Sunday, November 02, 2008

The Rudd Government's agenda is revealed

Well I learnt this week that the Rudd Government's agenda regarding the deposit guarantee scheme was as simple as re- regulating the non-bank sector as far as it could.

Previously I had thought that they had just been the victim of the Law of Unintended Consequences where it is stated that every action generates at least one consequence that had not been intended. Although, I had struggled to fathom why a room-full of economists would not have anticipated that by guaranteeing the deposits of banks in this environment funds would've
flowed as they did. But dumber things have been done by Governments at the behest of economists!

But then the penny dropped!

Even Alan Greenspan, during the week, admitted that he had underestimated the implications of deregulation. Governments around the world have been moving to inject funds into banks and re-regulating them again to protect taxpayer's funds.. It stood to reason that we would do as everyone else was doing.

So by causing pain to the non-bank sector the Government had correctly anticipated that the funds would flow out of that sector, there would be a furore, and if they played their cards properly this would be the best chance for decades to throw the regulation net over the non-bank financial sector.

In the US, the investment banks Morgan Stanley and Goldman Sachs have both become 'normal' banks. This avails them of full government protection at the cost of full disclosure of their affairs and regular scrutiny by the US Government.

The banking sector lobbyists must be rubbing their hands with joy at this outcome. Not only have deposits flowed to the banks at a time when they werent in trouble but the banks will now have the funds to capitalise on this largesse.

The only sting in the tail for the banks is that the Government is making noises about them putting their booty back into the mortgage trust sector the allow the withdrawal embargoes to cease.

This we should watch carefully. It will be fascinating to observe how they walk this line especially when many of the mortgage trusts are associated with, or are, subsidiaries of banks.

The Australian Financial Review will be critical reading this week!

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