Thursday, October 23, 2008

Bank Guarantee Needs “Fine Tuning”

One of the biggest shortcomings of politics is the absolute inability of any politician to back away from a blunder and simply admit an error. That would involve an unacceptable loss of face, the willingness to appear fallible, the admission that sometimes they make mistakes. Instead, every effort is expended to maintain the perception that everything is under control, all is going according to plan, and that no mistake could possibly have been made. The circumstances are put through the spin machine so that any alterations to previously announced measures are presented as “fine tuning”. At all costs, politicians must avoid the need to perform an embarrassing backflip.

When Prime Minister Kevin Rudd announced on October 12 that all bank deposits would be guaranteed without limit, the move was immediately welcomed as a bold step towards preserving the stability of Australia’s banking system. Now, serious doubt is being cast upon that, with the suggestion that capital is being shifted out of non-guaranteed investments into guaranteed bank deposits at a massive rate, actually undermining stability, rather than promoting it.

Foreign banks which have limited deposit taking functions here in Australia are excluded from the guarantee. As a result, it is reported that funds are pouring out of those institutions, undermining their ability to continue to provide an important source of corporate finance. Others are also calling for some sort of protection for cash management trusts, mortgage trust funds, and superannuation funds, none of which are included in the guarantee. Imagine the chaos if people were suddenly able to pull out their superannuation money and move it into bank deposits!

The Government’s solution to this problem is to introduce a levy on deposits over $1 million as a form of insurance premium. The opposition is claiming that this amounts to a new tax, and is only adding to the mess rather than fixing it. But the Government is trapped by its own spin. It simply cannot admit now that the uncapped guarantee was a mistake. In retrospect, a cap at $1 million would have been more than enough to erase the concerns of most bank account customers. In fact, given the restriction preventing foreign banks from accepting deposits below $250 000, perhaps that figure would have been a reasonable place to draw a line in the sand.

Now, the debate has descended into farce as the focus has now shifted to the finger pointing game of who gave what advice to the Government and when. Rather than getting on with the real business of shoring up the Australian economy and softening the potential impact on ordinary Australians, the Government and the Opposition are firing salvos of blame at each other and at senior public servants such as Dr. Ken Henry at Treasury, and Glenn Stevens at the Reserve Bank. Perhaps the Government acted hastily in giving an uncapped guarantee, but the matter was urgent, and it still is.

In the meantime, all of the indications from the economy are pointing to worse to come, with credible forecasts of unemployment reaching 9%, and a million Australians expected to encounter mortgage stress while the value of their homes can be expected to continue falling. At the same time an O.E.C.D. report identifies Australian retirees as the fourth poorest in the developed world, and unemployed Australians as the poorest.

Failing to cap the bank guarantee may have been a mistake, but the political point scoring occupying debate now is an unwelcome distraction from the larger challenge of limiting the economic fallout for ordinary Australians.

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