The government’s ‘fifth pillar’ policy may be sowing the seeds of disaster.
FEDERAL government help in funnelling deposits into credit unions and building societies sounds like a good idea until you consider the other side of that question, which goes to the heart of all forms of banking – the quality of the borrowers.
It’s only when you look closely at the government’s plan to create greater competition for the four big Australian banks by revitalising small credit providing institutions that you discover the first major flaw – who are the customers and what is their credit-worthiness?
In fact, if you continue digging there’s another possible defect in the plan; the quality of credit union management, and its ability to spot ‘un-credit-worthy’ customers.
So far, the government strategy, which is aimed at adding a ‘fifth pillar’ to Australia’s finance industry, seems to have only considered one leg of what is really a three-legged stool – and no-one needs reminding how troublesome an unbalanced stool can be.
Well, perhaps they do need reminding, especially if they are too young to know about the antics of the last gaggle of third-tier financiers, which caused so much pain to Australian taxpayers about 25 years ago.
Back then, building societies and credit unions such as Pyramid in Victoria, and Teachers Credit in WA, thought they had the skills to behave like a bank, taking in deposits with attractive interest rates and lending to virtually anyone who walked in the door with what seemed like a bright idea.
When they finally collapsed, along with fourth-tier deposit takers such as Rothwells, the damage reverberated throughout the community, even bringing down state governments.
It’s that history which ought to be at the top of the government’s ‘fifth pillar’ plan, not that anybody yet seems to have thought further than creating a system that attacks a perceived class enemy of Labor – banks.
All that seems to be happening is that the Australian government, perhaps with an eye on its popularity, is listening to a plan formulated by 25 credit unions to create a new investment vehicle that will raise a few billion dollars, with the aid of a government guarantee, and then lend that money out in competition with the banks.
Possible providers of the deposits will include mum-and-dad investors, the global money markets, and local superannuation funds.
Said quickly and it sounds so awfully easy. With an Australian government guarantee on all deposits, it might even be argued that the ‘fifth pillar’ actually offers a safer place to save than a big bank, and almost certainly a lot safer than a small bank.
But that’s just the first part of this banking question because no-one knows, yet, who will borrow the money, though presumably it is people who can’t currently get a loan from a big bank.
History has a way of repeating itself and what is being talked about today has no difference to what existed 25 years ago when a bunch of cowboys took control of Australia’s once-thriving credit unions and building societies, and:
• raised vast amounts of money with seductive interest rates and an implied form of government guarantee;
• rushed about looking for borrowers because that’s what banks have to do – lend out most of what’s deposited;
• displayed appalling credit judgement by lending to people who couldn’t, or wouldn’t repay the loans; and
Politically, what’s happening today might win votes. Financially, and without ensuring that management and customer quality controls are in place, the seeds of a disaster are being sown.
A VARIATION on the question of foolish investment decisions is the latest rush by Chinese investors into a particular asset class – gold.
According to the latest data from Beijing, a total of 209 tonnes of gold was imported by China in the first 10 months of the year, a five-fold increase on 2009 and unquestionably the major driving force behind the gold price cracking the $US1,400 an ounce mark.
Seasoned investment watchers will be looking with a combination of awe and suspicion at the Chinese rush into gold because it reminds them of the last Chinese investment stampede – into US government debt.
Losses on exposure to the US dollar via its debt instruments, such as treasury notes, has been horrific for China, measured in the hundreds of billions of dollars as the value of the US currency has plunged.
In time, China’s paper losses might be recovered as the US economy improves, but the ill-conceived and heavyweight exposure to US debt is a sobering reminder that China does not always make good business or investment decisions.
That’s a reason for watching the gold stampede and wondering what might happen should the Chinse herd, with its enormous buying power, suddenly change its mind and think about those US debt losses.
CHINESE buying power, of the wise and unwise category, has been on display around the world during the past two years for a simple reason; it is the country with the money and it reckons there are bargains aplenty as the Western world fumbles around with its debt crisis.
Recent art auction results, including this week’s $17 million purchase of two bird statues by a Hong Kong billionaire, are a sign of just how much spare loot is washing around inside China (especially as the price was miles above pre-sale value estimates).
But, just as the Australian government’s credit union revival plan triggers memories of past financial disasters, so does the Chinese art buying revive memories of excess in better times.
Back in 1987, Alan Bond set a world record by bidding $US53.9 million for a Van Gogh, not that he ever actually paid for it, perhaps because his business was built on a mountain of debt.
The Chinese leaders of the current art boom appear to be bidding with their own cash, but whether they are bidding wisely remains to be seen when considering the old adage about fools and their money being quickly parted.
“Blessed are the young, for they shall inherit the national debt.”