Zero Collateral

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–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 Daily Reckoning 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.

–So what?

–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?


Lots of Housing Assets

–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…

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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Chris in IT
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“http://en.wikipedia.org/wiki/Reserve_requirement”

“Statutory Reserve Deposits abolished in 1988,
replaced with 1% Non-callable Deposits”

What does Australia have in effect 0-1% reserve requirements? Is there some other legislation to prevent bank runs? (prior to 2008)

Biker Pete
Guest
DD: “Everyone in Australia will get rich with rising house prices without having to do any work.” Now I _like_ precious metals_ but I hardly see buying, holding and hiding them as much ‘work’, Dan. Yet we’re constantly advised that buying PMs is the way to wealth. See the inconsistency in your argument?! Probably not. I _like_ work… and I/we do a lot of it, each week, to ensure our properties not only provide the best possible service to tenants, but steadily appreciate. Please enlighten us: Where’s the hard work (apart from diggin’ up the back yard to bury the… Read more »
Ned S
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“Now I _like_ precious metals_ but I hardly see buying, holding and hiding them as much ‘work’, Dan.”

But Biker, the mining and refining of highly productive gold bars and the storing away of them in vaults and guarding them from thieves adds so much MORE to the well being of the human race than the construction of unproductive assets like housing! Surely you can see THIS??? ROFLMAO! :D

Biker Pete
Guest
Biker
Guest

Beginning of the end. Property collapsin’… ;)

Ned S
Guest

I had the MGM of one of the world’s larger gold mines say to me during a quiet chat one day that he wasn’t at all sure what he was doing spending his life in such a bloody USELESS endeavour Biker? (He wasn’t actually the MGM at the time but became so a few years later.) I hope he goes on to become the group’s CEO – He’s a bloody good bloke!

Ned S
Guest

Like seriously, have a look at the following pics and tell me that gold is gunna be important in a global depression? :

http://history1900s.about.com/library/photos/blygd17.htm – They weren’t there to take their gold out?

http://history1900s.about.com/library/photos/blygd45.htm – She ain’t thinking “Damn, if only I hadn’t pawned my gold wedding ring life would be really great!”

And he ain’t saying “Aw heck, I really WISH I had a few spare ounces of gold to give each of my kiddies this Xmas” : http://history1900s.about.com/library/photos/blygd50.htm

But then maybe I’m wrong and still just truly don’t understand???

Elastic
Guest
The difference between borrowing money to sink into property and mining of gold is that gold can be used to purchase goods from overseas because it is seen as a form of wealth. Increasing debt to increase house prices only has the effect of improving the banks bottom line. The increase in debt in this country and others has been a nice tactic by the parasitic banks but unfortunately the game is soon going to be up. The bringing forward of demand by lending everyone money makes us all feel wealthier up until the point where we can no loger… Read more »
Biker Pete
Guest

Elastic: “The difference between borrowing money to sink into property and mining of gold is that gold can be used to purchase goods from overseas…”

That’s stretching the analogy a little. There may be a few other differences.

Property pays a fortnightly dividend. There’s no CGT on your primary residence. Tax writeoffs are generous. Every Aussie _needs_ accommodation. Government intervention is almost guaranteed.

That’s just five differences, none of which apply to gold. Look, I _love_ the shiny stuff, but if you’re holding your breath waiting for a property collapse, it’s time to breathe out. Your lungs are only so elastic…

Chris in IT
Guest
“Where’s the hard work (apart from diggin’ up the back yard to bury the stuff… ) in buying and holding PMs?” PM’s are not for ‘making money’, rather, they are to detach from inflation reduced currencies as a liquid storage object. It can be bought, carried and converted in to fiat in relatively small quanta. Remember the money needed to buy the PM in the first place has to come from somewhere. Now, that said, when was the last time you saw houses offered no money down… I did, in the last year. I bet a number of people bought… Read more »
Chris in IT
Guest
Oh, I forgot. You CAN probably make money on PM right now. Right now PM’s are the equivalent of a stock that have a total market value of less than all to the capital totalled. We arrived at this unusual circumstance thanks to the US. In the old days they we’re locked in to a static oz\$ ratio. When then decoupled, then later dropped the gold standard we had the spike of the early 70’s. However it gets really interesting afterwards when the US started paying for Saudi Oil with a combination of $’s and oz’s. During this time they… Read more »
Ned S
Guest

“So why didn’t it just correct?” – The theory I relate best to is because it only costs about USD500 an oz to produce.

