We’ve all thought it. Actually, we’ve all said it. And now there’s proof.
We’re referring to the widely held belief that newspapers are editorially biased towards spruiking for the property market. It’s fairly obvious really.
You only have to pick up the Saturday edition of The Age newspaper with its three real estate sections to see that Fairfax makes a motza from the real estate industry.
Well, yesterday the ‘Benedict Arnold’ of newspapers, Marika Dobbin spilt the beans:
“The REIV is funded by real estate agents and, because of this, gets a higher rate of sales reported to it than say Australian Property Monitors. APM has the advantage of a national perspective and also claims to be more independent, although it is owned by Fairfax (owner of The Age), which sells real estate advertisements.”
So there you have it. I know it’s not exactly a ’smoking gun’ but at least it gives you some ammo when your mates accuse you of being a conspiracy nut job.
But of course, we don’t really need the newspaper men and women to tell us what we already know. The facts speak for themselves.
If newspaper sales are declining then your only other option is to scratch the back of the advertisers. Seriously, most of the property ‘reporting’ is more like advertorials than editorials.
At times we half expect the cheery souls from Danoz Direct to drop into the article telling you that if you buy one property they’ll give you a second for free!
Anyway, as we’ve pointed out before, it’s not just the real estate spruikers and the mainstream media that are in on the act, there’s the banks to worry about too.
It’s a right old triumvirate of trouble.
We should have short sold CBA
Not so long ago – two weeks ago in fact – we said that short selling Commonwealth Bank [ASX: CBA] shares looked like a good trade. The red circle on the chart pinpoints the spot:
If only we had actually written, “Short sell CBA now!” we could have crowed on about it. But we didn’t. In all honesty we thought there was still a chance the market could push the zombie bank higher.
Two weeks later and the CBA is down nearly 10% from its recent peak.
Quite frankly it’s still overvalued if you ask us. Based on what goes on the scenes behind this and every other bank, the share price should be around $1 – not a penny more. Here’s why…
Yesterday we took a peek at the Australian Prudential Regulation Authority’s (APRA) Monthly Banking Statistics. It’s been quite a while since we’d done so, but it’s always worth a look just to reinforce our belief that the banking system is one giant Ponzi scheme.
Seriously, the stuff you find out about the banks just by looking at the publicly available information is mind-boggling. You can only imagine the stuff that goes on behind the scenes, out of the public gaze.
Anyway, naturally enough we choose to pick on Commonwealth Bank. It is after all – by their own admission – the Australian bank with the biggest exposure to the housing industry.
What the banks do with your money
According to APRA, Commonwealth Bank has $277 billion of customer deposits. That’s money which you may have earned and which you’ve deposited at the bank for safe keeping – “Look after it folks, it’s all I’ve got” is what you may say if you had to physically deposit the cash.
So, you can imagine if every Commonwealth Bank customer logged onto their internet banking account at exactly the same time and wrote down the balance and then gave it to someone to add up all the numbers, the total balance of deposits would be $277 billion.
That’s reasonable enough isn’t it? That’s what you’d expect. And that’s exactly what you find.
However, thanks to the weird and whacky world of fractional reserve banking, guess how much cash the Commonwealth Bank really has in its vaults?
It has less than 3% of that amount held as “Cash and liquid assets.”
This is from one of the banks that’s touted as being one of the strong ‘4 Pillars’ of the Australian banking system.
Yet despite it being so strong, it only has enough cash on hand to meet 2.2% of its cash deposit obligations.
In fact, get this. Despite the CBA more than tripling the number of loans it’s issued in the last eight years, its cash reserves have actually fallen.
In 2002, the CBA had ‘Cash and liquid assets’ of $7.76 billion on its books, today it’s a pathetic $6.12 billion.
It’s the only one out of the 4 Pillars to have a lower cash reserve today than eight years ago. ANZ Bank and National Australia Bank have doubled their cash reserve, while Westpac has added marginally to it.
Now, the banks will argue, “Ah, but because markets are more sophisticated these days, we have cash tied up in ‘trading securities’ and ‘investment securities’.”
Just $2.20 for every $100 you deposit
Well that doesn’t make things any better. When you deposit your money in a bank account you do so because you want someone to look after it for you.
Right now, for every $100 you deposit in the bank, the CBA keeps just $2.20 in cash. Another $17.60 it invests in ‘Trading securities’ and ‘Investment securities’. And pretty much the rest it invests in loans to businesses and households.
The majority of it going to Australian residential property market.
It’s no wonder the mainstream economists are so panic stricken by the thought of another interest rate rise.
On reading the report from Fujitsu Consulting that 45% of first home buyers were facing mortgage stress, AMP Capital chief economist Shane Oliver said:
“This is a scary survey. It provides a clear warning to the RBA not to push rates up too far or too fast.”
