24 Feb 2009

How To Dodge Bullets

By Alan Thornhill
If we're doomed, well, we're less doomed than most, according to the Reserve Bank — and now we need to smile more, spend wisely and count our blessings, writes Alan Thornhill
Over the past few weeks, the Reserve Bank has been taking on a new role. In a series of public statements it has been encouraging Australians to look for the bright side in the deep economic gloom now upon us.

The Bank's governor, Glenn Stevens, was at it again on Friday when he met a parliamentary committee in Canberra.

Stevens — and his team of senior managers — walked a fine line as they answered questions put to them by the House of Representatives Standing Committee on Economics.

They don't want to be seen as pollyannas, so they admitted quite frankly that the nation's short term prospects are "weak".

But there was another underlying message in what they had to say. They spoke of the hidden strengths still in the Australian economy. And they put the case for confidence so strongly in fact, that given the scale of the crisis some might reasonably accuse them of talking up the economy — what economists call "jawboning".

Stevens isn't alone in this. Kevin Rudd and his Treasurer, Wayne Swan, have been doing it for months. So has the Federal Finance Minister, Lindsay Tanner, who has been reminding Australians that recessions, typically, have a "psychological" dimension as well as an economic one.

But since Stevens is one step back from the political front — and an acknowledged expert — his words carry extra weight.

So what does he see? In Stevens's own words, "there are reasonable grounds at this stage to think that the Australian economy will come through this very difficult period — certainly not unscathed — but well placed to benefit from a renewed expansion".

Stevens and his team gave an up-beat performance at a fairly bleak moment. Less than an hour before he spoke, the Dow Jones Industrial Average closed at its lowest level for six years. But even that didn't throw Stevens off balance.

Nor did a particularly blunt question from Canberra schoolgirl Peldon Tenzin, one of the students that the committee had invited to participate in the day's proceedings.

"How low are you willing to let interest rates go [...] to help stimulate the economy?" she asked, noting that the UK had a 1 per cent marker rate while the comparable US rate stands at 0.75 per cent. At 3.25 per cent, Australia's rate is positively Olympian by comparison. "We will be prepared to go low enough to do what is needed," Stevens replied quietly and with surprising frankness.

But what, exactly, are the signs the Reserve Bank finds encouraging when all most other players can see is deep gloom?

Once again, Stevens was frank as he approached this point. "Things will be difficult over the next year ... But as I have said before, the long run prospects for Australia have not deteriorated by as much as we may all be feeling just now. China's emergence, for example has not yet finished."

Stevens said that although China's growth had slowed recently, its development still had years to run, "and Australia will benefit from that," he said.

Australia's banks, too, are strong according to the governor, and the nation's housing sector is not "overbuilt" as it is in the United States. "Instead, there is considerable pent-up demand and affordability is improving quickly," he said, in one of those statements often used in central banker-speak which rather coldly skim over the countless hopes, fears and pains of people struggling with rents, mortgages and house prices.

Stevens also supported the Federal Government's two big stimulus packages, saying that there is already evidence that the first of them, announced just before Christmas, is working. "I think the indications are that the pre-Christmas package did have quite a measurable impact on consumer demand," Stevens said.

Stevens also dismissed suggestions from Liberal MPs that at $42 billion the Government's second package is excessive in the present economic climate.

The second big question of the day came from another student, Andrew Gibson, who asked how much foreign debt Australia could build up before foreign investors lost confidence in us.

Stevens replied that if foreign capital was used productively rather than wasted, those who employed it would be able to meet the obligations that went with it without too much trouble. Which is as much as to say that it's not the size of the stimulus that counts so much as what you do with it — and that the country needs to use the money in the most productive way possible to overcome the stress of a debt as big as ours is going to be.

Over the course of their appearance on Friday, Stevens and his team were careful to distinguish between Australia's "weak" short-term prospects and its medium-to-longer-term outlook, which they saw as stronger.

But, as that other handy economist John Maynard Keynes would say, "in the long run we are all dead".

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Posted Tuesday, February 24, 2009 - 17:00

Stevens fudged his reply to the second student's question about foreign debt. He gave the same old bland theory. The fact is we've run up huge overseas debt, despite the mining boom, and have little to show for it. It was spent on SUVs and a housing bubble.

Nor is the foreign debt about the stimulus package, as you imply. Steve Keen has also documented our private debt - or rather passed on the Reserve's documentation. Private debt is approaching double the GDP, twice the ratio before the great depression.

Posted Tuesday, February 24, 2009 - 19:54

Is our debt to high? I'm not sure, I don't think so. I agree with Alan and every other right minded person. John Smith can blow his dosh on an SUV, but the government is spending big, please please please invest in something that will provide lasting benifit.

Rudd , cancel remaining permanent tax cuts to high income earners!


