Frankly it was a boring night in financial markets. Oil was up. Stocks were down. And Comrade Obama unveiled his grand plan to remake the American financial system. The Fed will become a systemic risk regulator and capital and liquidity requirements will be strengthened for banks.
The Fed as a regulator for systemic risk? Right. Because that's worked out so well since 1913. Clearly the world is doomed.
Australia is probably doomed too, especially the banks. Our colleague Kris Sayce at Money Morning waved a copy of today's Australian Financial Review in our face when we entered the Old Hat Factory this morning. "Bank chiefs warn on funding gap" screamed the muted headline.
The article made three basic points. The deposit base of Aussie banks is "too low." Aussie banks are over-reliant on offshore money. This entire situation is a "threat to economic recovery." So it appears Aussie banks are addicted to foreign borrowing and are currently suffering from withdrawal symptoms.
In case you missed it a few months ago we'll say it again: Australia's property boom was bought with borrowed money. Both residential and commercial property values soared with the credit boom. If you think the banks are fine because they don't have a subprime problem, think again. The banks have a property problem, and you can find it on the asset side of the balance sheet.
The banks are rightly worried about having to borrow money in the wholesale market. National Australia Bank's CEO Cameron Clyne says, "We are reliant on the willingness of others to lend to us, domestic demand for credit significantly exceeds our capacity to save."
There's nothing enigmatic about that statement, is there? Lending can be funded from savings (the domestic deposit base) or from borrowing internationally. The latter route is the one Aussie banks have taken to finance the property boom. Even if this property market somehow avoids the fate of all other property bubbles in the history of the planet (and the banks don't face big write downs on assets that would eat up shareholder equity) they are still likely to lend less if the real cost of capital is going up globally.
As a carpetbagger with a modem, as one reader once described us, we don't feel too bad about pointing out that Australia's banks are not nearly as rock solid as everyone likes to think. This isn't to suggest that they will fail or that your deposits aren't safe. It's just to point out that in a credit depression (which we are currently in), lending money will be neither a big nor a very profitable business.
Dan Denning
for The Daily Reckoning Australia
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About the Author
Dan Denning is the author of 2005's best-selling The Bull Hunter (John Wiley & Sons). He began his financial publishing career in 1997 and has covered financial markets form Baltimore, Paris, London and, beginning in 2005 Melbourne. He’s the editor of The Daily Reckoning Australia and the Publisher of Port Phillip Publishing.
Comment by Dan on 19 June 2009:
Dan, it's a relief to read a couple of paragraphs of sanity on here every now and again, in the face of the flippant and baseless rubbish that's all over the daily papers. People are too quick to forget where money comes from when they see shiny politicians polishing shiny dung.
Comment by Diggin it! on 19 June 2009:
Dan lets say i have a million dollars,which bank can i rely on NOT losing it[government promises aside]
Comment by TheGoat on 19 June 2009:
Dan do you have any insight into Rabobank Australia which is my bank. Being the worlds leading Agribusiness bank would you consider this agri-sector focus to be of benefit going forward. I'm told they have next to no exposure to global residential real estate - what have you heard about their global RRE exposure?. (Deposits are also covered by fed govt like the big 4).
Comment by Pete on 19 June 2009:
Dan: I'm with you there. So many times I have heard "I like Kevin Rudd, he gave me $900" from the younger people I work with. Clearly they don't realise that it was their money to begin with, and it will be taken back again too (in any number of ways).
But in regards to the article - our banks are in big trouble. And if the Gov. insists on bailing them out, then our Gov. is in bigger trouble too.
Our banks have very low reserves as it is...without factoring in the foreign debt as the article points out. Now the Gov. is COMPETING with the banks for foreign money, and it won't work out favourably. Eventually, costs of capital will continue to rise. The only thing to slow that down somewhat is if our dollar appreciates against that of our lenders.
And that is assuming that the lenders don't just hike up their rates when they see Australia is becoming more risky.
Comment by prozak on 20 June 2009:
Pete,
Um No.
Governements do not compete with private enterprise for funds.
This is and has been a fundamental economic principal since the 1800's... I could be wrong but I believe it was Ricardo who established this.
Comment by TheGoat on 20 June 2009:
Howdy Prozak, you are right the government doesn't have to compete for funds they have taxation. So at the end of the day governments always get some of our money.
What I think Pete is talking about is raising capital through borrowings (in this case the government selling bonds to obtain cash). Consider anyone that might have some money to invest (the global money pool) an individual, co-op of Japanese house wifes, a super fund, an insurance company, Chinese bank etc etc. They will put their money to work (invest) in the best place they can based on, their knowledge of investment vehicles, desire for profits (return) and the perceived level of risk (loss). This money might go towards buying houses, shares, farm land, commodities, corporate bonds, government bonds, deposited in a bank or simply stuffed in a mattress. My point is, all investment vehicles are always competing for a slice of the available pool of cash.
Sure governments can issue bonds and buy them back with freshly issued money (quantitative easing), which the UK and US are currently doing on a smallish (but growing) percentage of their borrowings. We will have to wait to find out whether this has good or bad consequences. The Australian government is not talking about doing this but borrowing (selling bonds) to spend.
I'm no economist and if you think I'm missing a key point here please set me straight, I'm certainly no expert but isn't cash at the end of the day almost like any other commodity the more demand (borrowings - selling bonds) the higher the price (interest rates), no matter who is behind the demand.
Comment by Pete on 20 June 2009:
Prozak: "Governements do not compete with private enterprise for funds."
As Goat says, yes they can raise money through taxation.
