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Life, Culture and Politics from BrisVegas
Larvatus Prodeo was an Australian group blog which discussed politics, sociology, culture, life, religion and science from a left of centre perspective. more»
Hmm, interesting. I like this piece by Bill Mitchell: Most bananas are atheists …
When did we reach the point where we are not even outraged that big banks can be handed billions in hand-outs… only to then give huge bonuses to the clowns who got us into this mess, whilst everyday people struggle to put food on the table?
Every side of politics appears to be accepting that we need to prop up the system with “tax payers” money…
Bring back Robin Hood I say.
I like how markets reporters attribute motives to stock movements – it’s sorta like a more developed ouija board.
People who are outraged at high banking salaries do not understand basic economics. The Investment banks that succeed are some of the best-run companies around and the bankers who earn these high salaries and some of the smartest people in the country. They are paid high wages because they generate such high profits to the bank.
Banks and finance institutions are a benefit to society because they allocate capital to its most efficient use. Consider how much better the world is because of all the innovative companies that have been able to raise money through the stock market. Google, Ebay, Amazon, Microsoft, Apple are just a few. (These are admittedly all technology firms but that has been the industry of major innovation in recent years).
I hypothesize that much of the populist “outrage” at high banking salaries comes from people who do not contribute as much to society as do the bankers.
If the banks are poorly run, then let them fail and the industry, the companies and society will be better off for it. But if they succeed – like they overwhelmingly do, then let us not resent their success, but strive to match it ourselves one day.
Suez @ 2 – are you talking about Australian or overseas banks?
The only things that has happened in Australia is the Deposit Guarantee to all Approved Deposit Taking Institutions and their activites in supporting the Orgination market for smaller lenders.
Time for the Deposit Guarantee to be scrapped.
Razor,
The deposit guarantee should never have been put in place. Given that, I would agree.
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Suez,
While I do not always read Vanity Fair, a recent piece on the banking crisis was a good one. The banks were, for the most part, actually reluctant to take the TARP funds but they were told they had to. As VF put it, it was a reverse hold up. The regulators put a (regulatory) gun to their heads and told them to take the money.
In some cases they did need it, in others not. Where they did not need it and were told to take it (like, for example, Goldmans) do you think it appropriate that the government then tries to dictate pay policies?
Andrew, I completely agree that the Deposit Guarantee was not required. More symbolism from Krudd.
The Federal Oppositionhas certainly dropped the ball on not constantly hammering the Government about the impact of the deposit Guarantee on Mortage Funds and all those still with funds locked up.
But the fact is that even if the deposit guarantee were scrapped everyone would expect it to be reinstated in the event of another run on liquidity. Therefore, scrapping it is merely a fig leaf to cover up the truth that the state underwrites the financial system.
Market finance is irreducibly subservient to sovereign control and nothing will change that reality.
Hmm… there is an interesting article linked to “most banans are atheists about Argentina.. “Why Pander to the Finacial Markets”..
THanks for sharing. Very interesting & worthwhile read for those trying to counter the arguments of th neo-liberals who are trying to whip up histeria against governmental spending on services / employment using the bogey man debt….
What’s wrong with the deposit guarantee? The banking system is built on the foundation of depositor confidence and there was always an implied guarantee in that none believes that the government will let a bank fail in that way.
d
Darryl – the implied Guarantee isn’t worth the paper it is written on.
Banks have always failed and always will. I was suprised as an Undergraduate when studying Economic History for the first time the amount of bank failures in the past. It is just part of the normal cut and thrust of business.
The GFC has highlighted the ambiguity in the system – small banks can be allowed to fail but banks that are too big to allow to fail wont be allowed to fail. Is that fair – depends.
Anecdotally many Australians believe the Deposit Guarantee applies only to the Big Four. The Big Four have doen nicely from this in terms of deposit growth and business share. Before the GFC appeared the Big four had been steadily losing market share to smaller ADIs. That has reversed at the moment. As global liquidity improves and public risk appetite improves it will probably reverse.
Sorry, I didn’t answer what is wrong with the Guarantee – it distorts the system. This is shown by the very obvious lock up of the Mortgage Fund market. It is also very arbitary – why draw the line at deposits of $1 million and then start charging? This forces depositors to have multiple deposits to stay under the $1 million limit or cop the charge. Why the arbitary $1 million limit – why not $100,000 or $10 million? – Why not just not charge? Why should the government make a profit from it, especially when they know how well capitalised our ADIs are.
It sucks on terms of equity (you lefties love that one), efficiency and distorts the markets.
To me, the real problem is the moral hazard it brings. This has had a terrible effect historically on the US banks, as provided you keep under the $100k limit there it really does not matter how bad the bank is the depositor is protected by the full faith and credit of the US government. The effect is simple – dodgy banks are propped up at the expense of the good ones, increasing the incentive for a bank to take bigger risks.
In reality, of course, the chances of an Australian government letting a big four bank collapse is (effectively) nil – but even then the question of whether a deposit guarantee or some other mechanism is the best one is (IMHO) fairly simple. Guaranteeing all deposits is a really blunt stick and another mechanism – like an orderly work out process – is almost bound to be better.