The truth be told, no one, including Mr Stevens knows what the future holds for Australia:

China the emerging tiger, and India her smaller counterpart, could continue to grow, or they may collapse in a heap. My hunch is that a total collapse is unlikely, thanks largely due to the Chinese government control of capital and currency markets. Economic crises in the 20th century, although revealing deeper causes, are sparked, deepened and lengthened by panic in the finance markets flowing onto currency and credit. In China, the effects of this panic will be less significant than in the rest of the world.

Australia's banks really have held up well. National Australia Bank was the most exposed out of Australia's large commercial banks, and it's sub-prime portfolio was less than 5% of it's assets. Don't thank banks or bank shareholders, thank our prudential regulatory regime, that fortunately, did not make the catastrophic mistake of completely blurring over the boundary between a convention bank and a investment institution.

I could go on about with other reasons why I agree with the Stevens, but there really is no point, as things could change very quickly. His job though, is to do the best job he can with the information he has. At present, there is nothing or no one who can say he hasn't done just so.

Anonymous (not verified)
Posted Wednesday, February 25, 2009 - 01:01

Stevens ( came over more fluidly than what the treasury heads Hendry and Gruen did in the week before.

Calming the markets is a significant function of Stevens' role; he dispatches calm with aplomb.

Although Stevens' distinction between the asset mix of the larger commercial USA banks and those of Australia's is a bit thin. (He seemed to tip toe past the point.)

Comparing say Citibank's circa Dec 2007 and Westpac's Sep 2007 asset mix (both before the credit crunch) sees Citibank's loans to consumers (mortgagees), corporate and federal funds / repurchase agreements amount to 48% of its asset mix against WBC 51% tied up in housing and non-housing. [Australia's government debt was nil - internationally unique at that time, hence Australian repurchase agreements and fed funds were not an option!]

So between these two major banks’ solvency = no vital disparity. (Despite Westpac's assets being only a fraction of those of the US giant.)

Both complied with Basel II's stringent solvency, liquidity, stability, capital adequacy and economic stability regulation.

Yet now Citibank's stockholder's plight is dire!

Stevens is mum or otherwise cryptic as to the distinction between the two, although he assures Australia, that Australia is different!

Where's the difference, Stevens?

Please explain...

Stevens doubtlessly knows full well what the difference is.

Could it be that at that time, the US bank balance sheets, not unlike the Australian bank balance sheets today, disclose less rather than more?

Isn't it that the US banks had a massive contingency excluded from their accounts - the collateralized debt obligations sold, under the umbrella of a mortgage guarantor’s guarantee, and quality stamped by the ratings agencies?

Isn't it true that the US mortgage guarantors (subsidiaries of the major banks and investment banks) had as Dec 2007 already begun to tumble and implode?

[This self guarantee by the US commercial and investment banking system, parallels what Enron did with its energy contracts , and which lead to the copious regulation of Sarbanes - Oxley, except now on a vastly more massive scale? That is, Enron is the micro-economic equivalent to the macro-economic bank’s global credit crunch.]

Isn't it true that many astute investors started to pull their funds from the US market when it became apparent that US mortgage guarantors were largely insolvent?

Isn't it true too that Australian banks still have a massive contingency as they too off loaded mortgages in collateralized debt products, and this massive contingency overhang overshadows the Australian banking system, as well?

Westpac stashes its full note to its SPV's (CDO's by another name) - AUD$24.7 Bn it does consolidate in its accounts with a proviso 'only where obliged to consolidate under international accounting statement.'
Hence debt that is fully guaranteed and securitized can evaporate off the Australian Banks accounts? Much as in the USA?

Is this the Australian case?

The government guarantees deposit holder’s deposit without fully quantifying this potential material contingency. It could be enormous!

b.t.w. i) All GOOD international banks did this to satisfy and circumvent the regulations of the BASEL II accords. [A damning indictment of regulation CAUSING the global credit crunch?]
b.t.w. ii)
The treasury officials looked like buffoons - quibbling over whether Rudd had consulted them before announcing the magical AUD $42 Bn - and the senate debate/enquiry faltered as to when or whether Treasury section heads had presented sectors of their report for publication and whether Hendry and Gruen may have ever read the relevant sections, and can you believe it - senate lunch which finalized the investigation!

What is clear is that Rudd applied a thumb suck prior, during or perhaps sometime after consulting with treasury?

Ruddy easy!


Posted Wednesday, February 25, 2009 - 09:33

I strongly suspect Stevens is feeling rather guilty and no doubt embarrassed for his and the RBA's abject failure to see the GFC, even when it was visible- preferring instead to take the US line and label it a sub prime crisis for far too long.

All that rarefied , high paid firepower at the RBA, for so little accuracy? Even outright error. How often did Steven spruik the line about how China will save Aussie? Clearly Stevens is concerned about the Emporer has no clothes syndrome here, and well he should!.