But it’s not the first homebuyers per se that Oliver is concerned with, more likely it’s the need for AMP to offload several billions of dollars of mortgages onto the securitisation market:
“AMP, Australia’s second-biggest asset manager, almost doubled its residential mortgage-backed securities to $1 billion in the nation’s first sale of the bonds this year. AMP had planned to sell $543.5 million of bonds. It priced the main class of $920 million in notes to yield 130 basis points more than the bank bill swap rate.”
Yet again it’s another classic example of the mainstream economists getting economics back to front.
Each argument they make is more illogical than the last one…
Cheap money created asset bubbles which caused the economic meltdown therefore we need to make debt more available so people and businesses can borrow more to stop asset values from falling but this will cause another bubble as people and business borrow more because asset prices didn’t fall, etc…
And so it goes on and on and on. Each attempt at manipulating and already over-manipulated market just creates bigger problems.
And the Australian banking system is at the core of these problems. So, the next time your employer pays your wages into the CBA – or any other bank – just consider that for every $100 that goes in, the bank only ‘looks after’ $2.20, the rest it punts on the financial markets and the housing market.
Happy saving!
Cheers.
Kris.
{ 54 comments… read them below or add one }
Which explains clearly why St. Kevin the Stimulator and his sidekick treasurer ‘Goose’ had to intervene with their dubious guarantee to stop any form of run on these 4 pillars in late 2008. With such meager reserves it would have been all over in minutes. Which makes me now wonder whose guaranteeing the guarantor and please don’t tell me it’s the federal mint?
Very sobering. Thank goodness for the government’s deposit guarrantee! And the guarrantee of borrowings. No need to worry, Jack, the government’s got your back!
With this level of moral hazard, you wonder why the government is so timid in getting the banks to do anything remotely responsible in return for taxpayer support. You would think that (slightly) increased capital and liquidity requirements would be a minor price to pay for what is effectively a taxpayer bailout. But instead, it seems that the government is offering a bailout while still being afraid of upsetting the banks. Talk about a warped situation.
Given all of this, I can’t see how there is any real chance that this house of cards can stay up for any length of time.
What was the time frame of the government’s deposit guarantee? i.e until what date is it valid?
Thanks Kris, for your exposure of the banks. Unfortunately, it’s not exactly new. 10 years ago and more there was a little Australian website that exposed the same sort of things, and more. Take a look to satisfy yourself that I am correct by visiting:
http://dkd.net/oldpoliticspages/moneyalt.html
You can tell the site is dated by the number of links that are now dead, the different matters that were current then, and so on.
The alarming thing is that we are a further 10 years down the gurgler, and the same problems remain. Media has given scant coverage of the issues, government hasn’t fixed the problems, banksters continue to gouge our economy to enrich themselves, whilst the Australian sheeple meekly accept it all without staging a revolution or doing anything that might be effective.
I would just like to ask anyone who agrees with Kris’s article, how are we going to fix the problems?
one way to fix this “over-priced-housing -debacle ”
exascerbated by
KRUSTER & GOOSTER
is to vote for the new
“CAP AUSTRALIA 23 MILLION PARTY”
implemented by the one & only Sir Dick Smith
thats who i am voting for next election
come and joiiiiinnnnnnnnnnnnnnnnnnnnnnn
mmmmmeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeee
How can our banks fail. With $1.2 billion dollars poured into their coffers each week from Compulsory Superannuation Contributions, the banks can’ t lose. At least with your pay cheque deposited by your employer each week into the CBA, you can withdraw that straight away.
Withdrawing super-forget it. It’s in the clutches of the banks forever and a day. And you must pay in because the Government has a gun to your head if you don’t.
yeah micheal
but it didnt save the YANKEES with their equivilant 401ks. etc
they still got raped
i did some maths to try and understand fractional reserve banking. Not sure if i got it right so if anyone knows how it works let me know if i am on the right track
The way i think it works is this: If i put $1 in the bank, the bank keeps 10c and lends out 90c (I used reserve ratio of 10). The bank lends that 90c to someone who buys something. The preson who sold it then deposits that 90c and the bank keeps 9c and lends 81c and so on….
Does that mean by the time the banks have sucked that $1 dry they have lent 8.5 times that amount into the economy or $8.50? So for the $277 billion in deposits mentioned above there is $2.4 trillion in funny money – money that doesn’t actually exist and yet does because we bought stuff with it
So if i am on the right track then cba has $2.4 trillion worth of loans that are only actually only worth $277 billion
$1.00 Starting Deposit
Reserves Lending
$0.10 $0.90
$0.09 $0.81
$0.08 $0.73
$0.07 $0.66
$0.07 $0.59
$0.06 $0.53
$0.05 $0.48
$0.05 $0.43
$0.04 $0.39
$0.04 $0.35
$0.03 $0.31
$0.03 $0.28
$0.03 $0.25
$0.03 $0.23
$0.02 $0.21
$0.02 $0.19
$0.02 $0.17
$0.02 $0.15
$0.02 $0.14
$0.01 $0.12
$0.01 $0.11
$0.01 $0.10
$0.01 $0.09
$0.01 $0.08
$0.01 $0.07
$0.01 $0.06
$0.01 $0.06
$0.01 $0.05
$0.01 $0.05
Total
$0.92 $8.58
GB – yes, that sounds about right, but with this difference. It is a myth, although almost universally believed, that banks first have to have the initial $1, or any of the other figures on your reserve list before making loans. As Steven Keen keeps making the point, in matter of fact things work the other way around. That is, banks will fish around for credit worthy borrowers (well, in theory at least) and will write them all the loans that they can bear and are willing to take up. Then, with approximately one year delay, the banks will chase depositors or anybody with savings who is willing to lend them the reserves they need to have, given the loans they have written.