Funny – I was under the impression that this thread had been created for Daggett, but there’s no sign of him. Oh well, never mind.
There is a fundamental problem with banking that is related to the way interest rates are now set by central authorities.
Interest is supposed to represent risk – a premium you pay to cover the lenders assessment of the risk of getting the money back. The lenders profit comes when they lend prudently.
However, this relationship has now been fundamentally broken. Interest rates are now not representing risk, rather they are a blunt instrument of social policy.
The appalling downside of this change is that artificially cheap credit has done two things: massively expanded the amount of credit in the system; removed the assumed social compact between employers and employees that their wages would keep pace with the costs of living.
The result? A massive blowout in personal debt that used to be inflation. The inflation genie was never really stuffed back in the bottle at all, he just assumed a different face.
This article is slightly OT but is about a specific market , bubbles and investor behaviour.
http://www.newcriterion.com/articles.cfm/The-art-market-explained-4337
Ute Man – have to disagree. There is still a strong risk-reward relationship in interest rate markets. In fact the GFC highlighted the problems in assessing risk properly and exposed incorrect pricing. In Australia offical interest rates have fallen and so have mortgage rates, however credit card rates haven’t, nor have commercial rates and lending criteria has tightened significantly. The GFC actually re-set the risk-reward interest rate settings to a more normal setting.
As for your contantion that debt levels reflects inflation could win you a Nobel Prize if you spruik it hard enough. Actually maybe don’t – Obiwan got his for doing bugger all.
I’ve long thought we wought to reform the way finance for residential property is given out.
It seems to me that one could insist that all applicants for residential property could be required to have at the time of application and settlement at least 5% of the sale price of the property in cash or some other liquid asset above all other outstanding debts. Over time, this minimum equity could be progressively incremented — say by 0.1% per month until all applicants would have to have at least 20% to apply.
A further rule could prohibit loans that would demand more than 30% of household income (after other recurrent commitments and deemed expenses for dependents, maintenance etc were deducted) being paid in debt service.
The same rules would apply to refinance, second mortgages etc
Due diligence would be enforced on lenders so that those who failed to follow the rules would forfeit so much of their claim as was above the threshholds.
This measure would, over time, place a cap on house prices by enforcing buyer discipline and in the end, it would virtually extinguish mortgage stress and the whole McMansion urban sprawl problem too. An added advantage would be that it would make moving house a lot more feasible and of course encourage saving, which would in turn yield greater funds for productive investment and pretty much make housing bubbles impossible.
Razor wrote:
Not for institutions who are the main beneficiary of low federal rates – it’s a rot that starts at the top. Rates might be high on credit cards, but that seem to be a function of a total lack of competition (or market failure). Surely if I wa a better risk I would be able to negotiate a better rate from the bank for a visa card, but it’s one size fits all. That isn’t pricing risk, it’s collusion.
I’m not expecting that nobel prize any time soon though – I have as much trouble as other posters with the bubble in house prices that make entry level housing unaffordable. Yet more meddling in a market that would have been better as higher levels of public housing rathere than the stupidity that is the first home buyers grant.
On the basis of my own personal experience of about 40 years, I can count the following weaker areas in managening the banking and financial institutions leading to the ‘ECONOMESS’ of such a great magnitude:-One.Risk management and value of ‘trust’ reposed by depositirs and all concerned were belied.Two.The credit agency’s quality of performance was never questioned and bankers followed them blindly.Three. Non of the CEOS ever appeared to take responsibility for failure. In fact most of them proved to be ‘white elephants’.Four.There was no answer as to who was auditing the auditors. For want of desired standards of of performance evaluation it was not possible pinpoint responsibility. Even today this is the case.Five.Difference between interest rate and usury was not recognised.Creditcard debt @ 30% is destined to fail.Six. Branc openings and expansion were done without considering cost effectiveness and the criteria as to the yield on every dollar were completely ignored.Seven.Finally those at the helm of affairs practiced only the system of financial audit acting as mere money managers not as bankers.They never knew about the need for social audit or management audit which could highlight their own quality of management and measure the impact of banking services on the quality of life of the society to which they belonged.I think these reasons need to be probed and corrective measures adopted after the fisco for better future.
Fran Barlow @18, it’s been a while since I set out to buy property, but IME there is already a financial penalty called mortgage insurance for borrowing above a certain percentage, plus the extra repayments you need to make for that part of the loan. There has long been a rule of thumb that a mortgage should cost, at most, a third of your incomings.
Legislating to increase the size of the minimum deposit to 20% makes it almost impossible for low-income earners to ever consider owning a house… and home-owners are favoured in our tax system. We don’t want to entrench poverty more than we are already doing.
Incidentally, the very strict mortgage arrangements of the Fifties still enabled the Australian Ugliness to occur then. Very interesting and amusing read — every time I see a magazine article that talks about features, I think of Boyd’s fulminations! Nothing’s changed.
AIUI, Chookie, the 1/3 rule is honoured often in the breach, and of course, little allowance was made during the early years this century to ensure people did not overcommit.
