The bank guarantee – what does the Opposition and the media really believe?

Ever since the Rudd Government announced its guarantee for deposits in banks, credit unions and building societies there has been a running commentary from the Opposition and the media about that move.  After a brief flirtation with bipartisanship, following Tony Abbott’s dictum that oppositions should oppose, propose nothing, and turf the government out, the Opposition has embarked on a corrosive process of criticism in the hope that some of the gloss would be rubbed off the Rudd Government.  Even if that were a legitimate course of action for oppositions, it would improve their standing if they at least added their considered opinion on the best course of action, so the public could judge which seemed better, their's or the Government’s.  So far, the only recommendation that Malcolm Turnbull has made was to limit the guarantee to $100,000.  All the rest has been carping criticism.

One would have hoped though that the media might at least have been even-handed, dispassionate and critically analytic, and that their analyses would be based on factual evidence, precedents, experience elsewhere, or well-founded, economically sound arguments.  Sadly that has not been so.

We have seen a wide range of appraisals. Janet Albrechtsen’s 12 October piece Courageous Rudd overcomes history and populism, written the day of the guarantee announcement, says “...the Rudd Government deserves praise for acting responsibly and courageously.” and “Whilst safeguards, limits and restrictions need to be added to today’s measures to avoid them becoming blank cheques for foolishness, the government has clearly demonstrated leadership at a critical time. It is a sign that the Rudd Government is economically responsible in direct contrast to the Liberal Party populists who have ignored the international reality that banks are falling over, or being bailed out by governments, on a weekly basis.”  No mention of bungling.  Paul Kelly too had praise initially, although he subsequently hedged his bets by saying that although the unlimited guarantee was a ‘mistake’ it would do the Government no harm, and that Rudd had played his cards brilliantly.  Predictably, Dennis Shanahan labeled the move as Rudd’s ‘first big mistake’.

As time went by, with the benefit of hindsight, the media began to express even greater doubts.   Some, such as Alan Kohler in Business Spectator on 28 October said in Savings in a stranglehold  “Unless they (Rudd/Swan) are to go down in history as the bumbling fools who wrecked the Australian economy, they must instantly, this morning, put a universal price on the deposit guarantee that was announced on October 12.”  Strong words, but at least he offers advice, namely that every institution be enabled to offer AAA accounts that pay zero interest, and explains how this would work.  Who knows if there’s any merit in his advice, (no one else has publically endorsed his views) but at least he’s explained himself.  Not so the rest of the media. [more]

The Australian overplayed its hand in suggesting the Reserve Bank reservations had been either not been passed onto the Government, or were ignored.  It was caught out.  Several of its journalists have taken up the cudgels and have taken a swipe at the Government, culminating in a piece this morning’s 30 October issue of The Australian, Policy caught short in a crisis by respected journalist Mike Stekatee, in which he made several assertions that are archetypical of much of contemporary media opinion.  Talking about the guarantee he says “Turnbull is right when he says it was rushed and bungled.”  Rushed, yes, all agree the situation was urgent, but Stekatee provided no arguments to show how it was bungled.  He goes on to say “The Government went further than in most other countries, despite our banks being in better shape.”  So he’s arguing that the better shape a banking system is in, the less it needs a guarantee.  It might sound self evident, but where is the evidence?  In casting doubts about the wisdom of an unlimited guarantee, and the levy on amounts over $1 million later imposed, he says “Turnbull's suggested threshold of $100,000 is closer to that set in Europe, but whether it would have solved the problem is anyone's guess.”  Given that admission, what then is the ‘right’ threshold?  More or less?  How much more or less?  Steketee offered no opinion.  Like many other commentators, he has latched onto the conventional wisdom that there is a ‘right’ threshold, without ever stating what it might be, but quite certain that Rudd’s initial unlimited guarantee followed by a $1 million threshold for a levy was ‘wrong’, a 'bungle', and that his actions have resulted, at least in part, to the flow of funds from non-guaranteed funds to guaranteed institutions/funds, although he points out that 10 funds had already placed a freeze on redemptions before the guarantee was announced.  So clearly investors in those funds saw reasons to make their move before the Rudd guarantee.  The extent to which the advent of the guarantee accelerated that movement is unknowable, but like so many commentators, he attributes most of this ‘problem’ to the guarantee.  Again there’s no supporting evidence.