This is significant, as it demonstrates how, in practice, a bank can gorge itself with “assets”, read: loans written to borrowers, only to find itself hugely overstretched if they then have difficulties securing the deposits they need to have in reserve. This also explains why some banks seem so eager to entice savers money to be deposited with them. Such eagerness, as we have seen of late from some of the banks, is quite plausibly explained by reference to this need to now cover themselves in terms of the reserve requirements they must meet. That’s my understanding, anyhow.
Ah, and should I point out a corollary: A bank is permitted to print out of thin air all the money it can lend out to qualified borrowers, but is not permitted to print the reserve component. It actually has to borrow the reserve component from somewhere else, it cannot simply print it out of thin air. Same goes, presumably, for the salaries it pays to its employees and other expenses.
But then, my question would be this: What exactly stops, say the CBA from borrowing from WBC, and vice versa, the reserve requirement? I suppose that there would be rules against such hanky panky, but it should not require too much ingenuity to get around such annoying rules, and only the angels know what cannot be hidden in off-balance sheet accounts.
I have just read Sayce’s articleWhat a load of tosh!!! More oversimplifications, more exaggerations. For starters, if the bank does not lend out the majority of the money you deposit with it, where will it earn an income with it, so that it can pay interest on your deposit? As for the actual amount of physical cash on hand, why have more of it than you need to? Most transactions these days are non-cash, and you don’t need to have cash on hand to honour electronic transfers, cheques and bank cheques. These are merely records and do not necessitate any sort of handling of physical cash.
Plus, the article would seem to insinuate that your deposited money is not safe, that it is not being looked after by the bank. This is utter rubbish, of course. Especially when your deposits are guaranteed by the government, your money, in nominal terms, is as safe as it can be. They will not guarantee its purchasing power, but you will get back dollar for dollar, even if the bank goes belly up.
I honestly struggle to see anything of value in this paper. It must be one of the worst hatchet jobs produced by Sayce so far.
Dave – Ten years of wilderness must be trying to the patience of even the most committed of bears. How would one be doing if one shorted the banks 10 years ago?
And this story for those who follow the China story and the commodities. It is a sort of bedtime story for the bears. Enjoy.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aAid0.8z1qBs&pos=6
cb amazed me by writing: ‘For starters, if the bank does not lend out the majority of the money you deposit with it, where will it earn an income with it, so that it can pay interest on your deposit?’ The problem is not that the bank lends out the money you deposit with it, the problem is that the bank lends out many times more than everybody has deposited with it… money that the bank has conjured up out of thin air, money that did not even exist until the bank created it. The potential for this to cause inflation and other problems that affect all of us seems pretty obvious to me, yet the whole of Sayce’s article seems to have gone right over cb’s head.
cb went on: ‘As for the actual amount of physical cash on hand, why have more of it than you need to?’ One reason is to provide proof that you actually own it, a bit more plausibly than figures that exist only in the bank’s computers. It could go a long way towards preventing fraud on a monumental scale by manipulators in the banking industry. You may have heard reports that something like 90% of the world’s entire wealth is owned by fewer than 10% of its population. When you discover that most of the 10% are bankers you might wonder how they got into that remarkable position, and want some reassurance that fraud is not involved.
cb then claimed: ‘when your deposits are guaranteed by the government, your money, in nominal terms, is as safe as it can be.’ Before the recent financial crisis the government did not actually guarantee the deposits in privately owned banks… one of the reasons that so many people chose to deposit their savings in a government owned bank (when there was one). Moving on to the present, it seems that the government is now prepared to go to extraordinary lengths, at its taxpayers expense, to guarantee that our deposits will not be lost if a bank fails. I don’t see that banks can claim much credit for that, and even if deposits are now guaranteed by we taxpayers that is just one of many bank caused problems dealt with.
I suggest you give the banking industry a bit more thought, cb. You are smart enough to figure it out.
On Kris’ other favourite topic of the free market in regard to wages and one of my favourite soap boxes I watched the ABC breakfast show this morning that had two small business people who were “outsourcing” their work to foriegners.
