We’ve had almost a week now of the press gallery writing about the alleged effects of the bank guarantee deposit on managed funds. With lots of alarums… Commentators who were praising Kevin Rudd a couple of weeks ago for “decisive action” to address the financial crisis are now bemoaning “policy on the run”. Is this as good as it gets when it comes to serious analysis of the economy and of Australian politics?
It’s crystal clear that the government was never going to offer a guarantee to bail out investors in market-linked funds. There’s no surprise here – Wayne Swan and Kevin Rudd both said so days ago, yet we’ve had the media either speculating on whether they will or attacking them for not being clear about their intentions for days. Nor was the offer to allow managed funds to become banks some silver bullet. It was obviously something of a feint to urge the big banks, who in many cases are the owners of such funds, to provide liquidity and capital and/or rejig their corporate structure. Meanwhile the government has been exploring the possibility of allowing ASIC to grant permission to such funds to allow redemptions in the case of urgent financial need, something that is currently restricted because of legislative requirements to treat all investors equally. But the tone of the commentary is that was meant to have been done yesterday.
Of course, if it had been, it would have been “policy on the run” and dire “unintended consequences” would no doubt follow as night follows day in the meaningless 24/7 media cycle. And you’d need to have been reading the Fin Review to know that there are current regulatory and legislative barriers to action. The rest of the press gallery apparently think there are a stack of magic wands lying around in Treasury.
Malcolm Turnbull blew this story out of the water by his admission that he’d bailed out of his own property fund investments – before the bank deposit guarantee supposedly distorted the market. Not so much because of the attack line Wayne Swan used – though there is actually some truth in pointing out that he’s radically inconsistent and supremely opportunistic in his rhetoric on the financial crisis – but because it reinforces the point that you have to have a fair bit of dosh in the first place to be an investor in such funds. Toffee voiced members of the haute bourgeoisie popping up on the news to complain that they won’t be able to afford their contemplated holidays on the Riviera (I kid you not…) haven’t helped much either in popularising the opposition and media’s “struggling retirees with millions of dollars they can’t access because of teh Government!” narrative.
So there should be no great surprise that Kevin Rudd’s been throwing out a bit of a “we feel your pain” lifeline to folks with big credit card debts instead, prompted by Sydney University research finding that one of five workers are struggling to meet personal debt and mortgage repayments. This is a much bigger constituency than the less than 200 000 people with money tied up in high risk market-linked funds, and… guess what?… they’re also the people who swung to Labor in the last election.
But, as usual, from the media, we’ve had a nonsensical series of reports and commentary focusing on a minority of comparatively well off folks, who ought to know that riskier investments… carry risk. They won’t be bailed out. And they shouldn’t be. And Malcolm Turnbull feeling the pain of people with a few hundred grand they can’t access immediately is not a political masterstroke.
The performance of the ABC in swallowing this guff hook, line and sinker has been particularly pathetic and reprehensible.
Eh? Turnbull’s gripe, as I understand it is not the concept of an ADI guarantee, but the unlimited nature of the guarantee proposed by Rudd.
Turnbull said that the unlimited ADI guarantee encouraged the flow of capital from market-linked accounts to ADIs. Turnbull’s actions were consistent with that prediction.
An ADI guarantee was a good concept, but the unlimited guarantee chosen by Rudd was both policy on the run and is having detrimental market impacts.
Not having a full guarantee would have the effect of encouraging people to pull funds from banks and open multiple accounts to spread the risk. That would also cause instability in the market and is not ideal. I believe that was a point John Quiggin made recently. Damned if you do and damned if you don’t.
Have you got a link or an example or something? I find that hard to believe.
You realise when you put your money into managed funds you do not have the same protections as you get with a term deposit, let alone a bank account.
That’s part of the trade off-
You plonk for security at a lower yield, OR go gangbusters, in the knowledge that if you pick the wrong fund you might get fingers “burnt”.
It irks me, as someone who played safe and forewent a higher yield, that I now see those who knowingly forwent security, chasing quick bucks, getting the reward for caution forwent, that I paid for by missing higher yields.
