–Australia’s biggest problem on Monday, December 2010 is that there’s just not enough government debt. Yes, it may sound strange to you, dear reader. But take it from the Australian banks, the Reserve Bank of Australia (RBA), and the Australian Prudential Regulatory Authority (APRA).
— It turns out your Markets and Money editor has been thinking about it all wrong! It’s not too much debt we should be worried about. It’s too little!
–We’re referring to the story this weekend that the RBA will offer “contingency loans” to any Aussie banks if and when there’s another credit crisis. The plan was cooked up in response to new global banking liquidity requirements. Those requirements were set up by the Basel Committee on Banking Supervision. It’s a group that makes the rules for other central banks.
–Well, the Basel gang has said that in order to prevent another crisis from taking down big banks, banks must hold the kind of assets they can quickly turn into cash; enough cash to see them through a 30-day “severe liquidity stress scenario,” according to Bloomberg. That’s the cash the banks would use to settle up short-term loans and obligations (the kinds of loans that are hard to refinance when no one is lending).
–The types of assets that are liquid enough to satisfy the Basel people are cash, government bonds, and non-financial high-grade corporate debt. Basel says 60% of assets must meet the liquidity requirement. But here’s the problem…there’s not enough government debt in Australia!
–Aussie banks have most of their assets tied up in home loans, as the chart below from APRA shows. And with only $175 billion in government debt outstanding, there’s not enough government debt for the banks to load up on to reach the 60% threshold. So how can they make sure they satisfy the Basel requirements?
–The obvious answer is that the Australian government should go much deeper into debt. Borrow more money at all costs! This would allow the banks to buy up that debt and hold it on their balance sheet as high-quality capital in a liquidity crisis. If only the government would borrow more money, the banks would be better capitalised with more liquid balance sheets. With more debt, the whole economy would be richer.
–But let’s assume the government is not going to issue new bonds fast enough to meet the Basel requirements. No problem! The RBA has said it will accept other kinds of collateral in exchange for liquid reserves that can see a local big bank through a global crisis. What kinds of collateral qualify?
–That’s where it gets a little tricky. The RBA hasn’t finalised what kind of bank assets will be acceptable as collateral for a loan in a crisis. But there are only so many assets on the balance sheet to choose from. The big ones are: residential housing loans, commercial real estate loans, and deposits (expensive watches, gold coins, and plasma televisions do not, unfortunately qualify…not yet anyway).
–If the RBA is going to accept commercial real estate loans as collateral for a loan, it will slowly be turning itself into the kind of pawn shop/brothel that the Federal Reserve has become. We say “brothel” because the joint RBA/APRA announcement says the RBA may simply charge a borrowing bank an “appropriate fee” in exchange for liquidity. Don’t have collateral? That’s okay. Just pay a fee!
–This is called “renting the public balance sheet.” It is more of an over-night rental rather than a long-term accommodation. It’s a kind of financial love motel in which the banks get what they desperately need for the night (or a few weeks). But afterwards, no one has to know what happened and the banks can go back to pretending they are good, upstanding citizens.
–Of course the other possibility is that Aussie banks pledge deposits as collateral for emergency loans. But with deposits also potentially backing the newly-approved covered bonds, surely you couldn’t double pledge the same collateral could you? Or could you!?
–If you dismiss with all the mechanics of which collateral is eligible at the RBA, you can see that the real problem is that the banks have massive over-exposure to housing on the asset side of the balance sheet. But hey, that’s where the money is to be made right? Keep feeding the bubble and you can’t go wrong.
–The only thing different with the story today is that in order to satisfy global liquidity requirements from Basel, Aussie banks have to basically admit they don’t really have any other assets that would satisfy normal collateral requirements. So the RBA has agreed to create a scheme where no collateral is required at all!
–Presto! Change-o! Bingo, bango, bongo!
–So as we begin the week we see that the gradual financialisation/debt enslavement of Australian life continues. The interest of the banks trumps the interest of an economy based on building real things and selling them to generate incomes. Everyone in Australia will get rich with rising house prices without having to do any work. Because that’s worked so well everywhere else!
–Finally, the man who coined the expression, “a currency without a State” is dead. Italian central banker Tommaso Padoa-Schioppa died in Rome at the age of 70, according to the Financial Times. Former EU President Jacques Delors said that Padoa-Schioppa, “Embodied the spirit of European construction,” Jacques Delors, former president of the European Commission…He had a huge historical culture, and he was also a specialist: he had a great knowledge of the economy and financial regulation. And he was even more federalist than me.”
–History sometimes offers up these parallels. Europe’s federal experiment in centralised money without harmonised political and economic structures is falling flat on its face (also dying). It was an intellectual conceit to begin with, based on a flawed understanding of money.
–Money isn’t an idea. It’s a commodity. And if it doesn’t have certain real, tangible properties, it will eventually fail (as all paper currencies do). That will probably be the big event of next year. If this year was the year of the sovereign debt crisis, next year is the year of reserve currency failure. Until tomorrow…