The first who runs a you have something to rent to someone else site paid the princely sum of $100 to someone to design a webpage for him instead of paying an Australian $5k to do it (I do have to admit it is expensive to get a web page designed here although $100 is a bit low too, there must be some happy medium) and also outsources IT support to a lad in Russia. The other is outsourcing some secreterial services to a lass in the Phillipines I think. The first was kind enough to end that segment with a warning to us that insist on a minimum wage – there are people hungry for your job!
The article in today’s newspaper should also please you. Indians are taking the kids to work on the Commonwealth Games sites because they are behind. Super.
Two fantastic arguments in support of Kris’ argument that wages should be subject to the free market. There you go Kris, thanks to the internet and non enforcement of minimum wage laws by governments we no longer have to bother with minimum wages. You should be pleased.
And there are two business that will never have mine. And I will not be watching the Commonwealth Games either.
To answer you question DK you don’t. If they want to run their business that way then they can. But let them fail. Don’t bail them out with direct and indirect support, the same as any other business.
GB, I think you’ve got the right idea.
There’s a pretty good explanation and example of fractional reserve banking here:
http://en.wikipedia.org/wiki/Fractional-reserve_banking
cb – i wouldn’t count on the gov guarantee. They just guaranteed billions of loans, billions of our deposited money and need billions to pay for the boomers retiring
They wont have the money to do it
As for fractional reserve banking:
That means the banks created funny money but the people who sold stuff and deposited their money in the bank claim that funny money as their’s. They sold something and deposited it – that is their money – so you must include the lent money as actual money.
So for every dollar i put in the bank, the bank creates $8.50 of money perceived to be real.
It seems to have started around the time the gold standard was removed – is this what being backed by gold prevented??
one for PF
http://spectator01.businessspectator.com.au/bs.nsf/article/australia-pd20100202-2a2r6?opendocument&src=blb&is=financial%20markets&blog=keensian%20economics
Wow, see Lord Monckton being interviewed by the ABC’s Fran Kelly:
http://www.youtube.com/watch?v=dVd8OwvNZ5Y&feature=player_embedded
And this one as well, on the ABC. It is good to see Monckton being at least allowed to explain and argue his points, unlike in the Cubby interview where he was not.
http://www.youtube.com/watch?v=TSXVZwQpsjQ&NR=1
GB at post 18 – yes I have read it. Interesting that he wanted rates to drop to zero and stay there for a long time only 12 months ago, and now he complains about a setting of 3.75% not increasing. I wish he would make up his mind. No wonder he is walking to the summit.
Etch – I love the way you give everyone one star, but yourself 5 stars. Nice work mate, I’m impressed.
Tell me if one of us writes something you agree with do we get 2 stars, or is 1 star the best we can get?
Is there a criteria?
cb…
How can you possibly say:
“Plus, the article would seem to insinuate that your deposited money is not safe, that it is not being looked after by the bank. This is utter rubbish, of course. Especially when your deposits are guaranteed by the government, your money, in nominal terms, is as safe as it can be. They will not guarantee its purchasing power, but you will get back dollar for dollar, even if the bank goes belly up.”
So Sayce is wrong for saying that the Banks are dodge for not holding much of our deposits in liquid cash???? Just because the Government (TAXPAYER!) would foot the bill if they went belly up??? So this somehow invalidates Sayce’s point that the Banks are a liability and sham! Sayce never said or insinuated we should rush to the banks and get our money, but simply pointing out that they are not as safe as everyone believes – the fact that the Government will bail em out isnt a solution or doesnt change that…it simply means we are all going to be up for higher taxes etc… Geez mate, this is elementry stuff and to come from you I am very surpised!
cb – you have had a real shocker today. You seem to be switching between climate change and GFC – it is clouding your reasoning.
PuntPal – I agree that the depositis held in banks are guaranteed by the government and they are safe.
You raised a point that the bank doesn’t hold our money in cash (from the article) but you will know that a bank has to lend a proportion of their depositors balances out to function as a bank. That is how they make money. How can they just hold our money and sit on it?
At present banks work on a BASEL 1 agreement but a tougher Basel 2 is around the corner. Have a look at that on the internet and let me know your views later please.
Yes, we’re already seeing the government, the RBA and banks colluding as much as possible to keep the housing bubble inflated. We have had FHOG boosts, generational low interest rates, government guarrantees (with the government being unwilling to demand much in return), reluctance to tighten capital adequacy and liquidity requirements, spruiking galore and business made to suffer with higher interest rates so that mortgage rates can be kept lower. Almost everything possible has been thrown at residential real estate to keep prices high. And it’s pretty much worked – for now.
However…we’re now on the precipice. AFG lending finance figures show that lending for housing is plummeting. The ABS figures for housing finance show the same thing. The FHOG boost has ended and rates are on the rise.
