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Tuesday, 25 November 2008
Page: 11326


Mr LAMING (9:48 PM) —Drawing this debate on the Guarantee Scheme for Large Deposits and Wholesale Funding Appropriation Bill 2008 back to the general community and their expectations of what we should be debating tonight, most of what we have seen in what has now become termed as the global financial crisis has been viewed by Australians through a television screen. Many of course are shocked by what they have seen but just as many of them are uncertain, not only about what faces us in the next 12 months to five years but about what a responsible and beneficent government should be doing to protect where possible and, where it is not possible, to adapt to some of those external shocks that may face Australia. What they also expect from us in parliament is a bipartisan approach to what is certainly one of the great economic challenges of the past decades. Their expectations would be that we have a strong banking system, a pillar of four large and highly regarded AA rated banks. They would expect that the opposition, along with the government, would be consulting with the major players.

What has become clear over the course of the last month or two is that that actually has not occurred on the government side. Much of the debate tonight about the merits and the pros and cons of an unlimited banking guarantee is probably quite esoteric to most in the community. I guess the overriding sense I have found is that the government is exceedingly sensitive to any form of dialogue on this issue. Very early in their term, when, in November last year, the first offers of bipartisanship were cast across the dispatch box, you would have hoped it might have been the first of a number of offers to follow. But when it really came to the crunch and there was some hope that there could be some bipartisan approach, that was not only ruled out but energetically resisted by the government. If every one of their moves were without mistake and without uncertainty, the Australian public would respect the government for that. But that has been far from the case. I think the opposition has done an exceptional job—not in a negative way, not in a point-scoring way—to highlight not only the deficiencies of a policy that has been very much put together on the run but also the reluctance of those opposite to incorporate the views of the opposition and, as we have learned here in debates at question time, the reluctance of senior members of government to talk in a constructive way with the very regulators that they are quite happy to roll out and quote when required. That became very obvious to us in the past four weeks.

Let us remember a little bit of the context. It was 10 October when the Leader of the Opposition and shadow Treasurer called upon the Rudd government to take three immediate decisions—to increase the proposed government backed deposit guarantee scheme to cover deposits up to, in this case, a minimum of around $100,000; to increase the investment into AAA rated residential mortgage backed securities through the Australian Office of Financial Management; and to announce that there would not be an introduction of an emissions trading scheme prior to 2011. The coalition at that time was committing to working cooperatively with the government to expedite the passage of any legislation that was required for the deposit guarantee. But, almost in contrast to that, what we saw was an approach by the government that seemed more about a political strategy—not only appearing to be decisive and committed without any doubt whatsoever but also giving a sense that they had to do something that was bigger, brasher, bolder and more confident and visionary than anything that had been proposed in a common-sense way by the opposition.

We woke up on 12 October to photographs of the Prime Minister again rolling up his sleeves, as he has oft tended to do, and, probably in a series of phone calls with the Treasurer, he concocted the unlimited banking guarantee. One would have thought that it is not a terribly hard thing to do to speak to the nation’s major regulators. Many of them are exceptionally experienced over the long term—they have seen a number of crises before and ridden the Australian economy through them. I would have hoped that, prior to finalising that policy, that intimate communication would have taken place. No matter how hard the opposition have tried, we are yet to clearly understand whether there was that communication directly between the Prime Minister and the Reserve Bank of Australia. That should not be a hard question to ask or a difficult answer to provide. One wonders just what level of communication there was, if any at all. It has been an answer that has been almost impossible to divine.

The haste to finalise the policy should be contrasted with the lethargy in actually bringing this legislation to this chamber. The government was in haste to roll it out. One senses again that that 24-hour headline cycle was driving the Prime Minister more than any great concern for a functional, well thought through deposit guarantee scheme. When this deposit guarantee was announced, the Prime Minister told Australians and the opposition that he had had the advice of the Australian regulators. I think ordinary Australians would think of the Reserve Bank as being a fairly critical player in Australia’s banking regulators. As I have said, we are not confident that the Prime Minister has done that. The answer has never been provided. On the other hand, any bipartisan approach has been firmly rebuffed—and it is worth examining why that would be.

When it comes to the economic dogma of the last decade or two, economics has matured significantly over the last two decades. There do remain different schools of thought, but I am very confident that in this country we have exceptional advice. One would expect that there would only be perhaps some nuancing between the views of the two sides of the chamber—I would not say that there are massive ideological fault lines that run between the two sides of this chamber on how to deal with the global financial crisis. For that reason you would think that the offer of bipartisanship would not be a difficult one to take up. It would not be terribly hard to extend the hand of friendship and actually think through all of the implications of an unlimited bank guarantee.

