3% when the debt is stripped out)? Surely a lending system predicated on genuine national economic growth would be a far more practical solution?''
If governments had constrained debt growth, bank profits could not have kept growing at 15% a year. Or executive salaries at 30% for that matter. (Not to mention state stamp duty revenues.)
Bank binge
It is no coincidence that the banks' profit numbers match the growth in national debt.
As the banks have racked up their record profits they have come at a price, but that price is yet to be crystalised. Anecdotal evidence suggests loan-to-valuation ratios of 90% are still on offer so the banks are keen to keep the residential mortgage-growth dream alive.
Against the backdrop of consumer debt at 174% of GDP (down slightly from its record high of 176.9% last May) is the spectre of banks not being about to roll their wholesale funding offshore.
On the ABS numbers for September (the December lot will be interesting), there is $654 billion of net debt owed to overseas parties - banks and others who have problems of their own.
The December quarter numbers will show a sharp increase over September. In little over two months the Aussie banks have run wild with the government guarantee on wholesale funding, raising some $50 billion - or half of their estimated $120 billion in wholesale funding needs for the year.
The average size of borrowings is up threefold and the rush is widely put down to the view that there is a fair risk of global credit markets icing over once more. Better soon than never is the gameplan.
The pricing of the issues has improved since the guarantee was brought in and overall the demand for Australian bank paper is a vote of confidence in the banks and the system. Indeed, racked up against the sorry state of most western banks, our banks are killing it.
Wipe-out
A report from Boston Consulting group released last night estimated the global financial crisis has wiped some $US5.5 trillion from the market value of the world's banks, equivalent to 10% of global GDP.
The banking industry's market value fell $US4 trillion by the end of 2008, and shed a further $700 billion in the first three weeks of this year.
While US banks drop like flies and UK banks lapse into the hands of government, they are still producing loan growth before bad loan write-downs, and profits of $4 billion-plus per year.
Look no further than Westpac's $1.2 billion in cash earnings for the December quarter delivered yesterday. Revenue growth remained strong. Westpac, along with the rest of the Big Four are still pumping out the loans. Chief Gail Kelly conceded consumer delinquencies were on the rise, but the quantum is yet immaterial.
Thanks to the other government guarantee, the deposit guarantee, the banks have prevailed at the expense of non-bank institutions following a flight to safety last year. Bulking up their deposit-bases has also protected them, delivering far greater domestic funding.
Another 'D' word
Still, the worst is to come. The level of unemployment will largely determine the degree of mortgage defaults. Meanwhile, the great unspoken, the national debt, will continue to remain unspoken.
The monthly RBA bulletin was released today. A couple of countervailing trends: outstanding balances on credit cards were up from $44.7 billion to $45.2 billion, while growth in personal loans is down.
According to Professor Steve Keen, who keeps a close watch on Australia's debt situation (and is particularly bearish on the economy) these figures are evidence of people being cautious on taking on new debt but sufficiently hard-up they are not paying down their credit cards.
When it comes to indebtedness, on Keen's numbers Australia ranks third behind the UK (with household debt to GDP at an astounding 240%) and the US (180%). Australia's ratio has come back to 174.2% now. It is still way too high.
And it should be borne in mind asset values have been declining, so debt to equity ratios are going through the roof.
All this makes for a monumental challenge for the Government and the big banks.
Both have managed the crisis reasonably well until now but the cycle is likely to deteriorate from here and the big unknown is the potential for a foreign debt crunch.
mwest@fairfax.com.au
BusinessDay
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