See ABS figures here
So now the RBA is spooked and is $hit scared that house prices may be about to fall. So they pause for a breather. Oh dear! And then, as Peter Fraser says, there is Basel II around the corner, which will tighten up the banks and restrict credit. Unless I’m reading this incorrectly, all the risk is on the downside for house prices. Fewer housing loans are being given and credit is tighter. How on earth is this going to translate into higher prices in the near term?
The government had better start pumping the cash back into housing, bringing back the grants. And the RBA might even need to start dropping rates again. Otherwise, Chris Joye might not be a happy chappie in a few months time. And K Rudd might find himself on the verge of being a one termer.
PuntPal and all, I have something pressing on my timetable for now, so I cannot respond in more detail. But let me just make this point for the record. My view on the banks is that in a fractional reserve banking system are permanently insolvent. If we all wanted to take our money at the same time, or even if just 15 – 20% of moneys held on deposit were withdrawn at the same time, no bank would survive. That is just the nature of the beast. They could survive, of course, only if the rules governing them were relaxed and effectively were allowed to trade while insolvent.
Now, there is absolutely nothing, NOTHING new in that. It is a scam and a con, yes, but is it something new or surprising as a revelation? NO. So, we either accept modern day banking for what it is, that it is a scam and a con and that therefore it has to be constantly supported and bailed out by the taxpayer if there is a run on the banks, or we do not. If such an arrangement is not reassuring to someone, they can still withdraw their cash and put it under the pillow, or exchange it for real money, gold and silver, and be exposed to no risk from the banking system.
Anyhow, the outright and permanent vulnerability, if not insolvency, of the banks under the current system is, and has been, a fact for generations, so I don not see what monumental scary revelation anybody could see in what Sayce has written, and especially the way he has written it. I stand by my arguments that he shonked this one, which is far from unusual.
Bravo that, Ralph. But I must run. Talk to you all later.
Hang on GB, Dave, cb, you’ve neglected to take into account the interest charged on all those loans. Taking GB’s example, the bank lends out $8.50, but every borrower pays interest on their loan, so the bank will get back $8.50 plus a very large amount of interest.
My mortgage repayments are mostly interest and only a small part is repaying the capital. If I choose to pay the minimum over 25yrs, I will pay the bank much more than double what it lent me in the first place. I reckon I pay the same amount to the bank each year as I do to the tax man.
The banks are not broke, and they will not go broke. Australians cant walk away from their loans like the Americans can. If the value of my property falls and I sell for less than I bought, I still have to pay the remainder to the bank plus interest. There’s no escaping it.
PF – I am aware of Basel 1 and Basel II.
I am massively in support of changing the way banks operate. I think the proposals, which strengthen global capital and liquidity regulations will promote a more resilient banking sector. And this is the key…just because the Government guarantees our deposits, doesn’t mean we have a resilient banking sector. It means we as taxpayers are sharing the risk that the banks are taking, yet the billions of profits that the banks are earning go to the likes of Ralph Norris and Gail what’s-her-face…and their shareholders. It’s a moral hazard, not a safe banking structure
cb – I understand that fractional reserve banking means they are always technically insolvent – but the reason why your remarks about Sayce are totally unfair is because of the figures that he reveals. In terms of liquid cash – they are not holding 10%, but 2.2%
So the point Sayce was making was that with the fractional reserve system, you would expect that the CBA with their $277 billion, you would think they would have at least $27 billion in liquid cash. They have 1/4 of that! So although may think you knew their financial vulnerability, I have never once heard you mention this low level of liquidity.
The reason this is breathtaking is because of the constant reports of how rock solid the banking system in Australia is. APRA apparently are some marvellous institution, but they have allowed the CBA to punt with our money on the mortgage markets. If house prices dropped by even half the amount that the Economist Magazine says they are overvalued, then these banks would fall to pieces…
But according to you guys that cool – coz the Government’s guarantee our money!!
Hey PQ. I think the argument is not about how much banks earn on the money they loan to over indebted Australian’s on the mortgage money-go-round. It’s pretty obvious they make staggering amounts and are very interested in continuing their party with bigger loans because it brings in big income to them. Why lend $100K when you can lend $400K – which apparently is now the average mortgage in NSW? The question refers to actual liquidity. Small businesses know it well as cash flow and if you don’t have it on hand you can seize up real quick. The banks were indeed rescued from insolvency by Rudd in 2008. What were they gonna do if savings depositors came in large enough numbers to demand their money back? Come and ask you and every other mortgagee for an advance? And by the way. The continued lie about ‘we are so different here in Australia’ because we can’t walk away from our mortgage commitments like the Yanks. Well mate that’s bullshit. It is a little harder but if you’r smart enough to get some good advice and strip assets then declare yourself bankrupt your bank that now has the house it lent you money for will wait and wait and wait but will have to settle on a payment less than what you owe. Just remember to stare vaguely at the judge like Bondy did and utter ‘I can’t recall’ several hundred times before discharging your bankruptcy for 1% of what you owe. Our level of debt is a house of cards and we are having the illusion of prosperity and banking jurisprudence rammed down our throats by that industry and our lily livered politicians to maintain sentiment because when that goes mate, it’s all over.
