Out of a clear blue economic sky, the Australian Federal Government plans to introduce a program to
protect bank deposits and other deposits should a bank, insurance company or credit union FAIL!
Horrors! What does somebody in OZ know that nobody else knows? Apparently, Mr Costello,
Australia’s Treasurer, has written a letter to the Australian Bankers Association seeking their comments
about such a new program. It gets better - or worse, depending upon one’s economic perspective. Mr
Costello’s new plan was designed by Australia’s Reserve Bank Governor, Mr Ian MacFarlane! Pushing
from behind to advance this new program is an organisation with the name of the Council of Financial
Regulators. There’s yet more. The new program is backed by the heads of the Australian Securities and
Investments Commission, the Federal Treasury and the Australian Prudential Regulation Authority.
This is pretty well a clean sweep of Australian financial agencies. All of a sudden, all of them are eager
to endorse a plan to deal with the FAILURE of a bank, credit union, building society or a life or general
insurance company. Under this new program, should any of these institutions fail, the hapless depositors
will get 90 percent of their funds on deposit (up to $A 50,000) back. In individual hardship cases, the
ceiling is $A 1 million.
What’s Really Going On Here?:
On the basis of comparative economic and financial history, what has happened here is clear. Somewhere
in the backrooms of State, somebody has had a panic attack. Having partially recovered from their panic
attack (suffered discreetly behind closed doors), they stormed off to the Mandarins to tell them what had
frightened them. These financial luminaries (listed above) also got deeply worried. So did Australia’s
Treasurer, Mr Costello. So did Australia’s Central Banker, Mr MacFarlane. They put their heads
together and figured out a way to stop the depositors from storming the financial institutions where their
money was deposited to demand it in cash in case of a failure from said financial institution.
The obvious solution was to promise that the Federal Government would bail them out with money from
Mr Costello’s Treasury, putting the burden of bailing out the financial institutions onto Australian
taxpayers. If this proves too onerous, Mr Costello can always take big bundles of new Federal Bonds
over to Mr MacFarlane’s Reserve Bank, who will of course accept these bonds as collateral and create
enough new money out of thin air to pay the depositors out in cash.
A Historic Change:
Captain Cook arrived on these shores in 1770. The Commonwealth of Australia gained its Constitution in
1901. But there has NEVER been an act of legislation in the Federal Parliament which placed ANY
guarantees behind ANY financial institution in which people placed their money on deposit. If the
institution failed, the depositors lost their deposited money. The hard nosed thinking which historically
lies behind all this is that it was expected that since depositors did not have any government bailout
guarantees, they would be vigilant about the safety of their money and the solvency and reputation of the
institution where they had placed their money. It was also expected that at the first hint of unease, the
depositors would withdraw their money. That would keep the deposit-taking financial institutions on
their toes. In practice it has not worked out that way. Today, a bank or financial institution is not a place
where most people deposit money to keep it safe, they are places where one borrows money to spend.
This new arrangement has but one real purpose - to place a GOVERNMENT Guarantee behind the
deposits in Australian financial institutions. If they are truly “safe”, why is this necessary?
Neither Mr Costello nor Mr MacFarlane would have advocated this unless there are very REAL dangers.
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