Chris in IT
Guest
Depends on two things: 1) Whether you think Gold\Silver is ‘money’ or a commodity. 2) Whether you think there is no ‘supply’ side in a demandsupply equation. If it’s a commodity then the base premise is correct, in that the base supply reflects manufacturing costs.. when -not unbalanced by demand being greater than supply-. Of course, if you research the silver ‘demand’ then you might find some very pleasurable fundi’s. However, if I’m correct in believing that most of the world still thinks silver and gold is money and that they have not forgotten that so far -no fiat system… Read more »
Biker Pete
Guest
Two issues here. First, it was silly of me to comment on the statement, by Elastic, that: “The difference between borrowing money to sink into property and mining of gold is that gold can be used to purchase goods from overseas.” That comment was so simplistic that I should have ignored it. :D Dan’s comment: “Everyone in Australia will get rich with rising house prices without having to do any work” remains only partially true. One of the attractions in buying PMs is the minimal personal expenditure of effort required. Buying and maintaining property/ies involves far more time, effort and… Read more »
Not Fooled By Property Spruikers Hype
Guest
Not Fooled By Property Spruikers Hype
Comment by Biker Pete on 21 December 2010: …… Property pays a fortnightly dividend…… Bzzz wrong typical property investment in OZ is at a loss no fortnightly dividend the bills come in fortnightly & the rent will not cover them … There’s no CGT on your primary residence…. Yes but you can rent the same thing at half the cost in most cities ….. Tax writeoffs are generous….. Even after writeoffs most investors incur a Nett loss of approx $5-$10K pa relying solely Capital Gains {FYI this is called Speculating not Investing} Every Aussie _needs_ accommodation….. & they can achieve… Read more »
Biker Pete
Guest
Thanks for those thoughts, Prozak. Rent covers all but two of our investment properties. Tax benefits, which you simply don’t understand, cover the rest. The very large cheque we receive annually is alone enough to live on. I accept that there are a few naifs, yourself included, who couldn’t make a quid out of property. You’re advised to rent. Yes, it’s possible to rent more cheaply at present. At the end of a ten-year period you’ll have nothing to show for your rent ‘investment’. Bill Bonner, our DRA editor, remarked recently that his employee’s home has doubled in value in… Read more »
Steve
Guest

Rent covers all but two of our investment properties. Tax benefits, which you simply don’t understand, cover the rest.

So I get a thank you for help paying off your “INVESTMENT” for you Biker?
Its on me….

Biker Pete
Guest
Well, yes, Steve. Thank you. And if you were renting, I could thank you twice, on behalf of your landlord. :D In the case of housing… and probably housing more than other investments… tax considerations are critically important aspects of staying ahead. Inflation is also a helpful factor. After a decade, you’re basically paying off loans with 65c dollars. We will pay off three more houses completely, by April 2011. Yes, one could argue that inflation takes a 35% bite out of one’s equity after a decade. It’s equally true that Australian housing values rise much more than that, even… Read more »
Steve
Guest

The interest I earn basically covers the inflation Biker….

Ned S
Guest

You’ve been promoted Biker – Leatherman is so much more endearing than Pinhead! :D

The lad has a point about it being significantly cheaper to rent than buy over here in the East. Though as a SFR I’m glad I’m not renting regardless.

Merry Xmas to you and yours also mate.

Ned S
Guest
Just thinking – What would the rent be on my $300K dunger – $16K pa. What would I earn if I sold and popped the money in the bank – $18K pa – On which I’d pay tax – So $14K pa maybe? Plus I wouldn’t have to do R&M or pay local council rates or insurance. Another $5K pa maybe. $16K to rent versus $19K to own. (For now anyway.) I’ll stick to owning – As it’s convenient – And on the off chance that we’ll get 1% pa increases average over the next decade or two – To… Read more »
Biker Pete
Guest

Steve: “The interest I earn basically covers the inflation Biker….”

Then if Sydney property is at 0% growth per annum… and you’re paying no tax on your bank interest… you’re neither losing nor winning, Steve.