And as for the favoured past time of bashing Steven Keen read the following from today’s Business Spectator.
“Those who were right include the strange bedfellows Steve Keen, who has maintained that rates will remain lower than expected, and Terry McCrann of the Herald Sun who argued last Saturday that a rate rise was far from a done deal.”
Wonder what other predictions he might eventually get proved right on?
PuntPal – the bottom line is this:
1. The banks are technically insolvent.
2. If they should need more liquid cash than they keep on their books, they will get it.
3. If they need solid, paper cash, as a consequence of unusually increased cash demands, they will put in the order and it will be printed up and shipped to them in no time. There is nothing particularly alarming about this. If anything, one should be more alarmed about what they might have sitting on their off-balance sheet accounts. By comparison, Sayce’s concern about liquid cash on hand is but a furphy.
4. Worse/even better, if the banks lose money because of bad loans and defaults, then you and I will bail them out. That is the deal, it always has been, and as far as the eye can see, it will continue to be for a long time to come. It is the ugly truth, and since you and I can do precious little about it, we better get used to it.
Excuse me for pointing this out… it may have already been covered but i hate the way everyone keeps saying the government guarantees our savings… we pay the government through tax… the government isn’t guaranteeing our savings WE are guaranteeing our own savings – the government may borrow money to pay the savings out but its us that have to pay back the loan with interest regardless of whether we benefited from the guarantee in the first place. at the end of the day its always the population at the pointy end of the stick regardless of who screws up!
PQ – As BB said, bankruptcy is something you have overlooked. As the saying goes “A debt that cant be repaid, wont be repaid”. If China slows and some of these miners who bought $700K houses all of a sudden are pushing trolleys, are you saying the banks will be ok because that miner still has to pay back the loans + interest? I dont think so…
If the asset falls in value (housing crash) then the miner will decalre themself bankrupt and its the creditor that loses out (the banks)…this is a nice segway to cb – who seems to think this is ok OR that Sayce is an idiot OR I dont know what he is trying to say?
I dont understand your position cb – you seem to be saying that Sayce is an idiot for pointing all this out because its so obvious, so are you saying that it wouldnt matter if the banks held even less in liquid cash reserves??
Lets say the CBA dont even hold $6-7 billion in liquid cash…lets say its $1 billion, or even worse $500 million (because that is the most they have ever had in cash demanded over a 2 month period, for example). Are you saying that this isnt something to be worried about?
Are you saying the Banks are still safe?
I simply dont get your point – other than trying to mock Sayce? Listen, I dont care and I am not sticking up for Sayce for the sake of it – I just dont understand the point you are making in this thread.
Well, PQ, modern banking is clearly good business if you can get it.
Hey, PuntPal, I understand where you are coming from and you are both entitled and welcome to ask the hard questions. For my part, I will try to do them justice.
Sayce’s article, as reflected in its title, appears to have its central thrust with this suggestion in mind, that banks do not in fact look after you money very well, and that therefore your savings with them are not safe. Then he marshalls a few arguments to support this contention, all purporting to show that the banks are wobbly and that they could be pushed under with very little effort. If this is not what Sayce’s central thrust is, then I need to be enlightened as to what it might be, because, as usual, he deals in insinuations and innuendo, stretching here, pinching off a corner or two over there, until the supposed facts are tortured enough to confess to his conclusions.
Anyhow, insofar as if I got his central thrust right, then I simply contend that he is arguing rubbish. If I did not get it right, then I am more than happy to have another look at the enterprise and its arguments and review my evaluation.
PS – you also asked the question whether the banks are still safe.
Any decent answer, I would think, would have to proceed in two parts:
1. For depositors up to the deposit guarantee limit – yes, they are very safe.
2. For unsecured creditors, such as shareholders – probably not. I personally would not tough them with a barge pole.
3. A relevant third question would be whether one should short them. Given my particular profile, I would not. You just don’t know what manipulators do in the background to what, so their share price can shoot off in any direction without any notice. However, traders have tools and methods of keeping themselves safe, and the banks could well be a suitable section of the market for them.
Sorry, not ‘tough’ them, but ‘touch’ them.
And, incidentally, I should point out that, had Sayce argued against being long banking shares, I would have no argument with him. But he was addressing their safety and stability from the point of view of the depositor, and it is on this front that I consider his arguments bunkum.
In an apparent fit of hopelessness, cb wrote: ‘if the banks lose money because of bad loans and defaults, then you and I will bail them out. That is the deal, it always has been, and as far as the eye can see, it will continue to be for a long time to come. It is the ugly truth, and since you and I can do precious little about it, we better get used to it.’
Which amounts to saying that whatever crazy schemes our government puts in place we can do precious little about it, so we better get used to it. Sorry, but I’m too much of a rebel to accept that!
