For months Money Morning and Daily Reckoning have been a lone voice on the precarious position of Australia’s banking system.
We’ve seen the talking heads and economic boffins assure the public the Australian banking system “is the best in the world.” The mainstream press has waxed lyrical about Glenn Stevens being a hero at inter-central bank meetings.
They’ve been positively thrilled the four major Australian banks are amongst the handful globally with a triple-A credit rating.
We argued the opposite. Our consistent position has been that Australian banks are no better off than any other bank in the US or UK. That Australian banks have received just as much taxpayer support as Citibank, Bank of America, LloydsTSB, Royal Bank of Scotland and any one of the other faltering overseas institutions.
We’ve written several times that claims by ANZ CEO Mike Smith about Australian banks not receiving “1-cent” of taxpayer money is bogus. [You can read our most recent story on the matter here]
The fact is…
The global banking system is rotten from inside to out. It is one giant Ponzi scheme that requires an ever increasing amount of consumer/business debt, deposits and inflation to support it.
Without the combination of all three, the banking system would collapse. It’s partly for that reason they has been so much fear of deflation.
The institutions haven’t feared deflation because they are worried about things getting cheaper and businesses potentially having to lay off workers – even though what they fail to understand is that in a free market an equilibrium price would be reached that would suck in demand.
They fear deflation because of the impact it will have on their rotten balance sheets.
But let’s look at page one of today’s Australian Financial Review (AFR).
“Bank chiefs warn on funding gap” is the headline. It’s accompanied by the following points: “Deposit base too low,” “Overreliance on offshore money,” and “Threat to economic recovery.”
Ignore the last point; the banks aren’t really that bothered about an economic recovery, it’s saving their own bacon that concerns them.
National Australia Bank’s CEO Cameron Clyne told the paper, “we are reliant on the willingness of others to lend to us, domestic demand for credit significantly exceeds our capacity to save.”
It’s not so much the demand for credit, it’s the phony asset values that they know aren’t sustainable.
You see, the problem the Australian banks have is the reverse to the problem the US and UK banks had. But that doesn’t mean they are any better off. It is just the other side of the same coin. And there’s no winners in this case.
While banks in the UK and US were trading in and out of securitized loans and mortgages, buying them up to try and make a profit on the interest payments. Australian banks were part of this. They were among those supplying the international markets with the debt that other banks were buying.
On the plus side it meant that Australian banks were net receivers of cash. So when subprime hit they weren’t left with bucket loads of “crap” (if you’ll permit us to use ANZ CEO Mike Smith’s phrase) which needed to be marked to market.
The trouble is, there’s less appetite in international markets to buy up Australia’s equally “crap” first-home buyer debt. At the current price anyway. That’s why interest rates are certain to rise. And if the international banks start to take a closer look at the Australian banking system and what it’s built on – first home buyers. The feeling of deja vu will surely follow.
But the banks are making these noises for a reason. And it’s a sign of desperation.
It’s the next step in their efforts to grab another slice of taxpayer cash. Only this time it will be a direct injection of cash they’re after. After the failure of the Fairy Ruddfather Bank bill to get through parliament, the banks know they need to get their hands on money from somewhere.
If the international markets won’t supply the funds, and depositors don’t have enough cash (even though we’ve been told there is billions of cash on the sidelines), and the pollies won’t let the Fairy Ruddfather Bank be formed, where else will the banks get the money?
The taxpayer.
And most probably cash from the Future Fund, superannuation funds, or if they’re feeling really ballsy, they could get the Australian Office of Financial mis-Management to buy the debt. One thing is for certain, there is no way the federal government will allow the four major banks to flounder.
As we’ve argued all along, the Australian banking system is on a knife edge. The banking and property Ponzi scheme is within an inch of collapsing. And instead of letting the property market flop years ago when the damage would have been far less, governments and the banks have been complicit in keeping the scam going.
But once it goes, the banking system will follow. Or vice versa.
Yet, we’re sure the mainstream press and economists will continue on with their hapless claims about the strength of our banking system. Don’t believe a word of it!
Other Stuff on the Markets
The S&P/ASX200 fell by 1.47% yesterday, while there was mixed news overnight on Wall Street with the Dow Jones Industrial Average falling 7.49 points. In Europe the FTSE100 fell 1.16%.