Why, in turn, do I not get paid a ten%interest differential compensation for choosing security but missing out when riverboat gamblers get favoured, but apparently not thrifty types who pay the tacit dues?
Changing goalposts and it stinks as far as I’m concerned, esp the “Australian” and the Tories.
“Eh? Turnbull’s gripe, as I understand it is not the concept of an ADI guarantee, but the unlimited nature of the guarantee proposed by Rudd.”
The opposition position is generally that every detail that is activated, that is not at the Turnbull suggestion, is wrong and likely to destroy their economy. And the media seem pretty happy and lazy enough to run with that line.
Mark, I know where you’re coming from with the financial reporters, I don’t think I’ve heard many that have been consistent. Maybe we should start referring to “Journalism on the Run” as well.
So, is it policy on the run from the government? Probably not, it’s more like a ‘finger in thy dike’ approach, where they’re identifying the places in the economy that are starting to crack and jamming big wads of cash in them. It’s rushed in that respect, that the money is just being thrown around, but it’s also an attempt to respond quickly while they have the resources to actually slow the rot. So … some good, some bad.
As for Malcolm? Who knows what’s going on in that head of his at the moment. He really needs to stop for a minute and think out his line of attack, there are weakness in the approach that Kevin is taking, he just needs to think it out a bit more. On the plus side, the fact that most of the media are still listening, even the ABC, could be a good thing, IF he get’s his line right.
PinkyOz
Current debts on credit cards are about $45 billion, which puts the recent $10 billion ‘stimulus package’ into perspective. While the interest rates charged on credit cards are undoubtedly a problem, the easy availability of credit has been a bigger one.
I suspect the banks will soon have lots of empirical data to justify the argument that high interest rates on credit cards reflect the elevated risk of default.
Ken,
Having done that analysis for some of the banks I can assure you that credit cards are not immensely profitable, partly due to credit losses but also due to the high amount of work they require.
I’ll probably lose a bit of money on the races on the weekend. Will the government bail out those losses?
Nonsense.
Any cap can easily be circumvented by the creation of multiple accounts under the limit of the cap.
A core constituency of the ABC are folks with trust accounts.
So the narrative has moved quickly from ‘policy by committee’ to ‘policy on the run’. Presumably there was some golden time, probably during the Howard era when policy took just the right amount of time, and was fully endorsed as prescribed by the usual suspects.
And it’s all so friggin’ circular. Boring Brissenden was at it again the other daysaying something like ‘the government has been critisised for having no narrative and and governing by committee, but now it’s policy on the run’ or some such crap. Critisised by whom? Oh yes, commentators like you.
Andrew @ 7 – if they’re not all that profitable, why are so many banks (and bank-like organisations) involved in them? Someone must be bringing in the cash, otherwise companies would be getting out of the business and finding more useful things for their time and money. I always figured them for gold-mines, which is why people keep getting offers to increase their limit in the hope that it’ll also increase their interest payments.
The credit card gold mine is not the interest rates but the late fees and over limit fees. The customers the banks love most are those who sometimes spend over their limit, always pay their account, but always pay it late.
What has been totally lost in all this turnbullshit about policy on the run and limits and the rest of it is the other part of the guarantee: to wholesale market lenders to the banks. Because Australians save very little, bank deposits are sufficient to fund no more than about half of bank loans. Our banks make up the rest of it by borrowing, much of it from overseas. As anyone knows who has been paying attention, international financial markets are largely seized up at present. Even the 4 major banks’ AA credit rating (4 of 14 such rated banks around the world) may mean it is difficult for them to roll over loans as they mature.
Hence the guarantee, effectively lending banks the government AAA credit rating. Having done that for lenders to the banks, it is extremely awkward to not do it for depositors as well.
There’s an analysis of this subject on The Political Sword: <a href=”http://www.thepoliticalsword.com” The bank guarantee – what does the Opposition and the media really believe?
Sorry about the link. There’s an analysis of this subject on The Political Sword: The bank guarantee – what does the Opposition and the media really believe?
Again, sorry about the link. Hopefully third time lucky. There’s an analysis of this subject on The Political Sword: The bank guarantee – what does the Opposition and the media really believe?
