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Thursday, October 23, 2008

The goverment is helping, H-E-L-P-I-N-G

Get it?

The Government may be on the ropes over its decision to guarantee bank deposits, but the Opposition is going over the top.

How’s this for an overegged claim?

“The government’s own actions have caused greater instability in the Australian financial markets than any event that has occurred overseas”.

That’s from the Opposition Treasury Spokesman Julie Bishop.

What about this from the Opposition Leader Malcolm Turnbull?

“We have seen institutions not covered by the deposit guarantee losing money, we have seen funds putting a stop on redemptions, we have seen savings frozen.”

We have indeed seen those things. Perpetual, AXA and Australian Unity each put some sort of freeze on their redemptions late yesterday.

But it’s a stretch to say they did it primarily because the government guaranteed bank deposits...

Bank deposits have always been implicitly guaranteed by the government. They have always been regarded as safer than the funds run by the likes of Perpetual, AXA and Australian Unity.

Money was always going to be moved out of the Perpetuals and into the banks as soon as global financial troubles turned into a global financial crisis.

Explicitly guaranteeing bank deposits (and also deposits in building societies and credit unions) doubtless accelerated the trend. The Reserve Bank and the Prudential Regulation Authority have said so.

But it didn’t cause it. We would have had instability, a run on funds, and funds frozen without it.