The US stock market has underscored the urgency of the government acting to protect the public from a financial crash by enacting a Glass-Steagall banking separation and scrapping its “bail-in” bill. The Down Jones Index plunged 1,177 points on Monday, the largest single one-day points drop ever, following its 666-point drop on Friday. The Australian Securities Exchange fell sharply upon opening today, after losing $30 billion on Monday.
As the CEC and numerous experts have long warned, the meteoric rise of the US stock market has been one of the insane speculative bubbles in the global economy. Others include the property bubbles in Australia and some other countries, the US corporate debt bubble, the Bitcoin bubble and the big one—the US$1.2 quadrillion global derivatives bubble. All of these bubbles effectively constitute one great big “everything bubble” that has been fed by the US$14 trillion of so-called quantitative easing (QE) money that central banks have “printed” since the global financial crash in 2008.
The everything bubble has depended entirely on the ultra-low QE interest rates. For instance, the rise of the US stock market has never reflected an economic recovery, but has come from banks and corporations borrowing at very low rates to buy back their own shares; consequently, US corporate debt increased from US$8 trillion in 2008, to US$13.5 trillion in 2017. Likewise Australia’s property bubble, and similar bubbles in Canada, New Zealand and Sweden, expanded under record low rates—the only way borrowers have been able to afford to buy houses that are 10-12 times income, compared with the historical average of 3-4 times.
Rising rates will prick the bubble
The biggest worry about the global financial system right now is that the people in charge in megabanks, central banks, regulators and governments believe their own propaganda. They act as if 2008 never happened, and deny that these bubbles exist. Pretending that there is a recovery, the US Federal Reserve has started to slightly reduce the US$4.5 trillion of QE assets on its balance sheet, the amount of the securities it purchased from the banks since 2009 with newly printed money. This is pushing interest rates higher—effectively a pin in the bubble.
There have been countless warnings that this would happen. In May 2017, the CEC’s Australian Alert Service reported the International Monetary Fund’s warning in its “Global Financial Stability Report, 2017” that if US interest rates rose sharply, defaults on the US$13.5 trillion in corporate debt could reach 20 per cent—far higher than the mortgage default rate in 2007 that triggered the 2008 crash.
William White, the former chief economist at the Bank for International Settlements (BIS) who was one of the few experts to forewarn about the 2008 crash, said in a 22 January interview with London’s Telegraph that “Central banks have been pouring more fuel on the fire”—referring to the expansion of QE. “Should regulators really be congratulating themselves that the system is now safer?” he asked. “Nobody knows what is going to happen when they unwind QE. The markets had better be very careful because there are a lot of fracture points out there.”
White warned that surging global debt levels could be detonated by just a 1 per cent US rate rise, setting off massive losses throughout stock, bond, mortgage and derivatives markets and triggering a liquidity crunch. “All the market indicators right now look very similar to what we saw before the Lehman crisis, but the lesson has somehow been forgotten”, he said.
Australia heading off a cliff
QE has also fed Australia’s mortgage bubble, through the 30-40 per cent of their funding that Australia’s banks have been borrowing at cheap interest rates from overseas. As Robert Gottliebsen noted in the 30 January Australian, this dependence on foreign borrowing exposes Australia’s banks to US rate rises. Australian borrowers cannot afford rate rises. ME Bank’s latest Household Financial Comfort Report reveals rising mortgage stress, with 46 per cent of homeowners paying 30 per cent or more of household income on their mortgage, 26 per cent of households paying more than 40 per cent, and 14 per cent of households paying more than half of their income on their mortgage. According to a finder.com.au survey from November 2017, 54 per cent of households reported that just a $100 per month increase in mortgage payments would push them over the edge.
The impending disaster for Australia’s banks has been noticed in London. Today’s Australian Financial Review reports that London investment consultancy Absolute Strategy Research (ASR) has warned its clients that Australia’s banks, like the banks in Canada and Sweden—the other countries with huge housing bubbles—may become a global systemic threat, due to their disproportionate size in their domestic economies and in the global financial system. ASR notes that no major economy has been able to sustain a banking sector that is 20 per cent of its stock market capitalisation, but Australia’s Big Four banks account for more than 25 per cent of the ASX!
Glass-Steagall now!
Financial authorities will be scrambling to arrest the stock market fall, but at best they might be able to buy a bit of time. The reality is the next crash is inevitable, because all bubbles burst. This means the Australian government’s bill giving the bank regulator APRA sweeping powers to prop up failing banks by confiscating the public’s savings is not an academic exercise—APRA and the banks need such powers now.
It is urgent that Australians force the government to change its policies, by forcing changes on the banks that protect the people, and not the other way around. This means scrapping the APRA bill, and implementing a full separation of commercial banks with deposits from all other financial services, modelled on the USA’s successful Glass-Steagall Act of 1933.
Don’t wait until it’s too late—join the CEC’s fight today!
https://www.cecaust.com.au/shopping/shopexd.asp?id=66
Toms Blog on Life and Livingness