Further on he says “The truth is that the Government has been making it up as it goes. It is understandable that it did not want to be caught napping by fast-moving developments overseas, but it overreacted and it has been scrambling to patch things up ever since.”  Of course the Government has been making it up as it goes; urgent and unique situations, for which there is no precedent, require that.  But how has it ‘overreacted’?  Journalists seem to think that just repeating mantras that say the same thing: ‘bungled’ and ‘overreacted’ make them valid.  Experienced journalists must know that this is not so.  These words reflect individual opinions, often shared by others, but all the like opinions in the world don’t make them right.  The fact is that in this complex, rapidly evolving, completely unique financial situation, no one has the wisdom to unerringly know the best way to proceed.  Rather than acknowledge that, he has followed in the footsteps of other columnists in his condemnation of the Government’s moves without ever revealing what would have been a better course of action, and why.  The fact is that neither he, or anyone else, knows. 

If only journalists would acknowledge that, and write pieces that are helpful to our understanding of this complex dynamic situation, rather that fuzzy material that does little to enlighten.  Instead, they are infected with groupthink, both in expressing their opinions, and in their failure to back their opinions with plausible evidence.

In Malcolm Maiden's piece in Business Day in today's Age, Rudd's wacky 'become a bank' idea is impractical and smacks of desperation, he says "There's no doubt that the Government had to guarantee bank deposits when it did. Ireland's earlier decision to guarantee its banks forced every government to follow suit, or risk being swept away by fear-laden depositor runs to regimes that did offer the guarantee. By the time the Rudd Government acted, a run was developing here in the smaller banks.  And the bank deposit guarantee accelerated a move by investors out of managed funds and into the safety of the now explicitly guaranteed banks, rather than creating a run. Money had been moving away from funds into cash, government debt and bank deposits all year, as it always does in financial crises.”   Later he offers his advice: "The best long-term solution is to re-establish the status quo, by withdrawing the bank deposit guarantee, and replacing it with the more limited, $20,000 deposit insurance scheme the Government announced in March, before the crisis went nuclear.  The markets are going to have to stabilise for that to occur. But if stability returns next year there would be a case for truncating the three-year term of the bank guarantee"  Advice, but no evidence to show how this is a better option.

So what does the Opposition and the media really believe about the bank guarantee?  From all that has been said and written, it seems that they don’t know what they believe, and even when they think they do, they advance no evidence to support their beliefs.  Talk about the blind leading the blind.  Pity is they don’t realize how sightless they are.

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doghouse

31/10/2008Nice piece, I do think the situation is a mess. But I do believe that the Gov had no choice and if it had chosen to conduct a lengthier analysis of the situation before acting it still would have been crucified and there would have been a run on banks AND mortgage funds to boot. Basically they were forced to choose winners and no one likes being a loser.

janice

31/10/2008Ad Astra, it is hard to fathom what the Opposition and the media truly believe other than they believe in undermining the government whatever decisions it makes. The Oz mob appear to have a cheerleader club where the rules do not allow the members to write outside the theme chosen for the day. No matter which opinion piece you read the words are the same and although they allow readers' comments, they are not willing to answer, explain or even correct misinterpretations of their own piece, let alone the misinterpretation of government decisions. They are a national disgrace and I now have grave doubts that the freedom of the press is a good thing when they are not held accountable. I don't think I remember reading anything about Turnbull's revelation that he pulled his bikkies out of ? investment funds before the Government announced the bank deposit guarantee. Malcolm burshed his move off as something his 'financial adviser' advised him to do which seems a poor excuse since Malcolm and Malcolm alone knows best.

Rx

31/10/2008It is too easy for the Opposition to sit on the sidelines and "oppose" for the sake of it. There are no dress-rehearsals to this crisis: it's all uncharted waters. (pardon the mixed metaphors) In a quickening crisis, with incalculable stakes, the cool heads in the government acted quickly in the best way they could see how. It is unreasonable to have expected more from them than that.