Let us be mindful that Australia and New Zealand were two of the developed economies that did not have any form of guarantee until this debate of the last few weeks, so we have been relatively slow to come to the table with those policies—and that is for very good reason: there are as many pros as there are cons to a banking guarantee. But in the current times we have seen most developed economies moving not only to put such a scheme in place but also to increase them where required. A great reason for that is not only to avoid contagion but also to remove of course the distortions that may exist between different economies and the financial flows that can be aggravated as a result.

After rebuffing the offer of bipartisanship what we then saw was a very precious determination on the part of the Prime Minister to go it alone. You might think: ‘Well, there must be significant political gain for an individual to make such a decision—to attempt to look not only decisive but also as if he is acting completely without the assistance of the minnows of the political system, those on the other side of the chamber.’ Well, as I have said, if the government were making faultless decisions then that would be fine, but that is far from the case. As these inconsistencies and these inadequacies have been pointed out we have seen a rushed effort—every time something salient or pertinent to the debate has been suggested there has been a rushed mopping up of what has been left undecided. The government have rushed out a quick press release and then of course suggested that this was always going to happen. If we look at the history, we can actually see that that was far from the case. In many cases there was very little intention to move to address some of the concerns until they were effectively staring the government in the face—until the concerns were sitting, like the elephant in the room, as a completely unaddressed fault line that ran through the government’s plan, with no move to correct it.

Of course it is very difficult, once the regulators have been rolled out and used in pic facts to make it appear that the Prime Minister is shoulder to shoulder with the regulators and that their embrace is warm, to then expect those same regulators to be defending the inconsistencies and the inadequacies of our Prime Minister’s hastily cobbled together plan. So of course when this policy was announced it did what had been suggested by the Leader of the Opposition—it created confusion and distortion in the markets. There was a lack of policy detail, and there can of course be some understanding that economic times were moving fast and that you cannot expect to have a finished product. But the government was determined to do it alone, to do it without the best advice and to do it without the assistance of the opposition. So for that reason the scrutiny must be on the Prime Minister for the results.

The government was unable to answer questions about the fee structure. Those of us who sat through the almost-agonising Senate estimates with Treasury could see that there was great pressure on the regulators to support the Prime Minister at a time when it must have been exceptionally difficult to do so, but they managed to do so. There was no detail on the fee structure and no detail on the fee levels. There was no detail on whether BBB rated banks would have the same access at the same rate and under the same conditions as AA and AAA rated institutions. So what did we see? Precisely what had been predicted—an attempt to move cash management trusts into government backed assets and debentures issued by financial companies, and confusion over whether or not superannuation was in fact covered. The government at that time was completely unable to release a comprehensive list of institutions or accounts that were covered. This only came at a much later date.

It was at that time, again, that the Leader of the Opposition called upon a workable cap for the free bank deposit guarantee. We made initial recommendations, and of course those were ignored. That was part of the early debate. Mr Swan’s plan to establish a compulsory guarantee fee for deposits over the cap was effectively a tax. We put it to this place and to the Australian people that that should be abandoned. The tax would only serve to impose additional heavy and unnecessary costs on banks at a time when they could least afford them, and it may also put upward pressure on interest rates, as banks would naturally seek to recover additional costs from their customers.

Guarantees on any deposits over the cap, as we had put to the government, should be optional and subject to a fee. The fee should be at a commercial level that does not encourage risky behaviour or moral hazard by banks. The Reserve Bank had recommended a scale of fees in its letter to Dr Henry in mid-October, and once again the government had a chance to accept some of that advice from the regulators that they have so often claimed to stand shoulder to shoulder with.

The wholesale term funding guarantee would eventually be subject to legislation. Putting the Commonwealth and thus the taxpayers on the hook with potentially billions of dollars that, if these obligations could not be met through consolidated revenue, would have to be borrowed was a significant ask. It should be noted that, even if the government believes it has a legal argument to enable it to give a guarantee without legislation, it knows that it would be very difficult to honour that guarantee without an appropriation bill at least being passed through parliament. So the legislation needs to state that the price of the guarantee will be set on a commercial basis and, once again, on the advice of the Reserve Bank.

Once this policy had been proposed, what we saw was a rush to patch it up. I have to say that over the last few weeks that has been a most unseemly exercise. Probably the only forgiving element for the government is that the average Australian who is watching what is happening, predominantly through a television screen, knows that the economy has been in good hands for over a decade, and I think they are hoping that the economy does remain in good hands. The last thing that any Australian would want is for there to be, over the next year or following years, dire economic consequences from the actions of this government over the last two or three months. That would be the most painful lesson to subject an economy to, and of course no-one wants that to happen. That is the very reason why there is an offer of bipartisan assistance, the offer to make sure that suggestions that are put from this side of the House are meaningfully taken up rather than summarily dismissed and then secretly added to the explanatory memorandum at a later date.

