The commissioner acknowledges the last two years have been extremely distressing for Australian households and businesses.
The jobless rate at 18% is unacceptably high.
Personal bankruptcy numbers are the worst we’ve seen since records started to be kept. With more households experiencing negative equity in their homes, banks are provisioning for another wave of bad debts.
Bank shareholders have been warned that the temporary suspension of dividends is likely to be extended.
In spite of efforts to arrest the trend, business foreclosures continue to rise.
For the first time ever, superannuation funds are reporting that outflows exceed inflows.
This appears to indicate that people are wanting to take control of (what remains of) their retirement funds.
Our nation’s once-robust economy continues to shrink. Negative GDP growth has been recorded in six of the past eight quarters.
Society’s frustration and anger at the abrupt change in personal fortunes is being expressed in street protests. It is not an exaggeration to say that we are in the grip of a national emergency.
This royal commission’s task is to identify how this financial crisis was allowed to happen.
Who was ultimately responsible for putting our nation in such a parlous situation?
Only when we answer this question, can measures be implemented to ensure future generations do not suffer the hardship our nation is experiencing today.
The 2022 royal commission into ‘The Greater Depression’ has identified four major players.
Firstly, there was the political pressure for endless growth. Understandably, no political party wanted the public shaming of having a recession on its watch. Successive governments pushed and pushed for more growth.
There’s no question that this pressure was a contributing factor. But as we know, or at least we should know, politicians are serial over-promisers. It’s in their DNA.
While this commission is not absolving politicians of their sins, the blame cannot be laid entirely at their feet.
Secondly, bankers, driven by inherent greed and a focus that doesn’t extend beyond the next reporting period, lowered credit standards and increased debt levels.
The 2019 royal commission into banks laid bare the sheer contempt bankers have for everything but their own paycheques. Therefore, it comes as no surprise that when given a choice between responsibility or remuneration, bankers chose the latter.
Thirdly, the public has to share some of the blame. In the end, they must take responsibility for their own actions. They chose to accept the offers of additional credit. They chose to buy into over-valued property markets. They chose to live beyond their means. They chose to believe in the mantra ‘shares always go up’. While people may feel deceived by the system, they failed to question the sustainability of the debt-funded economic growth model.
Lastly, there’s the Reserve Bank of Australia (RBA).
The RBA’s Role in Directing Australia’s Economy…
It’s the finding of this commission that the RBA must accept ultimate responsibility for causing the ‘Greater Depression’.
The RBA is meant to be an independent institution. The governor could have pushed back against the political pressure.
While politicians are all-consumed with the electoral cycle, the RBA should have played the long game
With hindsight, the RBA’s obsession with positive quarterly growth is really dumb.
The aim should be for steady and sustainable long-term growth. Some periods are positive. Some periods are negative. No big deal. Growth will work itself out in the long run.
The RBA governor should have used his position of authority to change public perception on the need for endless growth.
But the responsibility he owed to his fellow Australians was shirked. Instead, the RBA remained wedded to a flawed economic growth model.
What this commission finds truly mystifying is this ‘lower interest rate and greater liquidity’ model had a proven track record in abject failure…the ‘tech wreck’ and the GFC.
Given that the theoretical application of this model produced such woeful practical outcomes, why did the RBA think this time would be different?
The commission notes that the RBA’s actions accord with Einstein’s definition of insanity…doing the same thing over and over again and expecting a different outcome.
One of the more telling moments in the commission’s hearings was the RBA governor’s attempted defence of the RBA’s inflation target.
We presented the governor with the following extract from the Australian Bureau of Statistics (ABS)…
‘The simplest way of thinking about the CPI is to imagine a basket of goods and services comprising items bought by Australian households. Now imagine the basket is purchased each quarter. As prices change from one quarter to the next, so too will the total price of the basket. The CPI is simply a measure of the changes in the price of this fixed basket as the prices of items in it change.
‘The total basket is divided into 11 major groups, each representing a specific set of commodities:
- Food and non-alcoholic beverages
- Alcohol and tobacco
- Clothing and footwear
- Furnishings, household equipment and services
- Recreation and culture
- Insurance and financial services.
‘In the case of the Australian CPI, this methodology involves devising a basket of goods and services representative of those acquired by metropolitan private households during the course of a full year.’
When the Governor was asked ‘which of these items do you want households to pay more for each year? Do you want them to pay more on their phone plan (communication) and/or their favourite wine (alcohol) and/or their kid’s school fees (education) and/or private health insurance (health)?’.
‘Mr Governor, have you asked households whether they want to pay more each year?’
The governor remained stony faced and silent. Eventually, he said…’well in economic theory, it’s not as simple as that.’
Yet, the ABS begins its explanation with ‘the simplest way of thinking’.
The RBA tells us that ‘we need to get inflation up’, yet when questioned on the practicalities of making this happen, the RBA is all ‘ums’ and ‘ahs’.
Targeted inflation creates the illusion of growth. Wages go up. Government receives more income taxes (to fund more give-aways). Prices go up. The dog keeps chasing its tail.
How this nonsense passes for sound economic policy befuddles the commission.
The RBA knew or at least should have known, that lower interest rates would produce two outcomes.
- Encourage people to borrow more…creating a debt bubble
- Force normally conservative investors to chase higher yielding (and higher risk) alternatives…creating an asset bubble.
It was these toxic elements that gave us the great crash of 2020.
Australian property values have fallen 30%–50%. We hope the bottom is in sight soon. The US share market is almost 70% below its 2019 peak. Cryptocurrencies have become a footnote in history.
The lion’s share of the blame for this disaster rests firmly with the RBA. The RBA was meant to be the responsible adult in the room.
We know politicians, bankers and households will act like children and push the boundaries.
The RBA’s role was to act with restraint. To set limits with a built-in margin for error. Rates should have been kept much higher.
The Australian economy should have been allowed to experience periods of negative growth. This is healthy. It prevents complacency from setting in.
It’s quite apparent from the mess we’re in that the institution charged with the responsible management of our economy has been an abject failure.
Therefore, it’s the recommendation of this commission that the RBA be abolished.
The marketplace is far better placed to exercise judgement over interest rate settings.
Savers and borrowers can negotiate between themselves on what’s an acceptable ‘win/win’ rate for both parties.
The commission appreciates the economy may not grow to the extent we’ve been conditioned to believe it should.
However, it’s the finding of this commission that it’s far better to experience smaller, more frequent economic setbacks, than it is to build and build and build to an epic collapse.
PS: HOODWINKED! Why Australia’s ‘miracle’ economy is a farce. Download your free report.