Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 64

Ian Macfarlane on emerging markets, banks and property prices

Ian Macfarlane, AC, was Governor of Reserve Bank of Australia from 1996 to 2006. He is a Director of ANZ Bank, Woolworths and the Lowy Institute for International Policy. He is a member of the International Advisory Board of Goldman Sachs and the International Advisory Board of the China Banking Regulatory Commission.

This is Part 2 of an edited transcript of a Q&A session at the Morningstar Investment Conference on 15 May 2014.

Q. On the emerging markets other than China, what do you see as the investment paths and which countries do you favour?

This is more a story about last year than this year. When people started realising that at some stage, the US would return monetary policy to normal, there was an outflow of capital from emerging market economies, their exchange rates and share markets went down. There was a lot of alarmist talk. For some people, their only frame of reference was the Asian crisis of 1997-1998. It was wildly alarmist, it was never going to occur anything like that. I think by early this year, the smart money was moving back into Turkey, South Africa, Brazil, India and Indonesia. Many of their currencies have gone up this year. Let’s put it in perspective – the developing world is still growing a lot faster than the OECD, twice as fast, so I’m reasonably optimistic.

A broader point is that since the financial crisis, we have tended to exaggerate every story or problem to think they are worse than they are. I think it’s because the financial crisis itself, concentrated in the final quarter of 2008, was worse than anyone expected. That mindset has continued when every pothole comes along. Small problems are really exaggerated. The financial press and others tell a far more compelling story about a crisis than the ‘muddle through’ story. People who have held a steady course have done a lot better than people who are too influenced by the scare stories. I do a lot of talking to people and my story is more a ‘muddle through’ story and I think people are disappointed. They think I should be some stern moralist telling them all the problems they face and the errors of their ways.

Q. Can we focus on Australia and the banking system? Does the concept of ‘too big to fail’ apply in Australia and to the government guarantee on banks?

IM: … on deposits, not banks. Australia is in a unique position. No depositor in Australia has ever lost a cent. And no regulator has ever had to spend a cent to bail out an Australian bank in all the time since Federation. So on the basis of our track record in Australia, you would not change anything. But of course we are signed up for the Basle rules, tightened because of the disastrous performance of the North Atlantic banks, so we all need higher capital and liquidity ratios.

What about ‘too big to fail’? The first point is in Australia, it’s a relatively recent concept, and secondly, it’s not a policy, no regulator has such a policy. It is a public perception. The public is probably right, but it is just a perception. You cannot credibly say that in the next financial crisis, we’ll let the big banks fail. Even if you say it, nobody would believe it. What do you do about it? In 2008, people took money out of small banks and building societies and put them with the big banks. They were awash with cash. Some people say they should pay a fee, but it’s not a government policy. It’s a perception. We’ve settled on a half-way house where the big banks have to have a higher capital ratio. Does it make sense? The ones who are safest now have a capital penalty, widening the gap even further between the safe and less safe. In so doing, you’ve reinforced the concept of ‘too big to fail’. That’s where we’ve ended up today.

Q. Australia had little stimulus during the GFC but we contracted only half a percent. Isn’t fiscal policy as dead as monetary policy?

IM: I disagree, we did have fiscal expansion. And it was quick, the first part was very successful. The money came out in the fourth quarter of 2008 and early 2009. Where fiscal policy has a bad name is instead of doing the simple things the government decided to make it sound much more responsible, we need to help education, we need to help the environment. So we ended up with all these school classrooms being built, whether they were needed or not, and I believe they are still being built. And we also did the pink batts thing. But there was fiscal expansion in Australia.

If you look at patterns around the world, there was a good recovery in late 2009 and into 2010, but then Greece came along and the whole debate shifted to ‘we have too much debt’, and so some countries who’d had a period of fiscal expansion went to fiscal contraction. For many countries with debt to GDP around 100%, after a brief flirtation with expansion they went back the other way, leaving too much weight on monetary policy.

Q. Why are you not concerned by the expansion of the Fed’s money supply?

IM: I would be concerned if I thought it would lead to inflation. I also believe it will not be that hard to reign it back. The first step is to stop buying these bonds, which is what tapering is. They have reduced the buying. The next step normally would be to start selling what you’ve already bought, push it back out there. Reduce the cash in the system, and eventually the cash in the system is back to where you want it. Then you squeeze a little bit and interest rates go up. That’s the normal. The risk in the US is that they have bought so much, their balance sheet is so big, it will take so long to push the bonds back out. The Fed has announced they will raise interest rates long before they’ve got rid of the extra cash. How do they do it? They pay interest on the cash that the banks hold with the Fed. It should not be difficult for the Fed to restore rates to where they want them to be.

