That so many investors seem to be making unreasoned decisions and dumping stock as share prices fall is understandable if they are, as has been described, in a state of blind panic, occasioned by unremitting fear. But that state of unreason should not infect journalists, who ought to be able to view events with cool dispassion. Yet we see them apparently also afflicted with unreason.
Take the Government’s response to the global financial crisis, now just the ‘GFC’. To have done nothing would have seen the flow of funds from Australian banks, building societies and credit unions to overseas banks that had been guaranteed. By being the first to offer a government guarantee on bank deposits, Ireland started the inexorable process of ‘follow-the-leader’ with European banks offering the same to stop outflow to Ireland, and banks elsewhere being forced to follow. Not one commentator has challenged the validity of our Government’s initial move, and it was supported by the Coalition in its passage through the parliament. But that has not stopped Coalition members and their media cheerleaders from labelling the Government’s actions as having been bungled. If the initial move was not bungled, what was? Michael Stutchbury in The Australian says “Not enough work was done on the 100 per cent guarantee when Rudd announced it on October 12.” Stutchbury does not say what more work was needed. Because he doesn’t know. Like so many journalists his learned opinions emerge only after he has gazed down the retrospectoscope.
On the subject of market-based managed funds, who have frozen redemptions to cut the flow of funds to the guaranteed institutions, Glen Milne in the 25 October issue of the Daily Telegraph in his piece How Wayne Swan made a right royal gaffe canvasses the idea that if the Government had followed Malcolm Turnbull’s suggestion of a $100,000 cap on the deposit guarantee, the flow of funds from the non-guaranteed managed funds would not have occurred to the same extent. That might be so, but according to Government figures, at $100,000, 40% of bank deposits would not have been covered by the guarantee. What a protest that would have evoked. Columnists like Milne seem to be unable to look at the whole picture, preferring instead to cherry-pick aspects that suit their pre-ordained attitude.
Recognizing the need to levy a fee for guaranteeing very large bank deposits, the Government consulted with the regulators and arrived at a figure of $1million over which a levy would be paid, the amount depending on the rating of the institution. According to Government figures this threshold would exempt 99.5% of bank depositors from the levy. This was announced on Friday last. Was that the bungle? If so, how was it a bungle? Was it too slow? If so, when should it have been announced? Would an earlier announcement have stopped the flow from investors in non-guaranteed funds? Yes, but only for investors with more than $1 million in managed funds. As most of these investors have less than $1 million invested there would be no more incentive to stay with their funds than there is now, and even those with more than $1 million could break the amount into aliquots of less than $1 million and transfer them separately.
There have been numerous references to the ‘unintended effects’ of the Government guarantee. Of course they were unintended, who would ‘intend’ to cause market distortions? But ‘unintended’ does not mean ‘unexpected’. It would not require Rhodes scholarship to anticipate that if one sector of the financial world was guaranteed, money might flow there from the sector not guaranteed. What was likely unknown was the extent to which that would happen, the extent to which investors who had chosen to place their funds in a higher interest environment, managed funds, which by definition mean higher risk, would feel so fearful of the safety of their deposits that they would move them to a lower interest environment just to get the guarantee. The funds and the Government watched, and when the flow became too great, the funds froze redemptions. Can anything be done to help them? The Government is consulting with them to see what can be done. The fund managers don’t seem to be blaming the Government for their situation, although they acknowledge the guarantee has been one among several causal factors. It’s hard to see how the Government can ‘guarantee’ funds in organizations that depend for their increased returns on making riskier investments than do banks, in the same way as they guarantee banks. They might as logically ‘guarantee’ returns on the stock market. The idea of a partial guarantee has been suggested.
Milne calls Wayne Swan’s advice to managed funds investors to seek help from Centrelink if they were experiencing difficulties as ‘a right royal gaffe’ al la Marie Antoinette's 'let them eat cake' retort. How pathetic. What would Milne have said if Swan had no advice to offer at all? Centrelink is there to help in such instances. Milne calls the original initiative a “poorly-thought-out ‘big bang’''. But he doesn’t say what approach would have been better. Why? Because he has no idea. He is engaged in casting uniformed poorly reasoned aspersions at the Government without the foggiest idea of what might have been a better course of action. By revealing his emotions as he does, by relishing the opportunity to lambaste the Government, no matter how illogically, he shows his true colours. If you have the stomach for looking at Milne’s article, you will read a condescending all-knowing parent to stupid child ‘lecture’ that only someone with unbridled ego coupled with unclear thinking could write.
It’s easy to use words like ‘bungling’ but no one has shown where the bungling occurred. Until journalists, like Milne, who seek to make a good story out of this fraught situation exhibit more reasoning to support their assertions, no one who really thinks will give them credence. Maybe that won’t faze them – stirring the pot among the shallow thinkers may be their object.