CB -
would love to support you mate, but i’d have to give this another couple of reads first!
Just one thing I noticed though with what you said:
“if the banks lose money because of bad loans and defaults, then you and I will bail them out. That is the deal, it always has been, and as far as the eye can see, it will continue to be for a long time to come”
I always thought that – before the government(s) stepped in to secure depositors’ funds at the outset of the GFC – it was normal for people to lose their money if the bank went under? Bank bailouts are not the norm – or at least that’s what i always thought.
So is it really true to say that this is the way it’s always been?
Okay, Sandra, you have a point. I have been talking somewhat losely when I assumed that government implicitly has been standing behind the banks all this time. Perhaps some veterans could point us to instances where Australian depositors lost their deposits. I have not heard of such incidents over here, but I will be happy to stand to be corrected.
Good on you, Dave. A worthy cause is always worth fighting for.
yeah back to the eureka stockade
cb – Sayce was never saying that our deposits were not safe. Point out one instance where you can show he was suggesting that in the article? Maybe I missed it, but I have now read it twice.
This is my take on Sayce’s awesome article – seriously, one of his best all year.
Banks in the old days would take your deposit and put it away for safe keeping. Now I am not suggesting that CBA should have $277 billion in their vaults just because that is their obligation to depositors…but over the last 20 years Oz Banks stopped just looking after our deposits and instead loaned it out to fund our housing boom.
Kris has picked out CBA because they have taken this to the extreme…as he points out; they have actually lowered their liquid assets over the past few years – despite going on a lending frenzy to mortgagees.
I understand what you are getting at with the point about the Government implicitly backing their deposits, but that is the exact problem! Because of this, the CBA think they can have as much exposure as possible to the residential mortgage market. They know that if these loans go sour (a lot of them will!) then Ruddy and his cronies will come and save the day with OUR MONEY!! (Thanks AC for also pointing this out, this guarantee is some painless thing, it would come at all of our expense).
So in summary, the point Sayce is making is clear, important and definitely worth being worried about – AUSSIE BANKS ARE JUST LIKE THE REST OF THE BANKS – THEY HAVE LENT OUT WAY TOO MUCH COMPARED TO WHAT LIQUIDITY THEY HAVE IN THE VAULT AND THIS WOULD MEAN A HOUSING CRASH WOULD WIPE THEM OUT!
The fact that the Government guarantees depositors does not change this (like I said, Sayve and no-one on the forum has suggested we need to go get our money out of CBA – after all they have all my measly savings). In fact, the whole reason this situation has gotten so out of control is precisely because the government has guaranteed them.
David – I am with you mate and I love your passion. We cant just accept these things. cb is often telling me “thats just the way it is” – but if people had that attitude throughout history, slavery would still exist in the US, Aboriginals would not be allowed to vote and women would be prevented from entering certain occupations (and gays would not be allowed to admit they are gay in the US – oh wait, those loonies in the US still have a fear of letting openly gay people in the military – religious freaks!)
Change is always possible and the first step is recognising the need to change things. We need to change the way the whole financial system operates and for that we need it to eithe totally fall apart and cause chaos – or we need people to be informed and a grass roots political movement to form and take power from the two major political forces…I am opting for the latter
cap 23 mill oz party
PuntPal – As I said, the article’s overall thrust has been that banks are not looking after depositors’ money, and that instead of keeping their money safe, they lend it out and invest in goodness knows what assets and ventures. It is true that he stops short of saying what is blatantly obious cr@p, but given that he addressed his article to the depositor, not the unsecured lender and shareholder, the insinuation is there. At least that is the conclusion that one would jump to if one read his article and gave it full credence:
“If my bank is being reckless with my money, then maybe my savings are not safe with them, and I better withdraw them before they squander my hard earned cash.”
PuntPal, tell me if anyone with their faculties intact and who had no contrary information to rely on from other sources would conclude anything else after reading Sayce’s article. Tell me especially whether they would still be left with the belief that even though the banks are being reckless squanderers with saver’s deposits, those deposits are nevertheless safe, and that savers need not worry about all the shenanigans of the banks with their savings while chasing their bonuses.
You have to read that article with these considerations in mind to get to the heart of and the likely effects of the arguments on the reader. I maintain that, insofar as the the article has been aimed at savers and depositors, which it clearly has been, it is largely misleading twaddle.
Now, as to your argument of moral hazard, that certainly is there. The banks know that there is no way in the world that they will not be bailed out if they are squeezed with cashflow, or worse, sustain losses that exceed their reserves. Consequently, they will be likely to try running as lean an inventory (reserves) as they can. After all, if they can count on the tax payer, why not? Their reasoning stinks, but iis entirely rational and understandable.
However, there is a little more to the low reserves probably, and I will cover that a little later.