Q. What are your views on a potential residential property bubble in Australia?

IM: I think we faced a risk in 2003, not 2014. In 2003, we had lending for housing and prices rising at 20%, half of it speculative lending, negatively geared. There were seven prime time television programmes on how to get rich in property. Since then, on average, house prices have risen at the same rate as household income. For that reason, I don’t think we have a bubble. We do have an affordability problem, it makes it tough for young people to acquire a house in a desirable area. This is characteristic of every major city in the world that has desirable job opportunities. London, Paris, Berlin, New York, Hong Kong, Singapore. Some of our policies make that worse, such as the extreme leniency we show towards negative gearing, but I don’t think it’s a bubble.

 

Footnote: There has been one case in the last 100 years where bank depositors lost a negligible amount of their deposits – Primary Producers Bank, 1931. If you are interested in reading more about the history and robustness of Australia’s banking system, see the Australian Bankers’ Association fact sheet.

RELATED ARTICLES

Are Australian bank boards fit for purpose?

10 reasons not to hold bank royal commission

The value of wealth management for Australian banks

banner

Most viewed in recent weeks

Welcome to Firstlinks Edition 433 with weekend update

There’s this story about a group of US Air Force generals in World War II who try to figure out ways to protect fighter bombers (and their crew) by examining the location of bullet holes on returning planes. Mapping the location of these holes, the generals quickly come to the conclusion that the areas with the most holes should be prioritised for additional armour.

  • 11 November 2021

Why has Australia slipped down the global super ranks?

Australia appears to be slipping from the pantheon of global superstar pension systems, with a recent report placing us sixth. A review of an earlier report, which had Australia in bronze position, points to some reasons why, and what might need to happen to regain our former glory.

Welcome to Firstlinks Edition 431 with weekend update

House prices have risen at the fastest pace for 33 years, but what actually happened in 1988, and why is 2021 different? Here's a clue: the stockmarket crashed 50% between September and November 1987. Looking ahead, where did house prices head in the following years, 1989 to 1991?

  • 28 October 2021

How to help people with retirement spending decisions

Super funds will soon be required to offer retirement income strategies for members in decumulation. With uncertain returns, uncertain timelines, and different goals, it's possibly “the hardest, nastiest problem in finance".

Tips when taking large withdrawals from super

You want to take a lump sum from your super, but what's the best way? Should it come from you or your spouse, or the pension or accumulation account. There is a welcome flexibility to select the best outcome.

“Trust your instinct” Hamish Douglass in conversation with Sir Frank Lowy AC

Sir Frank shares his story, including his journey from war-torn Europe, identifying opportunities, key character traits necessary for business success, and the importance of remaining paranoid yet optimistic.

Latest Updates

Investment strategies

Charlie Munger and stock picks at the Sohn Conference

The Sohn Australia Conference brings together leading fund managers to chose their highest conviction stock in a 10-minute pitch. Here are their 2021 selections with Charlie Munger's wisdom as the star feature.

Interviews

John Woods on diversification using asset allocation

All fund managers now claim to take ESG factors into account, but a multi-asset ethical fund will look quite different from a mainstream fund. Faced with low fixed income returns, alternatives have a bigger role.

SMSF strategies

Don't believe the SMSF statistics on investment allocation

The ATO's data on SMSF asset allocation is as much as 27 months out-of-date and categories such as cash and global investments are reported incorrectly. We should question the motives of some who quote the numbers.

Investment strategies

Highlights of reader tips for young investors

In this second part on the reader responses with advice to younger people, we have selected a dozen highlights, but there are so many quality contributions that a full list of comments is also attached.

Investment strategies

Four climate themes offer investors the next big thing

Climate-related companies will experience exponential growth driven by consumer demand and government action. Investors who identify the right companies will benefit from four themes which will last decades.

Investment strategies

Inflation remains transitory due to strong long-term trends

There is momentum to stop calling inflation 'transitory' but this overlooks deep-seated trends. A longer-term view will see companies like ARB, Reece, Macquarie Telecom and CSL more valuable in a decade.

Infrastructure

Infrastructure and the road to recovery

Infrastructure assets experienced varying fortunes during the pandemic, from less travel at airports to strong activity in communications. On the road to recovery, what role does infrastructure play in a portfolio?

Economy

The three prices that everyone should worry about

Among the myriad of numbers that bombard us every day, three prices matter greatly to the world economy. Recent changes in these prices help to understand the potential for a global recovery and interest rates.

Sponsors

Alliances

© 2021 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.