Bushfire Bill

1/11/2008The journalists are subscribing to the vanity that they are "the experts" in any matter. In the case of the Indigenous Intervention, cosseted, city-bound, one might even say effete opinionators in the national newspapers began writing about "the plight of the aborigines" as if they spent six months of the year sleeping rough on the mission stations of the Far North, sharing bush tucker and sniffing petrol so as to have a better understanding of their black brothers... and this was within 24 hours of the rough-cut policy being announced! We'd never heard or read an opinion from any of them on Indigenous Affairs before (with the exception of Tony Jones, who started the whole ball rolling a few months before). Now with the financial crisis, they're shouldering each other out of the way to get on the idiot box and into the newspapers spreading doom, gloom and depressive "wisdom". Instant experts, the lot of them. Rudd clearly said that some of his policies would not be popular. This was fully anticipated. At the time of the bank guarantee no-one in the media contradicted him on either the policy or his political prognosis. The Opposition voted for the bank guarantee - a guarantee [i]only[/i] for the banks - unanimously! Rudd received praise for the policy universally. Yet now the instant experts are blathering on as if they knew all the time that this would be a "disaster" (their word, not mine). The World is melting down fiscally. Banks are in the tank everywhere, being bailed out with real money (not just rainy-day guarantees). Bailouts have not been necessary in Australia and it seems likely they may not [i]ever[/i] happen. A few companies, in the property investment area, with higher risk investment vehicles have (to my mind, understandably) been forced to sandbag their portfolios with temporary freezes. This has affected about 60,000 people. he rest of the 20 [i]million[/i] Australians, the one without fancy high-risk investments, the one who just plonk their money in the bank, have been looked after. I don't know about any of youse, but where I work there is not much sympathy for the "smarties" in the investment fund game - either investors or managers. The general sentiment seems to be "They made their bed...", all 0.3% of the Australian population of them. What is prolonging the crisis is lack of confidence. Investors - from humble house buyers to high-flying bizoids in sharp suits - don't want to be the first to dip their toes in the speculative waters when fiscal storms are afoot. They might get swamped by a very big wave. I say "might". The real smarties are out there buying right now, with discrimination, but they're still buying, because prices for some stocks and financial vehicles have never been lower. Until confidence is restored, until people think that they'd better get back into the market before others do (and ruin it for them) the market (fo whatever you like) will bounce along the bottom. The Opposition and the opinionistas have been doing their best to wreck confidence, and for wehat? A few cheap votes and a few (maybe) extra sales of their fish and chip wrappers. I feel quite disgusted with them, but you won't see much criticism from the media,because the media themselves clearly want the crisis of confidence to continue as long as possible. Sex, money and misery... they [i]all[/i] sell.

Just Me

2/11/2008[quote]I don't know about any of youse, but where I work there is not much sympathy for the "smarties" in the investment fund game - either investors or managers.[/quote] Nope, not much around here either, and I will bet there is very little anywhere else in society. They wanted higher returns and put their money into higher risk investments to chase them, so they have to wear the losses when it doesn't all go to The Great Rational Investment Plan. I heard one guy on tellie whinging about having to put off his regular overseas holiday because the government wouldn't guarantee his investment portfolio. Well, boo f***ing hoo, isn't life tough. This kind of behaviour just shows how out of touch some of these investors are with reality. He won't get much sympathy from the vast majority of Australians.

Ad astra reply

4/11/2008Thank you doghouse, janice, Rx, BB and Just Me for your germane comments. The issue has died down somewhat as the flow of funds to the guaranteed institutions has slowed and ASIC has developed an enabling mechanism for those who urgently need redemptions from their managed funds. With hindsight it seems as if the initial and subsequent steps taken by the Government and ASIC, coupled with the timely consultations between Government and the affected sectors, have settled frayed nerves and have neutered the Opposition’s opportunity to make political capital from the situation. The Coalition has been strikingly quiet this last week on the issue, except for Julie Bishop in today’s [i]Age Business Blog: ‘Bank guarantee a disaster’[/i]. http://blogs.theage.com.au/business/archives/2008/11/bank_guarantee_a_disaster.html As most of the 29 comments dispute or even mock the substance of her blog, she just might get the message that her arguments and credibility are equally poor, and let the matter rest. The most caustic comment was: “Did you write this Julie???” This last week the Coalition has focussed on the so-called Rudd ‘gaffe’ after his telephone conversation with George W Bush. Malcolm Turnbull has tried to sound statesmanlike while being critical, but Julie Bishop has sounded even shriller than usual especially when challenged to apologize for John Howard’s comments about Barack Obama last year. Inexplicably, the ABC seems to have its teeth into this and on PM tonight dredged up Bruce Haig, an ex-diplomat, presumably during the Howard era, who, while emphatically assuring the episode would do no long-term damage to Australia’s international relations, was nevertheless scathing in his criticism of Rudd’s diplomatic skills. What the ABC thinks it is achieving by repeatedly drawing attention to this matter is a mystery; it would be better for our international relations if it let the matter lie. Who knows what’s got into the ABC lately. Today’s three quarters of one per cent reduction in the cash rate will give little ammunition to the Coalition, so they will have to return to their favourite theme, the prospect of the budget going into deficit if the Government decides the economy needs more fiscal stimulus. It will have to convince the economists and the people that it is better to let the economy sink than to go into deficit. That may prove to be a difficult task. The opportunity to foster confidence in the economy is now there for the Opposition to take. Will they grasp it?

doghouse

4/11/2008Hmmm, the 0.75% cut can be seen two ways, depending if you are a "the glass is half full or half empty" type of guy. Either we are sinking rapidly into deep shit or the RBA has learnt its mistakes from 1991, and is reacting more decisevely. In regards to mortgage funds, I am not surprised that we have not heard more from Truffles, its a rock and a hard place, he is probably glad he did not have to make the decision.
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