It was on 13 November that the government indicated through the Acting Treasurer, in response to questions from the Leader of the Opposition, that they did not intend to introduce legislation. On 17 November 2008 the Leader of the Opposition again called on the government to immediately present legislation to authorise the provision of wholesale term funding guarantees to Australian banks. Then, again on 17 November, he warned that without legislation the guarantees would not be effective, commercially or practically. Four days later, on 21 November, the Leader of the Opposition repeated the call to the government to present legislation to provide for an appropriation to give effect to the wholesale term funding guarantee and to wind back the unlimited element of the guarantee.

By this time, the banks were delivering a very clear message to the government that it had to fix its bungled wholesale term funding and bank deposit guarantees. Well, we are still waiting. It has taken six weeks for the government to finally concede that legislation needs to be introduced to parliament to support this entire process. It has become clear that the government’s bank guarantee policy was panicked and bungled rather than decisive. Six weeks ago the legislation was called for. It did not come. When confronted with the harsh reality and the real impact of this panicked and poorly thought through policy, the government has even now refused to acknowledge those mistakes.

The government’s bank guarantee has predominantly, I think we have now come to realise, been about a political strategy. The nature of an unlimited bank guarantee was one that surely no-one could possibly surpass—the ‘big pictureness’ of it all. The fact that Ireland had done it for its six banks a few weeks earlier led the government to think, ‘Well, if they could do it, let’s have a go.’ So what was announced was an unlimited guarantee, and it was quite obvious that in the mind of the government at the time there was no real understanding of what that implied. There was no real understanding of why, if it was such a fantastic idea, it had never been done before, save for Ireland. That should have been a warning bell that perhaps there are some significant cons to an unlimited banking guarantee. But those questions were not able to be answered at the time. Clearly, had there been reasonable discussion with our regulators, you would expect at least those answers to be there.

We have research from the OECD, easily available on the internet, to show the fairly detailed work that had been done on reserve bank guarantees. It had not even been looked at, we sensed, at the time that this announcement was made, and I think that is to the loss of this country. That will be to the loss of many people. I know many of them may seem faceless. They may be people who have large sums of money banked and who, for one reason or another, cannot access them. It can seem like that is a long way away, but they are Australians like anyone else, many of whom are planning for their futures and many of whom have been considerably inconvenienced, if not put at financial threat, as a result of what many now realise was a very hasty decision.

The government could simply have adopted the policy put forward by the opposition on 10 October. This is not about big-noting ourselves. It is not about saying we are better financial managers. It is about putting up a decent idea and hoping that the government would adopt it. It is not a hard thing, as the speaker on my side who preceded me said, to simply say: ‘You know what? The policy could have been slightly better. We had to move fast. We acknowledge these things require tweaking and improving and, yes, we will do it.’ But making these improvements has been an almost agonising process.

So what have we seen? Australian investors and our financial markets have been subject to six weeks of completely unnecessary uncertainty. It is one thing to try and cobble together comments by the Leader of the Opposition and say that he has had more positions than the Kama Sutra, but when you look at these comments they are effectively expressing an overall willingness to support the general trend of a bank guarantee but an uncertainty, a lack of confidence, in the way the Prime Minister has handled it. There was an unwillingness to give a blanket guarantee of support, of course remembering that the opposition has a basic right in any strong democracy to question the policies of the government. I do not think I need to say much more than that.

What we do know is that when we look at pros and cons of these bank guarantees, many countries have faced the very same questions Australia has. Financial uncertainty will always lead to the revival of deposit and safety schemes, and we have seen it no better exemplified than in the last few months. These kinds of insurance that we are debating tonight are now appearing in virtually every OECD economy and in the countries where they existed before, in many cases, they have been ramped up. We know that the US has some of the highest amounts covered, and it has now raised it to US$250,000; Norway is higher at $375,000; Italy is just over $150,000; and Canada and Mexico are around US$100,000. I think it was perfectly reasonable to have that debate in this chamber about amounts in that range. As I have commonly said, it is useful to be at the front of the pack, but you do not always have to be the one way out in front, for the obvious reasons—as any long distance runner would know when they get lost on the marathon track. We know that there are advantages in moving quickly and decisively in creating fiscal stability. Few would disagree with that. But we also know that there are considerable downsides to having a guarantee—in this case we believe that the upsides obviously exceed the downsides—as well as significant concerns about an unlimited guarantee. We have been wrestling with and grasping at those concerns over the last six weeks. It has been six weeks of agony for the financial markets, six weeks of agony for small investors, and had the Prime Minister been a little more humble in his approach, that six weeks of pain could have been avoided.