Tuesday, June 16, 2009

I've done Malcolm Turnbull a diservice

I suggested that he was prepared to let others spout garbage linking the Commonwealth Bank's 0.10 per cent mortgage hike to the government's plans to run up debt.

But yesterday in Question Time he did it himself:

Mr TURNBULL (2.15 pm)—My question is to the Prime Minister. I refer to the Commonwealth Bank’s claim that its recent rate rise was caused by an increase in its own long-term wholesale borrowing costs. Given the increase in long-term rates is directly related to the massive explosion in government debt, doesn’t the Prime Minister accept that it is his reckless spending and debt binge which is pushing up interest rates?

I was speechless.

Australian banks do borrow (much of) their mortgage funds from abroad - the same pond from which our government also borrows, so there could be a link, but the Australian government is an absolutely tiny borrower in the scheme of things relative to the US and others. The story below makes that point.

There is of course another mechanism by which government borrowing to fund stimulus payments could push up mortgage rates - the stimulus payments could be successful in stimulating the economy, as Joshua Gans points out.

But the Opposition (most of the time) claims they won't be successful in stimulating the economy, so this probably isn't what it is pointing to.

Anyway, today in Question Time it backed away from the assertion that Australian government borrowing could push up international bond rates, with Joe Hockey instead asking:

"Is the Treasurer prepared to claim that there is no relationship at all between the record level of projected borrowing by governments and the dramatic increase in interest rates on long-term bonds in the last three months?"

Note the switch.

By the way there is actually considerable debate about Joe Hockey's recast proposition.

Debate about Hockey and Turnbull's original proposition is continuing at Core Economics.

Below the fold is this morning's Age story:

Leading economists have derided continuing claims by the Opposition that government debt is forcing up Australian retail mortgage rates.

Chief economists from Westpac, Access Economics and the Commonwealth Treasury all told the annual conference of the Committee for the Economic Development of Australia that they could see no link of the kind identified by the Opposition between the government's borrowing plans and the move by the Commonwealth Bank to lift its mortgage rates 0.10 points.

"Australian banks borrow offshore," said Westpac chief economist Bill Evans. "The cost of that money is going up because loans the taken out before the crisis are expiring and being replaced by new loans at higher rates. That's what's putting Australian mortgage rates under pressure."

The head of macroeconomics at the Australian Treasury David Gruen told the conference that his reading was that Australian bond rates largely followed US bond rates which were climbing for other reasons.

Inside parliament Prime Minister Kevin Rudd said the Australian government's contribution to the global bond market amounted to 0.001 per cent.

Opposition leader Malcom Turnbull persisted with the claim, asking whether the governemtn's "reckless spending and debt binge" had helped push up bank borrowing costs.

Mr Rudd said the government's decision to guarantee bank borrowing following the collapse of worldwide financial markets had in fact enabled the banks to borrow at rates that would have otherwise been obtainable.

Access Economics director Chris Richardson told CEDA that not only did Australia's proposed government debt "not scare" him, but that he didn't worry too much about the debt being run up by other governments.

"After World War II many governments had very large public sector debts. What's important is how economic management is handled and whether that translates into inflation," he told the conference.

"The point is that we needed to stomp on the accelerator in Australia. Do I think our stimulus packages were perfect? No. Do I think they were much better than their international equivalents? Yes I do."

"Does the amount of debt that they create worry me? No. But at some stage we will need to find a sustainable path for the federal budget," Mr Richardson said.

Lending finance figures released yesterday showed business borrowing continuing to decline, suggesting that the government's proposed borrowing program was unlikely to get in the way of corporate demand for funds.

Commercial borrowing slipped 12.9 per cent in April retracing a gain in March to be down 0.1 per cent in trend terms. Lease financing slipped 3.3 per cent in trend terms with housing finance the only bright spot, climbing a further 2.9 per cent in trend terms.

Outside the CEDA conference the Treasurer Wayne Swan warned other banks against increasing their mortgage rates by in line with the Commonwealth Bank saying copycat increases would spark "understandable community outrage."

"The government and community need to work together. That's why this decision from the Commonwealth Bank is so disappointing," he said.