You say:
I disagree. If a 20% rule came into place in 12.5 years time (0.1% per month * 150 months) then what you would see is a plateauing of house prices since perceptions of equitable advantage through asset price inflation would dissipate. Right now, saving makes little sense because no low income earner can save money at the rate that house prices periodically appreciate. Indeed, we’ve rented since 1991 even though our household income over the last ten years has equalled or exceeded the average wage during the corresponding period. There is simply no way that we could consider borrowing to purchase even now, so it is plainly going to be well outside the realms of someone on low income to do so, except by buying out in the boondocks, spending large slabs of your life commuting and living on the edge of losing everything. You want a Howard-battler constituency? That’s how to get the hostage voters the Liberals need to subvert good public policy.
Current policy also subverts savings and thus lowers the amount that can be lent for productive investment. It undermines current account by encouraging consumption mostly of stuff Australia imports.
And yet, a policy of encouraging saving is one the Liberals would find hard to challenge.
Sorry Fran, I don’t really see how a minimum 20% deposit would affect house prices, apart from making it hard for people at the bottom, as I said. I might not have understood your terms, though.
Does “plateauing of house prices since perceptions of equitable advantage through asset price inflation would dissipate” = “people would stop believing that they could make a real profit on their houses, so prices would plateau”? I don’t see the logic. Prices in Sydney go up because we have an increasing population and a finite amount of land, due to our geography, and because we don’t provide new housing fast enough — there are people dossing on floors and subletting is back. Moreover, only some parts of Sydney are desirable (ie, the prices rise faster than the average), being either scenic or having good transport links, or occasionally both.
Which policies do you think subvert savings? I would like to see ordinary savings accounts exempted from tax, but at current interest rates, that’s not much encouragement!
Chookie@23 said:
The measure would take liquidity out of the market and so, ceteris paribus, the price of the good (in this case housing) must fall. You can only ask what someone will pay and if there is less cash competing for goods, then the price falls. As people save more and pay less for housing if wages keep pace with inflation, if real house prices fall, then eventually a new equilibrium will be established around the new parameters — 20% equity and 30% of adjusted houshold income.
Putting downward pressure on residential prices means that ultimately acquiring land will become cheaper for the state, meaning that public and quasi-public housing would become viable options. It would tend to encourage urban consolidation and higher densities which underpins other public policy goals.
You’re only looking at one factor. With less liquidity in the market, prices fall — look at the housing market in the UK and the US post-GFC.
Easy credit for starters. Why save when borrowing is easy and prices seem likely to rise faster than you can save?
Fran,
In practice, there is already a 20% LVR (loan to valuation) limit on home loans – above which the mortgagee must pay LMI (lender’s mortgage insurance) if the loan is to be securitised, as most are. The closer to 100% LVR you get, the higher the LMI rate, much like the system you are proposing.
Additionally, APRA enforces higher capital margins for lenders engaged in high LVR lending, and even higher if they do not take out LMI on the loans.
While in general I am opposed to this sort of restriction, this one – in the context of all of the other regulation – does seem to have meant that there has been no widespread collapse in Australian mortgages.
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Ute Man,
While there has been some disconnect from a “true” (i.e. purely market set) interest rate it is difficult to know exactly how big that disconnect is – as to try to guess the “true” price in the current (at least partially) false market is difficult, if not impossible.
That said, I would speculate that it is not too far from the current rate, as the predominant rate between banks is BBSW/BBSY (the bank bill swap rate) which show a fair amount of variation from the official RBA rates, and often lead it.
As I said, though, purely speculation on my part as it is difficult to know what the “true” price would be.
Andrew Reynolds@25
That’s not at all like the system I’m proposing as it allows a loophole large enough to drive a McMansion towed by a prime mover through. I was proposing a system in which one simply couldn’t lend to those who didn’t have the equity. The system as it stands is aimed at underpinning the position of vendors. Personally, I don’t agree with mortgage insurance either. Moral hazard and all that …
It could even be that there is a case to be had for applying capital gains tax to the family home.
Fran – what happens to people who are more than comfortable living in far less than 70% of their take home and would like to leverage up their investment in a tax free investment and provide for the best attainable level of housing for their family (the evil bastards!)?
Nothing happens to them, Razor. They would simply pay tax on their capital gain. They would still be able to “leverage up their investment”.
Spare us the histrionic special pleading Razor.
Unpacked, what you are really saying is that you’d like a publicly subsidised lottery in which some lucky few people get their needs met at the expense of others and in which everyone gets to explore urban angst and anomie.
I don’t agree that this serves net public utility.
Fran,
Would this encompass all lending? As soon as you hit 80% LVR you cannot borrow on your credit card, by overdraft or anything, or are we talking just as secured against real property?
The rules would apply to all loans supporting the purchase of residential property. The rules would remain in force during the currency of the loan. They would thus apply to refinancing of the loan and moreover, holders of equity in housing could not secure any part of their accumulated equity for other finance that would lower equity if called in default below the relevant benchmark at the time. The same rules on debt service would also apply.