It’s dividend season on the stock market. And so far the pickings are rich. A special dividend from Suncorp and Wesfarmers. And increased dividends left, right and centre.
Don’t forget research shows dividends are the key to stock market returns. But a snazzy reporting season is pushing the ASX 200 to post crisis highs in terms of prices too. Huzzah!
But someone had to spoil the party. Former Commonwealth Bank CEO and head of the Financial System Inquiry David Murray pointed out in a speech that the recent euphoria isn’t what you might call a natural high: ‘The ¬post-crisis monetary settings have distorted asset prices again. That is going to cause a correction at some point, which will put more political pressure on financial systems.’
Distorted asset prices? Correction? Murray is sounding like an Austrian School of Economics enthusiast. You’ve already heard plenty about those ideas from us though. So what about this political pressure?
Oh, that’s right. Banking and politics go hand in hand. If your business gets into financial trouble, it’s tough luck. In fact, the bank will be the first to close your doors. But if the banks get themselves into trouble, we all have to chip in.
Therefore, the theory goes, banks should be subject to rules and regulations you and I aren’t. Like how much business they can conduct at what price and with whom. Capital adequacy rules, interest rate manipulation by central banks and legislated lending standards keep a tight leash on those greedy bankers. When a crisis does happen, it’s still the bankers’ fault, of course.
Murray has an interesting solution to the risk building up in financial markets thanks to central bank policies. He wants the government to react to the correction before the correction happens. Whatever policies they would implement to make sure a crash ‘will never happen again’ should be put in place now.
Sounds good. But that idea has a big flaw. If asset prices are already distorted thanks to too much central bank pressure and a lack of regulation, surely political pressure will bring on a correction. In other words, will the policies Murray is advocating trigger a price crash in properties and bank shares? Not to mention the rest of the Australian economy if banks are forced to lend less and less riskily.
Australian Bankers Association CEO Steven Munchenberg is using just that line of attack. Increasing capital requirements and any other policies Murray might come up with will harm Australians by crippling future lending. Of course, he doesn’t mention already distorted asset markets that might crash. Just the blow to lending, which higher capital standards would require. Munchenberg’s analogy to illustrate his point is quite clever: ‘…the safest car is one that doesn’t move.’ Never mind cars that take you where you don’t want to go, like 2008.
According to Munchenberg, Murray is pursuing ‘theoretical future problems’ in a way that will shunt Aussie growth. And he’s right, except the problems aren’t theoretical. Asset prices are distorted.
Of course, nobody will consider the obvious solution. Banks who want the government and Reserve Bank of Australia behind them in a crisis should be subject to whatever nincompoopery those institutions come up with. Even if it’s red underpants on their head at bond auctions, as former Minister Conroy once suggested in a different context. Those banks who want to go it alone should be allowed to go it alone. And then deal with the consequences.
The IMF chimes in with research that says most government macro-prudential policies Murray might be proposing to makes financial markets safer don’t work anyway. And then there’s the political system. By the time Murray’s recommendations get through parliament, if they ever do, they won’t look remotely familiar to anyone.
Strangely enough, Murray made overseas regulation a big part of his argument for more domestic regulation. He argues Australia can’t be left behind when it comes to the global push for tighter bank rules. Just because we didn’t have a crisis here, doesn’t mean we can let the bankers get off scot free.
What is it with Australia’s fear of being left behind? We’ve had a twenty something year run of growth and Australians are always terrified the world will advance without them. Politicians use this rhetoric to justify getting involved in wars, subsidise doomed car manufacturers and now bank regulation.
‘We can’t go it alone’ is about the dumbest argument we’ve ever heard in any context. Going it alone just means making your own decisions. If Aussie bankers are more responsible than foreign ones, why give up on that competitive advantage?
Of course, they weren’t more responsible. But that’s another story.
Murray’s argument is that Aussie banks get much of their money from overseas. So they’ll have to keep up with foreign standards. But that just doesn’t make historical sense. Unlike the rest of the Western world, we didn’t have a crisis. So surely foreign markets will be keen to lend to us. And they have been so far.
It’s very strange to see the world going on a bank regulation witch-hunt. Most people have acknowledged that central bank action is distorting markets right now. This is a major change from blaming greed or capitalism. It’s a testament to the creeping influence of Austrian Economics.
But it must be blatantly obvious that the same theory applies to 2008. Central banks distorted markets then too. So why has the policy response been all about regulating the banks? Surely if central banks are the problem, they need to be fixed, not the banks. You can’t just pick and choose your witch as it suits you. Then again, that probably is the point of a witch-hunt.
Perhaps the answer is that the currency wars are still on. Governments think they need to give central banks cover to trash their currencies. This supposedly spurs exports and jobs. Distortions are for the next electoral cycle to worry about. And every voter loves burning a bank at the stake.
Jim Rickards has more on how it all ends below.
For Markets and Money