If you’re paying tax on the interest, you’re falling behind… but…
…if you’re not paying board to M & D, you’re probably still a little A Head. (I could have given you a ‘D’ rating for that, though… . ;) )

Biker Pete
Guest
The figures you cite are interesting, Ned. With base salaries well over $200K total, our effective tax advantage with property is appreciable. Our goal is to legally reduce tax payable down to the lowest possible rate. Salpacking used to reduce our tax debt by 23%. I think that’s where the N Fools lose the plot completely. If gross income is around 2.5 X that base figure, taxation benefits start to kick in to the tune of 33% or more saving per annum. Admittedly, once you hit retirement age, a fair percentage of that gain drops off… but, on the other… Read more »
Ned S
Guest
It is one of the difficulties of sites like this Biker – People find it pretty difficult to see things from others’ perspectives perhaps? (With me having a bit of a personal blind spot when it comes to bullion maybe?) But how exactly does a bloke who is locked into the thought that the only way people can purchase is on 95% debt, get his head around the fact that there can be other ways? Our mate Steve is getting closer and closer to falling into that category – Give him a 2 or 3 more years saving and a… Read more »
Biker Pete
Guest
We’d both agree that Steve has a lot going for him. He has a job, he saves, his expenses are low, he has a worthwhile goal, etc, etc. Where the difficulty lies is in timing. He’s not alone there. For decades, through a little savvy and some luck, our average was around 95%. In property and Super, we’re down to 66%. (ie., we ‘won’ in 2/3 of ‘recent’ actions involving land purchase; in Super tweaks, the same: 2/3 actions were very well timed.) Yes, we know that property corrections occur cyclically. The trick is, of course (as always) knowing where… Read more »
Not Fooled By Property Spruikers Hype
Guest
Not Fooled By Property Spruikers Hype
@ Biker Pete … you love to quote …. Bill Bonner, our DRA editor,… yet you always leave the bit he say at the end out …. You know the bit where he says … ” Our advice to our Colleague is to S*E*L*L* ” ….. Why do you quote the man out of context what are you so fearful of? ….. One other thing how can a man with all your wealth & assets to look after find the time to be on a dozen websites under different names trying desperately to pump up the property bubble? ….. Oh… Read more »
Stillgotshoeson
Guest
Comment by Ned S on 22 December 2010: Though yep, if you are leveraged, you get to do your sums differently. Comment by Biker Pete on 23 December 2010: Steve: “The interest I earn basically covers the inflation Biker….” Then if Sydney property is at 0% growth per annum… and you’re paying no tax on your bank interest… you’re neither losing nor winning, Steve. If you’re paying tax on the interest, you’re falling behind… but… @Ned Yep.. throw leverage in there… @ Biker “Then if Sydney property is at 0% growth per annum… and you’re paying”… $400000 mortgage @ 7%… Read more »
Biker Pete
Guest
Only read the first few lines of your nonsense, N Fool. Bill’s right about the past. His employee’s property doubled in four years. It’s easy to ‘fore’cast the past. DRA has been forecasting an _imminent_ crash for that entire four years. :D After that little gem, I started to read your crap… and didn’t bother to read past the Homeswest garbage. Your God-like powers are failing you again, wizened little man. You had my comment about checking out your image as God-like in a mirror removed last time. Check yourself out again, o financial deity. Take a handful of your… Read more »
Ned S
Guest
“DRA has been forecasting an _imminent_ crash for that entire four years” DR in the US was sniffing around the possibility of an Oz housing crash as early as April 2005 that I personally know of. :) Don’t actually know when they got onto the US one??? But their cited source in April 2005 reckoned Oz was the “canary in the coal mine” to watch for the US housing correction – “Yo Ho Ho” chuckled Santa … ;) Which is why I opined above, that IMO, they are looking SO late they are probably just plain WRONG now. But irrespective,… Read more »
Ned S
Guest

Just found the April 2005 DR US article again … BUGGER ME! THE EXPERT THEY WERE CITING WAS GRANTHAM!!! Who reckoned the US only had a “semi-bubble” at the time? :D :D :D :

http://dailyreckoning.com/the-australian-canary/

All good fun … We’ll see what the New Year brings soon enough! :)

Biker Pete
Guest

Nice research, Ned. Really enjoyed your posts.