The price of gold in Australian dollars is trading at $1,185.56, while in US Dollars it trading at $941.45.
The Aussie dollar remained steady versus the US dollar and Japanese Yen, trading at USD$0.7930, and JPY76.77.
Crude oil closed overnight at USD$70.96.
For the biggest movers on the market yesterday click here…
Cheers.
Kris.
{ 7 comments… read them below or add one }
You are pretty close to the mark!
There is an inherent assumption in banking (including Australia) that asset values & debt levels, will always rise, aided by an exponenential (never ending) inflation increases.
That is not correct, there is no such thing, as exponential growth, all things have limitations, as we are now finding out!
However, OZ banks are, at present, better placed (relatively), than other US & overseas banks.
That said, unless there is a general realisation of the changes now going thru the OZ & Global economy and that change is implemented urgently, to accommodate, then the OZ banks, will follow down the same path, as US banks.
Discarding NZ which is Australian banking’s casino that fractures if Steven’s can’t keep the AUD-NZD insulated from a Soros, Australia’s position is most like Spain. Unlike Spain it has no Euro as first line of defence but Australia does have an equal in commodities. Both share the common feature that both these defences are temporary.
The first hit is the drop in consumption tax receipts from the collapse of the services economy. Ken Henry’s tax grabbing of activity funded by mainlining from the current account deficit multiplier effected on the GDP has hit the wall and he is desperately looking for ad hoc fixes to the ponzi scheme he and Garnault and all the other wallies set up in the 80’s. You can measure the impending disaster best by looking at inventories rather than fire sale receipts bought with cash handouts, Look at merchandise imports. Of coarse Henry is really freaking out because he can see the collapse in the monthly GST filings of owner operator contractors.
In Australia’s case those exemptions given to US banks that have allowed them to lend to their broker dealers based on the face value of the worst of their asset backed securities, and than the appropriation of Tarp funds supposed to be lent into the real economy and using them to refloat the colonial empire they have mady of global resource commodities. The problem for AUD is that these programmes and exemptions are finite and the FASB close the off balance sheet vehicle 1 Jan 10.
Look back to how the AUD-USD and XMJ equities reacted in tandem to the liquidity drought that hit the hedge funds. With a finite end to funny money programmes commodities will be hit, and the AUD will be hit. Chinese stock pile building will ease at some point even if they are using them as a way to partially offset their USD exposures with less transparency than shorting US treasuries.
But at the end of it that hedge fund money must run home if liquidty meets reality (if they don’t monetise into the real US economy rather than bottomless pit balance sheets). If it runs home the AUD is a basket case at the same time tax receipts are collapsing and the ponzi scheme of Australian banking loses any efficy in it’s guarantee and bad debts and real estate asset value collapse are uncoverable by govt capacity to subsidise.
Calling banks “Ponzi schemes” doesn’t make it so!
hi
some alarming reports above i read …………..
so if i have $50,000 saved sitting i my account@ a WHOOPING 3.75%
when the ponzi scheme blows up as is predicted above
wat will happen tp my $50.000?????
will it just dissappear into the ether?
ormaybe should i withdraw it in cash & stash it somewhere ?
or buy property ? or shares ? put it in me super?
from reading above i feel nothing is safe …………..
please reply asap as this has made me very nervous &
i thought the worst of this reccession ,depression is over??
etch
QUOTE “all this scare-mongering ..amounts to froth’nbubble”UNQUOTE etch-2009
Looking at the US system, it has to collapse.
For the last 2-3 years we have been calling for the re-establishment of a development bank in Australia. This would allow states to borrow from this pool. Provide a safe haven for long term investors like (our super funds which are currently thought and talked of as sausages).
Offshore debt could be releaved at approx $75-100 billion per year and could really secure a large portion of our investments and save us from the inevitable. The development bank would stand or branch of the Reserve and provide safe home for our futures fund. Many economists agree but no side of the political (two headed monster or consensus) will even look at the idea.
Otherwise we’ll quickly follow the US.
Tony Zegenhagen
Democratic labor Party – DLP
Well Tony, I agree that things would be much better if we have a Government Development Bank.
I do note though that your view that we are following the USA hasn’t yet materialised. Job figures released this month June 2010 show an improvement.
Are we therefore really following the USA “quickly”?
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