Sorry but I dont accept your argument – yes Sayce was saying that the Banks take our deposits and then lend them out recklessly, but I dont agree that someone reading this would assume that their deposits are in risk…
the point as I have said on 3 occasion and would love Sayce to confirm tomorrow – please Kris if you read this! – is that the our banking sector is house of cards. IT HAS NOTHING TO DO WITH THE SAFETY OF OUR DEPOSITS!!
If the banks collapse because of recklessness we all pay – even though depositers will get their money via the Government, because WE FUND THE GOVERNMENT WITH TAXES!!
So say I get my money back off a collapsed CBA, I will have to pay for indirectly through higher taxes (look at what is happening in US and UK – that bailout money didnt grow on trees, it is a cost to the population of those countries).
I think you are actually being intellectually dishonest here, and you are the one twaddling
It was clear that this is what Sayce’s article was about and I only wish the mainstream press reported like this.
A run on the banks might be just the thing to wake up the regualtors to the trouble that lies ahead!
PuntPal – this discussion is clearly deteriorating. I suggest we leave it at that.
PuntPal, perhaps I should not, but I will make just one more attempt at demonstrating to you that there is innuendo in the article, as I suggest:
“Just $2.20 for every $100 you deposit
Well that doesn’t make things any better. When you deposit your money in a bank account you do so because you want someone to look after it for you.
Right now, for every $100 you deposit in the bank, the CBA keeps just $2.20 in cash. Another $17.60 it invests in ‘Trading securities’ and ‘Investment securities’. And pretty much the rest it invests in loans to businesses and households.
The majority of it going to Australian residential property market.
…………
So, the next time your employer pays your wages into the CBA – or any other bank – just consider that for every $100 that goes in, the bank only ‘looks after’ $2.20, the rest it punts on the financial markets and the housing market.
Happy saving!
Cheers.
Kris.”
There it is. The bank only looks after $2.20 of every $100 you deposit. The rest it bets in various risky ventures, with the bulk of it going into the most risky of them all, according to Sayce, (AND YOU), the property market. It is insinuation, innuendo, and total bunkum. But let us try not to fall out over it. It is just not worth it.
cb – True its not worth it, we agree to disagree on this one.
Cheers
My understanding of the Government ‘guarantee’ prior to end 2008 as the s*it hit the fan was that there was no implicit warranty required from the banks in respect of coughing up depositor savings. It appears to be one of the things nobody thought of as the traditional links between ‘government’ owned banks such as Bank of NSW (morphing in Westpac) and eventually the Commonwealth Bank sell out. Whilst banks were government owned there was no risk that you could loose your life savings. At end 2008 I think there was a commitment by St. Kevin and confirmation from then Liberal leader Malcolm Turnbull that $20,000 of savings in bank accounts would be guaranteed. In the context of those recent scary days they quickly realised that wasn’t enough to stop a run. Many ‘doctors wives’ were already on their way to their local banks with a suitcase! Rudd kicked it up to $1M and extended it to non-bank savings (but not super of course) and thence it stays today with no end in sight as far as I know?
That’s right, BB. Now the government guarrantee is in, it’s probably going to be there forever. The government might put a fee on it to make it look like the banks are paying something for it. Same goes for the guarrantee of borrowings. But regardless of the tweaks that may or may not occur, I think it’s safe to say that there will always be an implicit guarrantee. As several others have said, the banks know the government will step in and bail them out as soon as things start looking shaky. Out overleveraged financial system depends on it.
It’s moral hazard of the worst kind and I think it stinks. But it’s there. I would be able to live with it better if the gov’t had the guts to beat the banks into shape a little in return – a bit of quid pro quo if you like. Asking the banks to boost their reserves and increase their liquidity is not too much to ask in return for the safety of a guarranteed taxpayer bailout when the $hit hits the fan.
Bravo that, Ralph. You would expect at least that much.
However, we might see our wish granted in the form of government bonds that the banks will be required to hold as part of their reserves. Clever, ey? Treasury killing two birds with one stone.
I may have it all wrong, but, as a small business operator, I am constrained by laws, (not to mention controlled credit), that prohibit me from operating insolvent. It seems to me that the bigger the business the less constraints you have on you, all the way to the ‘TOP’(?), that is the Government, who operate under a situation where the whole assets of the nation could not bail them out.
Why not invoke their own laws on bankruptcy, wipe all their gambling debts and restart our own National Bank, like the CBA used to be, and build our Nation back up.
Sound too far fetched? It worked when our own Government credit system paid our own way through the second world war, exactly as did the USA, and came out of it healthily industrialised.
It worked when the Government via the CBA financed the Snowy Mountain Scheme and paid for it before it was even completed through profits already generated.
The problem is we are under the RULE of a world wide MONETARIST system, and that is a three tiered system, PROFIT FIRST, PROFIT SECOND AND ALL PROFITS to the financial empire that runs it.
Bailing out the banks? No, just let them drain our Super, get us further in debt with easy credit, further into their control, and so it goes on.
Australia wasn’t meant to be this way.
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