Question: Where do you think our deficit comes from? Tax in leiu?
Any lender is really an investor. They are lending based on risk and rate of return. All of these investors can pick and choose who they lend to, by:
- buying shares (lending money to a company to use as capital in an IPO)
- buying bonds (lending to a company or more likely a Gov.)
- lending cash directly through a contract
Oh now that I read Goat's comment I think he has covered this better than I was, except for the 'i'm no economist/expert part'...have more faith in yourself Goat, you're on the money.
Basically, when the Gov needs to BORROW money, they are competing with other borrowers for those investment dollars. If our Gov had no deficit and taxed us all, the stimulus package would have been even more of a waste of time (giving us money in April and taking it back again in July).
Comment by Pete on 20 June 2009:
Sorry "If our Gov had no deficit and taxed us all" should read "If our Gov had no deficit and taxed us for all the money it needed"
Most Gov's appear to be against raising taxes in a recession - due to the negative impact it would have on business, the general population and approval ratings.
Comment by Greg Atkinson on 21 June 2009:
Pete, governments have already started raising taxes or started to hit those who will be the target of future tax rises. In the UK the government has taken measures to increase the tax burden on high income earners, in Australia the pension age will be pushed back to 67 (a tax by another name) and in the U.S. Obama is going after companies and has made so secret that he will go after the top earners as well.
Oh then we have the Emissions Trading Scheme which is... simply a tax.
This is just the beginning because there is no such thing as a free lunch as they say (unless your an MP on a great pension plan!)and all the debt that is being piled up will need to be dealt with at some point.
Comment by Pete on 22 June 2009:
I agree Greg, but please don't imply that you are offering a counter-argument when in fact both our points are equally true. I was merely disputing prozak's claim that a Gov's only revenue is through tax.
If a Gov needs money, sure, they can tax the people. But they also run the risk of hindering any economic recovery by doing so.
Also there is only so much you can tax a country before it starts to deplete an economies output, and therefore revenue...and therefore the amount that can be taxed in the future.
I think taxing high income earners too much will hurt a lot in the future. Try getting someone to invest in your new company when you have no high income earners left in your country (well obviously they won't all leave).
I think a Gov is more likely to start 'quantitative easing' than to tax it's citizens 90 cents in the dollar. Let's hope they never have to make that decision.
Comment by Greg Atkinson on 23 June 2009:
Pete I was not offering any counter view, just simply saying taxes have been raised and will be again. What the government giveth the government shall taketh away
Comment by Pete on 23 June 2009:
I think you mean 'what the government taketh, the government taketh away more if it wants to'
Comment by Greg Atkinson on 23 June 2009:
I can't argue with that Pete. The thing is that many people do not even realise they are being taxed! I have even met people who do not think there are any State taxes. They say quite seriously that only the Commonwealth Government taxes people!
Comment by Pete on 23 June 2009:
There's plenty of them Greg. And I suspect that most of them vote too.
A surprising number of people know almost zilch about the economy. You'll have to excuse my sexism here but I think 'the economy' is seen as a largely male topic and therefore ignored by a large portion of the female population. But that said, a lot of the male (esp. youth) know zilch about it too.
Then you get some later generations who know plenty about the economy of the 1990's. It doesn't particularly help understand todays economy, but they are happy to give such advice to the generations below. That, the awful media coverage we get nowdays, and extremely distorted politics contribute quite handsomely to the naivety of a nation.
But I am happy for sites like this that can give us an idea of what is 'really' going on, rather than have crap spouted to us from the likes of Wayne Swann, David Koch, BIS Shrapnel, Ric Battelino, etc etc etc (it's a very long list).
Comment by Pete on 23 June 2009:
There's plenty of them Greg. And I suspect that most of them vote too.
A surprising number of people know almost zilch about the economy. You'll have to excuse my gender-ism (~I got moderated~) here but I think 'the economy' is seen as a largely male topic and therefore ignored by a large portion of the female population. But that said, a lot of the male (esp. youth) know zilch about it too.
Then you get some later generations who know plenty about the economy of the 1990's. It doesn't particularly help understand todays economy, but they are happy to give such advice to the generations below. That, the awful media coverage we get nowdays, and extremely distorted politics contribute quite handsomely to the naivety of a nation.
Comment by Paul on 7 July 2009:
"Dan, it's a relief to read a couple of paragraphs of sanity on here every now and again, in the face of the flippant and baseless rubbish that's all over the daily papers. People are too quick to forget where money comes from when they see shiny politicians polishing shiny dung."
And yet, the sheep continue to march to the slaughter.
Comment by Pat Donnelly on 30 July 2009:
Australia is a continent. It has a small population but is engaged in shipping food and minerals and GOLD! to the rest of the world. Dan misses a point possibly deliberately: there is no shortage of capital for good investments. When the country has 50Mn pop then be worried if we still need foreign investment. Workers here are underpaid and property is at fair value. Hence the least affordable housing in the world. But migrants bring capital. We brought 400k and 50k a year. And five kids.
You and Bill are welcome to Australia, Dan but try to understand it: the bolthole for those who know a bargain when they see it! Especially economically astute yanks!
Are you still pushing land in Argentina and Costa Rica? How are they doing now?
Comment by Greg Atkinson on 30 July 2009:
Pete it is also scary how little people know about the mugs they vote for as well. I would guess that more than 60% of voters could not write a half page summary of the person they voted for at the last election in terms of achievements, work experience and qualifications etc. It is even worse if at the State level. No wonder we end up with so many duds sitting in Canberra.