There is a lot of speculation at the moment about what is going on in the Australian credit creation industry and what exactly APRA is trying to achieve.

There is a growing concern that APRA is working to maintain rather than resolve or deflate the massive bubbles in Australian house prices and the related bubbles in household debt and foreign debt.

There is good reason for concern – it all fits a consistent narrative that starts with the ‘unexpected’ end of the mining boom and a search for solutions by the RBA and APRA within the neoliberal post Wallis framework of regulators “independent” from the political process.

If mining and the associated CAPEX could no longer be relied on for economic activity and employment an alternative was required. If the public balance sheet had been neutered by ‘fiscal conservatism’ obsessions that just left the private household balance sheet – the gift that had already been giving for a decade.

RBA starts cutting the target rate and APRA lets the banks off the leash and lets them blow out borrowing ZIRP/NIRP capital off shore.

The reason was clear – off shore borrowing allowed mortgage rates as close as possible to the RBA target rate. The down side was that the exchange rate was held higher on those strong inflows of unproductive capital.

Loan officers could now approve cheap loans with abandon and they did.

But lending mega mortgages to vanilla Australian speculators and owner occupiers was not enough and SMSF were allowed to load up on debt as well.

The population ponzi was juiced to keep things moving on the demand side.

But still that was not enough to drive the economic ‘rebalancing’ the RBA and APRA were looking for and the local banks were allowed to lend to foreigners who were not even temporary residents – if they wanted to punt on off the plan “OTP” developments.

Fonzie on water skis.

The recent fly in the ointment has been the decision of the Chinese government to stop their punters spraying Chinese capital (even if much was being supplied in the short term by Oz banks – who were borrowing offshore like there was no tomorrow) AND the growing local political sensitivity to large numbers of foreigners breaking FIRB laws.

Internal and external politics was turning down external demand for Australian credit just as it was OTP au go go.

It is highly unlikely that APRA has permanently lost its love for offshore punters – it just had to face the fact that the Chinese govt was cutting off the supply of speculators and the locals were getting increasingly pissed off.

This unexpected downward pressure on demand for loans on two fronts gave APRA and RBA two choices.

1. Acceptance of a significant reduction in demand for property loans and watch the market go soft – possibly very soft and very quickly.   OR
2. Cut interest rates and encourage the banks to spray credit at locals and hope they fill the gap left by offshore investors – until perhaps the Chinese govt relaxes its position on capital outflows or the local politics of population ponzi and flogging off the nation to foreign temporary residents or simply foreigners improve – i.e. the Australian public is distracted by another issue – say the RIO Olympics.

To the extent that Highrise Harry (and that diligent investigator Gotti) are calling for APRA to give the local banks a green light to lend heaps to locals they are simply arguing in favour of an option that the RBA and APRA would prefer anyway.

To the RBA and APRA private debt doesn’t really matter (consenting adults, rational economic actors, etc etc) and the exchange rate is not THEIR problem – they just observe it as they would a storm front rolling in and express concern (but no responsibility) as an inflated exchange rate devastates local industry.

From their perspective the effect, of all those low mortgage rate producing capital inflows, on the exchange rate is not their concern.

They are more worried about a collapse in credit growth setting off a debt deflation process and in that regard they and Harry are definitely on the same page.

Every boot is now kicking the can like the finale of a Tap Dogs show and the taxpayer will be the one to pick up the bill.