Home > Central banking, Fractional Reserve Banking, Mainstream failure > Dubai fiasco obvious only in retrospect

Dubai fiasco obvious only in retrospect

Everyone is piling in, stating that Dubai was obviously a bubble.  Where were they three years ago?

Oil revenues underpinned the Dubai economy through Abu Dhabi.  So it wasn’t completely irrational for bankers to pile in, on the implicit assumption that the govt would bail out Dubai anyway.  That it’s not happening doesn’t mean the bet wasn’t rational or worth making. 

Similarly the madness of Australian banks relying on VOLATILE and UNSTABLE international wholesale markets (Cth Bank needs to issue $1 billion in bonds a week just to survive) is clearly a sign of a bubble in debt in Australia but no one notices.

In Australia there is such a clear mis-match between savings and investment, such a clear bubble in real estate (both residential and CRE), it’s obviously leaking out in the wholesale market.  Which is why the govt had to play market sucker and buy $8 billion in RMBS that no one in the wholesale market would touch.  And which is why Westpac and the Cth Bank needed implicit/explicit govt guarantees to keep issuing bonds into the wholesale debt markets.

Australian banks have become dumb retailers of debt, pushing middle class Australians over the edge of the debt cliff through unsustainable credit card and housing debt, and passing this toxic trash onto the wholesale market through the issuance of wholesale bonds (to compensate for the lack of a deposit base to fund this unsustainable build up of credit).

Once the govt guarantee goes, and another crisis hits, where will these dumb retailers get their wholesale funds?  The answer is – they won’t.

APRA is already worried about this.  But there is no way out of this box.  Bubbles, once formed, have no easy way of deflating.  They always burst in a panic; they don’t gently deflate.  Interest rates have to rise – substantially – to get back to a more balanced, self-reliant banking system, funding by its own deposit base, and not vulnerable to a flight of overseas capital.  But there is no easy way to get from here to there.  The only way out is via a housing bust and a major recession or a major devaluation of the $A.

I don’t envy APRA or Westpac.

Then again, they deserve the dilemma they face.

Banking karma is a b*tch.

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