Glass Pyramid Exclusive

Investment Manager special edition: MyRBA – Superior for productive capital allocation

While the Australian banking ‘industry’ has plenty of devoted insiders who refuse to countenance any change to the status quo, even they have to admit that the performance of their “meal ticket” has been woeful over the last 30 years as precious national capital has been denied to productive parts of the Australian economy and, instead, vast amounts have been pumped into a massively unproductive, but tax effective, bubble in the prices of residential housing and other existing assets.

Although out performing the efforts of Australian banking is not much of a hurdle, the introduction of MyRBA will make a massive contribution to ending the decades of lazy, oligopoly asset price bubble blowing by Australian banking and will encourage a new era where much more capital is available to and allocated to productive purposes.

For a fast introduction to MyRBA see “MyRBA: The Quick Guide and helpful links

Allocating capital to blowing asset price bubbles – Shooting ourselves in the foot

One of the tragedies of modern Australia is that since the rise of China we have experienced one of the greatest booms experienced by any country in world history but have done very little with the proceeds of the boom beyond inflating, to the moon and beyond, the prices of residential land and various other existing assets.

Photo by Andre Furtado on Pexels.com

We have turned debt driven speculation on the prices of existing residential land into a national sport as an endless conga line of reality TV shows and media column inches have been devoted to charting the “amazing” (yet unsurprising) way land prices rapidly rise if we spray the leveraged proceeds of one of the world’s greatest booms at them.

Naturally, for a country who loves a punt, this national project of bank credit driven bubble blowing has been incredibly popular, with even 8 year old kids eager to get a foot on the ladder to future wealth. Our conservative political parties (waves at P.M. Scott Morrison former Policy and Research Manager at the Property Council of Australia), who are never ones to let the national interest burden their policy platforms, could not have been more eager to celebrate those who just “wanted a go” at riding the speculative bubble. Political parties who counselled caution and proposed slowly moving the punch bowl away from the inebriated party goers found themselves left on the opposition benches.

The graph above shows the residential asset pumping party in all of its glory.

Australian Banking – A delivery system for residential land speculation debt

One consequence of this national punt on asset prices is that over the last 30 years our private banking sector gradually morphed into little more than a delivery system for household debt for punting on residential land/housing prices.

Anyone seeking bank credit for purposes beyond housing speculation related industries were considered a bit peculiar or weird and , if they were serious, it was made clear that they would not get a cent unless they had some blue chip residential land to secure the loan.

As far as investment that would expand our national productive economic capacity was concerned the banks were simply not interested unless the ‘business plan’ could be clearly linked to the ever expanding residential land price bubble or the rapid population growth model designed to support demand for land/housing.

The special privileges of the banks, including a monopoly on deposit accounts at the RBA and the privilege of classifying their accounts payables as “deposits”, were directed to blowing a bubble in the prices of land and existing residential housing – one of the most fundamental economic inputs.

The impact on the stock market

It is no surprise that the residential asset price bubble blowing efforts of the banks would have an impact on the stock market. The table below shows the top 10 stocks on the ASX by Market Cap.

Miners and banks. Close to $300 billion dollars in market capitalisation between the big 4 banks.

Well why wouldn’t people want to place a bet on the banks, just as much as they love placing a bet on the residential land that the banks were driving up in price with their credit?

Exactly. The banks were rewarded for their abuse of their special privileges as banks with record stock market valuations.

A desperate need for capital allocation competition

Three decades of misallocating capital, including the proceeds of the once in several lifetimes mining boom, demonstrates that Australia desperately needs real competition in the allocation of capital. The strangle hold and special privileges of the banks in relation to capital allocation must be removed for the simple reason that they have failed to deliver over an extended period.

It is time to allow 100 “investment management” flowers to bloom and by doing so encourage capital to flow away from unproductive asset price pumping and towards more productive purposes.

As was explained in the post MyRBA: Ponzi-free loans and investment MyRBA provides a straight forward model whereby the domination by the banks is broken and capital allocation becomes a highly competitive and even playing field for a large range of investment managers and others seeking capital.

The competition for capital between investment promoters will make driving speculative asset bubbles in specific asset classes much more difficult. Especially as pursuant to the MyRBA proposal the public money supply (the balance sheet of the Reserve Bank of Australia) will now be entirely independent of the lending decisions of the private banks.

In addition because the model of banking is fundamentally changed by the introduction of MyRBA there will be no need for BASEL capital requirement rules as a bank will now be no different to any of the existing non-bank lenders. The removal of BASEL capital requirements will remove some of the incentives and reasons why banks have preferred to spray credit at Australian residential land.

The absence of bank driven unproductive asset price pumping investment opportunities will force investors to search for productive investment opportunities and investment managers who can identify them and make them available to investors.

SUMMARY

The objective of MyRBA is to allow ALL Australians to directly engage with the balance sheet of the Reserve Bank which is the foundation of the Australian monetary system.

This engagement take the form of ending the bank monopoly on RBA deposit accounts and allowing Australians to open and operate MyRBA deposit accounts on the RBA balance sheet.

However, the introduction of MyRBA also breaks the domination and effective strangle hold of the private banks on capital allocation in the Australian economy and opens the process of capital allocation to much deeper and broader competition.

It will be much more difficult if not impossible, after MyRBA is introduced, to drive the sort of unproductive asset price bubble blowing that has been a feature of the bank exercise of their ‘privileges’ over the last 30 years.

If you are a non-bank investment manager, want to be one or simply want to break the unproductive stranglehold of the private banks on the allocation of capital in the Australian economy you should support the introduction of MyRBA.

2 replies »

    • It really depends on how long Australia is willing and able to keep spraying capital at unproductive asset price speculation. During a boom of epic historic proportions it is easy to ignore the problem and put it off to another day.

      If China’s demand for our resources dries up and that could happen sooner than we think we might find that we cannot afford to operate a model where capital is as badly allocated as it is now.

      The reason why bank credit creation was carefully regulated prior to the 1980s was because we could not afford to allow the banks to do the terrible job they have been doing since deregulation.

      Blowing a massive bubble in house prices has been a frivolous luxury. We only need to look at countries like Norway to see how carefully income from extracting commodity wealth should be managed.

      Like

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