Why are our central banks digging trenches?

A question all too rarely asked earlier in the Iraq war was, if we’re not supposed to be staying all that long, why are we building the biggest embassy ever seen? It was a logical fallacy apparent to almost everybody with access to a decent newspaper.

Speaking of which; no new information seems to be coming to hand, concerning First Kuwaiti and its kidnapped workforce. Real information, anyway: my skepticism and cynicism are not overcome by the information that has come to hand. Which could well be to my discredit.


Like Bernanke before them, the Reserve Bank of Australia is muscling up and, by all appearances, digging in, over our markets’ liquidity problems:

The Reserve Bank is battling to regain control of interest rates by taking unprecedented steps to increase liquidity in money markets.

The central bank has widened the types of asset it will buy, doubling its ability to pump money into the financial system, in response to a continuing global credit crisis that is savaging market confidence.

Honestly, savaging? Battling? I hate newspapers.

Short-term money market interest rates have surged to more than 7 per cent and the Reserve is desperately trying to pull the market into line with its official rate of 6.5 per cent before the higher rates spill into the wider economy.

Credit woes are already spreading through the banking system and into the home mortgage market, with Macquarie Bank becoming the latest lender to increase mortgage rates. Yesterday it announced it would increase rates by 0.3 percentage points on its $8 billion low-doc loan book.

And, underlining the intensity of the credit crunch, the nation’s biggest banks said they would have to shift billions of dollars of loans that had been sitting in special investment vehicles back on to their balance sheets. National Australia Bank, the Commonwealth Bank and ANZ are considering moving almost $20 billion in liabilities on to their balance sheets, lowering their return on capital and once again increasing pressure on the interest rates they charge customers.

The Treasurer, Peter Costello, pleaded with the big five banks not to raise their mortgage interest rates.

Hold on – isn’t this the same Treasurer who’s telling the rest of us that shit is awesome? That Kevin Rudd will drive us all off a cliff? That’s of little interest: Costello is a stupid tit. This we know. What is of interest is the bit about Banks having to “shift billions of dollars of loans that had been sitting in special investment vehicles back on to their balance sheets.” Oh, really? Billions of dollars of liabilities, that hadn’t been on their balance sheets?

This is in line with many of the tricks banks play. Like Bear Stearns, in what seems like years ago, now, trying to prevent its collateral from being traded for fear that the actual price (i.e. the value to others) of CDOs would be revealed, banks will try everything from “special investment vehicles” to letting re-possessed houses sit empty rather than trying to sell them.

If the paper value of an asset is higher than the market value, irrespective of how high, banks, hedge funds, basically anybody that needs to give the appearance of a good credit risk themselves, will do whatever they can get away with to use the paper value. The fact that knowing the real values of ‘things’, from assets to companies, would return information symmetry to the stock market and would restore our confidence, one way or another, is apparently neither here nor there.

And so, here we are. With our central banks being torn away from real managment to deal with this nonsense. So to voters, the message is obscure, but there: don’t re-elect governments who set you up for all of this. Who waived away sensible boundaries so that privateers could go still further after their insatiable demand for yields. Who now depend upon central banks to reward that behaviour, while simultaneously sending the signal that the same behaviour will continue to be rewarded.

It’s a rule of macroeconomics usually applied to government expenditure, but true of any intervention. Anything that a government wants the private sector to do, it mustn’t do itself. It can do it in the short-term, when necessary, but anything a government starts doing long-term, the private sector will stop doing.

In this case, our central banks pre-forgave throwing risk-aversion out the window (an AUD8bn low-doc loan book? Explain to me why I’m supposed to protect your shareholders directly, instead of the idiots to whom you sold mortgages they couldn’t afford?) and are now, after the consequences start piling up all over the economy, acting as though they’re prepared to take over completely as a safety-net for the market: a ratchet device that will ensure the All-Ords (or Dow, or FTSE) always goes up; a bubble-re-inflating service.


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