You’ll recall that while we were in the NH six months last year, Pillman was adamant I was a Kiwi living in Sydney. The dill was also betting his left testicle you and I were the same fella. Utterly clueless. :D

Ned S
Guest
Watching the ‘exspurts’ is all good for a giggle Biker! :) It will be nice to catch up eventually, one of these daze, as you sometimes saze. Just bloody hope it doesn’t come about through me feeling pressured to take some bloody job in your booming blooming state mate! As I’m still a bit of a conscientious objector to exerting any effort to help prop up our nation’s over indebted and welfare addicted … :D Off to the old’s place for Chrissy. Family do – Me bro, his missus and kids. And his missus bro and family I fully imagine.… Read more »
Ned S
Guest
“that rental in the name of my SMSF” – Which is another thing Not Fooled just maybe misses? Some of us have long term (20 and 30 year) plans we are putting in place. With a few housing corrections along the way being things to be considered. And balanced against the likelihood of corrections in other asset classes. Plus balanced against a whole HOST of other factors as well – With Not Fooled simply turning up and saying PROPERTY IS DOOMED! But without suggesting any alternatives like Chris asked him to. Gotta take a bit more holistic approach to things… Read more »
Biker Pete
Guest

Sounds good, Ned. Enjoy yourself!

Both sons here for Christmas before they fly OS again; also two Dutch bikers we met during our four-month ride thru’ western Europe in 2005. With just six of us, you’d think it would be a fairly quiet break, but they’re all musicians and a few slabs have already been demolished… . (I’ve hidden the port!~ ;) )

The big holiday job is re-retic-ing and mulching our orchards. Very humid at present… pointless trying to exert ourselves in the middle of the day.

Jeez, Christmas eve Tamara. Have a good one, Ned. :D

Ned S
Guest
“Sounds good, Ned. Enjoy yourself” – Yep, even when I was working OS I always made a point of being home for Chrissy morning minimum. (As I spent one Xmas day away working early in the piece and figured it REALLY sucked! :D Though also reckoned it must have sucked even worse for the poor baskets of cooks who had the TOTALLY unenviable job of trying to make a bunch of misery gut’s like me feel better about not being home with loved ones when they weren’t either!) Glad you’ve got your mob with you mate. It’s as it should… Read more »
Not Fooled By Property Spruikers Hype
Guest
Not Fooled By Property Spruikers Hype

Biker Pete AKA TRAVS / Dogman / MARK of Vic Park / Bill of Leederville … Get the Port out & watch this series it even has a female version of Steve Keen who in 2003 forecast the Irish Property Bubble but was put down by property Inc …. enjoy my little xmass gift to you. Make sure you click on the next episode there are 5 in total that should keep you up at night … but then again I doubt it you like other property Speculators live in denial …. http://www.youtube.com/watch?v=BQ9UhMHWB2g&NR=1

Biker Pete
Guest
“Biker Pete AKA TRAVS / Dogman / MARK of Vic Park / Bill of Leederville” Right on the first two. You _could_ have added RTW Traveller and Traveller. No effort was ever made to hide these, or the shorter version, Travs. We’re NOT Ireland, N Fool / Kris / Prozak / Aaron / The Punter of Mindarie, john of dullsville perth / John / etc. Your pretense at being a Perth resident was made glaring obvious in your recent, repeated tag: ‘Not Fooled By Property Spruikers Hype of Perth of Perth.’ How many Perths do you need to add, son?!… Read more »
Don
Guest

Well the mini cyclone has passed over now so I have hosed away the leaves and cleaned the pool. Time to get stuck into Chrissie Lunch :)Merry Christmas to all DRA readers :)

peterg
Guest

back to the article, maybe the RBA can take the firstborn male as liquid collateral, given the propensity to fob off responsibilities to the next generation. would give the Chinese ‘little emporer’ makers an advantage if adopted by the NWO. hehehhe and hohoho.

Lachlan
Guest

Merry Christmas to all the DRA gang and hope everyone enjoys the break with their family etc :)

Stillgotshoeson
Guest
Ned S
Guest

The Yanks are pretty entrepreneurial little devils – If they don’t want to buy their shitty houses, I’m tricked if I know why I’d want to?

prozak
Guest

Thanks for which thoughts?

I commented somewhere on the DR recently but not on this article.

Biker Pete
Guest

Obsession is a wonderful thing… :

“Your Prozac comes in different colors with little M’s on them…”

“Another reason to act like we are ‘on prozac’ is the US dollar which is looking shaky…”

U become what U eat… . Wunderheilmittel: Mere mortals become gods… ;)

prozak
Guest

You are right. Your obsession engulfs you.

Go back to monopoly and stop talking about me.

Biker Pete
Guest

But… but… you’re so God-like and… and… powerful…

wpDiscuz
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