THE DISTILLERY: Repeated fictions

Yesterday this column ruminated on the need for debate on how risk is to be returned to banks and the housing market. Today we have the answer as to why no such debate can or will take place. Indeed the moral hazards created through the GFC bailout are now being institutionalised.

Firstly, officialdom doesn't want it. Yesterday, RBA deputy governor, Ric Battelino presented a speech that did everything in its power to justify bubble price structures for Australian housing. Peter Martin of The Age today writes: "While there was 'a common perception that house prices relative to household income in Australia are high', the country's population was 'more concentrated in a few large cities' than other populations and Australians had more free income with which to pay for housing.”

This is retrospective claptrap. Australian house prices rocketed to record multiples between 1995 and 2003, provoked by a generational mania that had its principal foundation in a colossal credit bubble fuelled by non-banks and banks' huge offshore borrowing. We were concentrated in a few large cities before then and multiples had not expanded. It was also long before the commodities boom, population surge or housing supply issues. Prices may have been supported and boosted further by the surge in national income after 2003 but, even so, multiples of income remain 80-odd per cent above historic averages. Battelino may not want to hose down house prices, but he should, at least, deliver historical facts.

A second reason there is no debate is commentator opacity. Coverage in The Age from Malcolm Maiden of changes to the Freedom of Information Act as they relate to the Future Fund is typical. According to Maiden the new changes "... will be listed in Schedule 2 of the FOI Act to exclude FOI requests related to acquiring, realising or managing investments. [Lindsay] Tanner says the Reserve Bank gets a similar break in relation to its open-market operations and dealings in the currency market, and he says the government is extending the protection to the fund because FOI disclosure could either harm the return the fund gets on its investments, or restrict it in the investments it can make". However, Maiden the goes on to say that "Negotiations for the fund to act as a wholesale lender and liquidity provider to the Australian banks, using start-up cash funds it was still holding when the financial crisis erupted, were complicated by FOI concerns on the part of the banks.” Maiden is being very crafty or careless with his terms. Conflating the RBA's and Future Fund's roles as "liquidity support” is an outrageous allegation. One is a central bank designed to support liquidity at banks in times of crisis. The other is an investment fund seeking returns for Australian tax-payers, including demanding big returns for risky investment in times of crisis, not sweetheart deals couched as "liquidity support”. The implication of Maiden's line is that the government is hiding bank support in the Future Fund. If this is his meaning, he needs to make it much clearer. If not, then he needs to revisit the thesaurus.

Our third reason for no debate is exemplified by John Durie of The Australian – the refusal to acknowledge mistakes and change course. After his strong support for the Ripoll Report two days ago, Durie is now backing away. Two days ago Durie wrote "if the law changes to reflect his parliamentary report, it will be a giant step forward ... Combined with the concept of informed consent – that the client expressly agrees to the actions – the simple change arguably puts the whole debate on fees and commissions in context ... Almost by definition, if the planner is acting in the client's interests, then he or she is not pushing a product just because the promoter quietly guaranteed a 10 per cent trailing commission.” But today we get something very different. "Given most of the trouble is caused because the client has no idea what they are buying – but the adviser said it was a good idea – it doesn't make a lot of sense to let the adviser hide behind explicit consent.” And moreover, he goes on, "This is why Ripoll's recommendation that there be a legislated fiduciary duty is smart. It underlines the bleeding obvious, combined by the implicit demand that producer-paid commissions and fees be banned. The debate will now centre on which fees are good and which are bad, which create conflicts and which don't.” There are no producer payments without conflict. This is an attempt by Durie to reverse his position without saying so. There is nothing wrong with changing your mind, plenty wrong with hiding it.

The Ripoll Report is also receives lukewarm support today in an AFR op-ed by Peter Haggstrom. He reckons the "most important” of the report recommendations is the new explicit "fiduciary duty” which comes with "the bleeding carcasses of litigated cases”. The result will be higher cost structures and that "Financial planning businesses will necessarily start to look more like law and accounting firms if they become subject to essentially the same legal duties”. This argument is worth consideration. But as large accounting firm scandals have shown, as long as the fundamental conflict of interest remains, the scandals may just get bigger.

The fourth reason for stifled debate is apparent in discussion around the taxing of foreign capital. The Australian and AFR run similar op-eds by Yaser El-Ansary of The Institute of Chartered Accountants and Ian Scott of Ernst and Young respectively. Both parties argue that the ATO's decision to tax TPG's profits threatens further foreign investment. This is technical stuff and not for the faint-hearted. But in general it seems to this columnist that both pieces make one simple error, they do not define their terms. Foreign capital is a manifold beast. Some is terrific, long term and helps expand the productive capacity of the economy through green-fields investment. Other foreign capital is short-term, speculative and destabilising (as the Australian dollar currently shows) and does nothing to expand capacity or productivity. Tax should be structured around such principles.

Other good stories today include a piece from Matthew Stevens of The Australian trashing the idea that Chinalco will exit Rio. This column agrees. Why would Chinese firms lose hard-fought leverage now? Another is by Ian Verrender of The Sydney Morning Herald who makes the useful observation that following the ETS frenzy, the Telstra bill is unlikely to be debated in the Senate today. To his mind this means "...faced with a delay on the Senate numbers, it could well be that Conroy may choose to deal directly with Telstra over the Christmas break. If Telstra was to split voluntarily, it may be possible to drop the legislation, meaning the upgrade of the ACCC's powers would never see the light of day.”

In less auspicious comments, Bryan Frith of The Australian reckons comments by Judge Austin in his One.Tel judgement may support the special liquidator's quest to impugn Packer and Murdoch. There is nothing new here. The same applies to Alan Wood of The Australian who reiterates the argument that the ETS is a rent-seeking debacle.