I've been fairly sure of this for some time. But today (or rather last night after midnight) I heard the clincher. Four investment houses have been forced to suspend withdrawls because there's been the start of a run. I needn't say that this is a BAD THING. A fairly substantial loss of confidence which says that the economy is in bad shape.
What caused them to panic so? Why the government's promise to underwrite the banks of course. Whowhatwhenwherewhyhow??? Let's take a step back.
Step 1, which I read about in the London papers back when I was over there in mid-2007: it seems there's a bit of a financial crisis in the USA. A few people have lent money to people who couldn't pay it back, and can't cover the fact up any longer. I read an opinion column in the financials section which said "Yes the stock market is in a bit of upheaval at the moment, but you only make a loss when you SELL at a lower price. Ride it out and the economy will recover." So I thought "Storm in a teacup" and turned to the comics.
Step 2: It didn't stop there. "A few people" were followed by a few more, then a lot more. Eventually the market panicked, loans became unserviceable and people declared bankruptcy. Now we have a real problem, it's not just paper losses any more because the employees of those bankrupt companies don't have a salary and are cutting back on spending. So the USA (which was already in dodgy territory because it was spending heaps of money on a war or two) started to edge towards a recession.
Step 3: It didn't stop there either. Our economy is based on our coal and iron ore exports, mainly to China. That doesn't stop just because the USA is in financial trouble. But the finance industry doesn't work to normal rules! Any hint of panic and everyone goes down.
Step 4: Mr Rudd and Mr Swan saw the terrible hardships being suffered by the American people. "How terrible!" they thought. "We must stop things like this from happening in Australia! Our people elected us to protect them, we need to do something!" So instead of letting the robust economy (which they'd been all over the papers about just a few days earlier) sort itself out, they decided to meddle. "What would we do if one of the big four banks went belly-up?" they asked each other. "Why we'd have to bail them out so the Working Families of Australia don't suffer!"
So they passed a law that said that if ever an Australian owned bank went under, the government would pay the bills. Of course if they'd asked Glenn Stevens first he would have told them that the reserve bank is ALREADY the final port of call for loans for Australian banks! But no, they had to be seen to be doing something to look after people.
The next day they probably woke up in eager anticipation of the financial press being full of praise for the masterly way they had headed off the dire possibilities of the fallout of the financial crisis. But no, instead they found angry statements from the foreign-owned banks which had Australian branches saying that they were suffering from a lack of confidence - and that many people were closing their accounts and moving to Australian-owned banks! Oh dear, when we said "only Australian banks" in that draft bill we never saw this coming.
And today we have a similar statement from non-bank investment houses! Oh dear, what can we do?
So Mr Swan, in trying to bolster up confidence and prevent a run on the banks, has instead triggered that very thing. A master stroke Wayne. You're so clever.
As for the finance industry... I wish it'd just curl up and die. I'm not against banks taking our savings and investing them to get a return. I'm not against long term loans to allow a business to operate before it has money of its own. I'm not even against personal loans, even though a lot of people take them to excesses and make a millstone for their own necks. But all this fiddling around on the stock market, over-inflating the price of a company which has no real value to it, and basically creating a big bubble made of nothing but people's expectation that they can sell it at a higher price later (ie that someone else is more of a sucker than they are), is not only a great way of making people believe they can get something for nothing (never a good thing) but is incredibly damaging to the economy.
This is why, when I was searching for a job for two years straight, I didn't even apply for any in finance. Keep your $45k salary and work-life balance, I'll do something which involves real achievement.
Anyway Wayne, I hope this will be a lesson to you in future to hold your tongue sir. "Prosperity cannot be restored by raids on the public treasury" said President Hoover in the 1930s. When I want to live in a socialist country I'll tell you. Until then, hands OFF - or change your surname to Kerr.
You asked, we listened: more Android!
5 years ago