Steve Keen takes on the banks

A lot of people are debating Australia's property markets and whether they are in a bubble.  None more entertaining than that between banking mogul John Symond of Aussie Home Loans and controversial economist Steve Keen.  The amusing video is here.

It is worth taking note of Keen's work - ahead of the curve throughout and before the crisis Keen has consistently pointed to the flaws leading up to the crisis and in the response and rightly identified the largesse which would be consumed by the banks and withheld from the functioning economy post 2008.  As noted in this article he has called the bubble in property and predicted  likely crash - as well as calling for unconventional measures which could actually have an impact like a debt jubilee (something being tried by the Occupy movement in America currently).  

Keen gets a mention in this article about a foreign central banker debating Australia's bubble (here). Stay tuned! 

Debt junkies

An excellent analysis by Leith van Onselen on the reported comments by NAB head Cameron Clyne as to the need for more debt.  While it is true Australia's public debt markets are small (and this is a product of the history of Australian government funding), it is spot on of Leith to point out the hypocrisy of a state guaranteed bank sitting on a private debt book which Moody's and other rating agencies have expressed concern to shout for more.  As Leith notes private debt in countries like US and UK can be a big risk:

That said, there remains a vulnerability that virtually nobody on either side of politics, the mainstream media, or the mainstream economics profession will acknowledge – one that is far more pervasive than concerns about public debt: Australia’s heavy private debt load. As shown by the below chart from McKinsey Global, while Australia’s public debt levels are low, our household debt is amongst the highest in the developed world, with most of that invested in pre-existing housing (here)

If Australian banks are anything like their international peers then they gorge on cheap government funding and speculate while holding out little to their depositors (and to become less when they price in the cost of the levy).  But still they ask for more...

Households teetering on the edge?

So Ozzie's personal finances show a high level of debt, but not to worry as it's being reduced and it's backed by investments in...housing?!

AUSTRALIAN household debt is still high by world standards, but it is not affecting the stability of the financial system. 

In 2012, the mean average debt level for Australian households was $151,488, a report from the Melbourne Institute showed. 

Commonwealth Bank senior economist Michael Workman says there are a number of factors why the high level of debt is not necessarily a problem."Some commentary on Australian household balance sheet positions conveys the impression that household debt levels are too high, leaving many households with unmanageable debt servicing commitments. 

...Australia's average debt-to-disposable income ratio, was at 147 per cent in 2012, a 28 per cent increase from 10 years earlier, the Melbourne Institute's 2012 Household Income and Labour Dynamics in Australia (HILDA) report showed.However, the average debt-to-assets ratio was a respectable 17.6 per cent, showing that most of that borrowing was high value assets like owner-occupied or investment housing (here)

The China connection...

Australian financiers must be worried.... what better way to stifle concerns that you are too exposed to the pitfalls of your biggest trading partner and engine of growth (or as Niall Fergusson would put it, your new colonial master), than to have a serious heavyweight economist interview to dispel any concerns about all those annoying images of ghost cities which have been making the press recently.

Over to Professor Garnaut (whose son John Garnaut is a top China analyst) batting away some pointed questions from Tony Jones and not an upbeat conclusion:

ROSS GARNAUT: Yeah. I think we've got some big adjustments coming and that's going to be quite difficult for us. China's growth being a couple of percentage points below the average of the few decades past does take the edge of things, but more important for Australia is the big structural change occurring in China. That's all written into the 12th five-year plan from 2011 to 2015, a deliberate policy of trying to increase the consumption share of total expenditure....

In fact the interview is excellent and covers a number of key aspects - link here.

Of course this would not be a worry for Australian banks in particular if they did not have a large exposure to China and rest of Asia (or was it just China?)...

....Australia’s banks have more-than quadrupled their exposure to Asia in the past five years as they seek to cash in on the resource-rich nation’s growing trade ties with the region, the country’s central bank said.....That hasn’t substantially increased their risk profile, the central bank said, although credit risk remains an “an area to watch.”... (here).

Oh dear...

All calm for now?

BANK shares, making up a record percentage of the stockmarket after their run to record and multi-year highs, show few signs of slowing as the global hunt for yield powers on, despite concerns about their valuation and investment risks (here).

...Australia’s bond market is benefiting from strong international demand for assets in the nation’s currency, Debelle said today. Sales of sovereign notes by Japanese investors have been “more than compensated for” by other asset managers boosting purchases, and the market has become more attractive to foreign borrowers, he said....

...“Kangaroo issuance has been supported by the broad-based reduction in spreads, the attractive basis, and foreign investors looking beyond AAA instruments for Australian dollar exposure,” he said. “These foreign investors have been notably active and Asian investor participation in particular continues to grow.” (here)

The Roadkill in the Tunnel

In very sad news - it was reported that the perennial loser of Australian infrastructure, the Brisbane Airport tunnel, Brisconnections, has entered voluntary administration.  

...BrisConnections had long been expected to follow a similar path to the failed operators of toll-roads in Sydney such as the Lane Cove and Cross City tunnels, and Brisbane's Clem7 tunnel.....Traffic on the 6.7-kilometre toll road which connects Brisbane Airport to the central city has been half what Brisconnections was projecting it to be.... (here).

As the article sets out, in addition to being ultimately unprofitable like other tunnel projects, the modelling was flawed and it never made money.  Except for one maverick investor - Nicholas Bolton who would come close to winding it up in 2009 after acquiring a massive stake for pennies - and made $4.5 million in a last minute sellout which Australian media, shocked labelled greenmailing.  

Bolton has gone on to found bigger investments, face winding up himself and be defrauded by the Russian mafia.  He was interviewed about Brisconnections last year and was unapologetic and argued the project was 

....doomed from the start because tunnels are uneconomic for private companies (here).

So if there is a lesson from this saga it must surely be worth looking around at corporate Australia - how many other businesses have models which are uneconomic from the start and will be exposed in coming market turmoil.