Now, Stevens is throwing his lot in with KRudd in efforts to shore up consumer and investor confidence. Why? Because he knows full well the dire situation Australia is in and will be mired in, relying COMPLETELY on debt and global trade which in effect both collapsed in the last half of 2008.

This isnt rocket science.Stevens is playing the media, public opinions and sentiments. Shame on any in the media for buying it and not being rigourously critical of what has been a VERY ordinary performamnce at the RBA.

Posted Thursday, February 26, 2009 - 13:20

Question: If all nations, including all of the banks are in debt, who or what is doing the lending?
A lack of personal restraint in housing affordability, inflated housing and land values and pure inadulterated greed have brought us to this financial crisis of liquidity.
And should worldwide peace break out, even more businesses and financial institutions would go under.
Perhaps this is where the metaphoric bullets should be aimed - at irresponsible money lenders and manufacturers who are propping up rogue governments, terrorist regimes and big businesses that facillitate wars.
Without enormous defence budgets, more of the hard earned savings and subsequent tax raised from the Australian people could be channelled into decent social construction.
Rather than indecent, social de-construction, like selling minerals for the manufacture of arms, munitions and weapons, that only cause injury, misery and death.

Posted Thursday, February 26, 2009 - 13:46

Geoff Davies "...Private debt is approaching double the GDP, twice the ratio before the great depression..." - exactly, and yet when we were tracking around 1.6 times the GDP during the "Goldilocks economy" nobody seemed to consider that this level of debt was a problem.

"The economy has never been stronger" we were told, "good times are upon us" we were told.

If we take the current plans seriously we will be staring a total of $A115Billion hole in the economy by 2011 and a reduced revenue take amounting to $76 Billion.

Can you imagine the levels of inflation we will be faced with when this "money" hits the streets and the velocity picks up a little?

Think massive hikes in interest rates, increased tax rates and rising CPI like your worst nightmares could not imagine.

Our economy grew by 0.1% in the 3rd quarter of last year, consumer prices plummetted to 12 year lows, annulaised growth rate of the leading index of economic activity sank to -2.2 % for November, and yet we would like to borrow?

Where to?

To economic oblivion.

Anonymous (not verified)
Posted Friday, February 27, 2009 - 14:31

Hi Denise

Question: <em>If all nations, including all of the banks are in debt, who or what is doing the lending?</em>

Answer: <pre>
These are the borrowers ...$USD
per cap %GDP
USA 12.25 trillion 42,343 99.95
United Kingdom 10.45 trillion 189,855 490.61
Germany 4.489 trillion 54,604 159.92
France 4.396 trillion 68,183 211.86
Netherlands 2.277 trillion 39,446 352.75
Ireland 1.841 trillion 138,619 960.86
Japan 1.492 trillion 45,287 34.93
Switzerland 1.34 trillion 509,529 441.95
Belgium 1.313 trillion 11,682 348.74
Spain 1.084 trillion 176,019 79.65
Italy 996.3 billion 124,049 55.35
Australia 826.4 billion 22,801 106.91
Canada 758.6 billion 35,574 59.69
Austria 752.5 billion 90,289 233.70
Sweden 598.2 billion 65,048 176.72
</pre> as per economy watch.

A bit more fudgy on the creditors side i) Japan, ii) Germany then iii) China and then a gamut of oil producing countries ... but this as err, of a few months ago, as oil revenues have tumbled and the USD$ has been stronger, though volatile.

You can go the the IMF webpage for 3Q 2008 creditor figures, but its an awfully unfriendly webpage‼

(Note Japan is in as a debtor and creditor) A net table would be a help? Anyone¿

The UK & Ireland are probably in the next most trouble, and are likely the first to default as nations‼

A very real likelihood that Ireland will soon follow Iceland into default.

Australia closely parallels the US i.t.o. % to GDP . Stevens says Australia need not worry - we are different‼ (He will not say why!)

All the creditor countries are at major risk of incuring losses from the debtor nations. The debts of the western debtor nations have been largely intermediated and on sold to the more eastern countries!

Rather chaotically now, is that many big US UK banks, involved in the intermediation of home loans have gone insolvent, and a large practical problem at the moment is simply finding out who owes what to whom? i.e. say what chinese bank/norwegian pension fund/saudi sovereign fund actually owns the security of the defaulted US, UK, Irish, Icelandic homeowner. There was never meant to be a redress. But the mortgage guarantors have collapsed - so now actual physical security must be pursued!

This will not take months, in many cases it will take years to figure out!

Once that is sorted out the big US / UK banks, involved in the intermediation of corporate debt, or more specifically the credit default swap market have gone insolvent too, and this too will take many more months - to determine who owes what‼ (There never having being a Soros type global bourse to guarantee counter party trade.)

Not good!

But be patient ...