AA – just an aside… do you realise you can test your link down in the preview window before submitting your comment? right click, open in new tab, Robert is the fellow you always thought was your uncle but who always looks just a little too long at your mother when he’s drunk.
Thanks FDB. The problem was first a missing closing tag, then missing inverted commas after the address. I should have known better. But I don’t understand how the LP address got mixed in with The Political Sword address in my second try.
Andrew how much of the work involved comes from the stupid ‘loyalty’ schemes and the bewildering array of products on offer? Presumably they are all intended to induce people to use the card to the enrichment of the issuer.
However I’m sure they are not a guaranteed gold mine, the ridiculous fees that are charged for the feelgood status of a platinum or even more exotic card suggest the banks are looking for new ways to make money from them.
Ken,
Essentially they are used as loss (although they do not lose much, if anything) leaders – get the punters in and then try to sell them other products. At the moment deposits are the best products they can sell you as the interbank funding is so expensive. That changes from time to time though – a couple of years ago the personal loan market was one of the better ones, with agricultural loans also doing well.
As MikeM noted, though, much of the revenue on CCs come from the fees attached to them. Even with these they are not really highly profitable.
If you, as a borrower, want to make the best of a credit card, the way to do it is to make cash withdrawls on one card, pay it off with the introductory offer of another (there are a few at 2.9% at the moment) and use the funds you withdrew to open a term deposit (paying 8.0% as some are doing) with another bank. Your margin is about 5% on whatever you can draw on. One of the few ways to actually get the banks to pay you money.
It is a fair amount of work for $500 per $10,000 drawn, though. It might be a good way to establish a good credit history if you need one.
(Insert standard disclaimers on financial advice here – personal circumstances, discuss with financial advisors etc.)
fine @ 8 – its all about risk. If you bet on a favourite for a place you might even come out in front or even but there will be no big win. On the other hand if you take a plunge on a 40 /1 outsider and win you’ll be a hero and a great judge.
If as is more likely your outsider trots home 3 from the arse end of the field you will be entitled to go whinging to the government for hardship bailout monies or at the very least be able to go on Current Affair or what ever its called and complain how the greedy bookies seduced you, a battler, into parting with your hard earned.
How true, Years ago in the National Times a cartoon appeared! The dialogue ran as follows:-
Dad, what are economists?
“Economists are a loyal brotherhood of mathematical geniuses,
skilled in the theory and practice of efficient resource of management…
and who, when the economy goes down the drain,
resolutely band together…,
totally disagree on a remedy!”
Apologies to the cartoonist, who I would like to congratulate.
Apologies to economists, who are trying to become less dismal!
I am a mathematician, I deal in probabilities which is why I do not bet on horses, stock markets or any activity subject to the vagaries of human irrationality.
I am also a historian, which is why I have written the above!
Finally , while I am the ABC are of the same age, alongside the Sydney Harbour Bridge; the bridge and I are doing well! The ABC is suffering from hardening of the veins, senior moments and a delusion of grandeur!
jOck
What about only letting an organisation or person claim once from the govt. So they can split their money as much as they want, but they only get paid out once and aren’t covered multiple times if multiple institutions fails. This provides a cap that is much harder to avoid. Its a lot more expensive to create many legal entities each holding $50,000 than it is to just open a bank account.
Hrm – a $100,000 (or even less) is a lot of money. But doesn’t last very long if you need to survive on it for another 30 years. And seriously when the average person is going to live for another 20 years after retirement, some for many more, if all they do is put their money into the banks, they’re going to require a whole lot more superannuation.
Not that I believe there should be a govt guarantee for these funds, but equating them to gambling at the casino or horse races is pretty silly and says quite a bit about the financial literacy of people making those sorts of comparisons.
And there’s lots of people out there from which banks make very little money from with CC (ie those who understand and use them properly). Its really a case of the uneducated and and those with poor self control cross subsidising those who do know what they’re doing. I’ve never been sent an unsolicited credit increase to my card but then they probably take into your payment record. My wife used to be quite bad about paying the whole amount off each month and got offers all the time.
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Professor Joseph Stiglitz and Linda Bilmes book The Three Trillion Dollar War offers an interesting perspective on the current GFC.