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China guns for cotton. Whatever.

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Still more people freaking out about China. When will they get it?

So it seems that China is gunning for Australia’s cotton industry now.

Australia’s cotton industry is bracing for what could be a devastating blow as it becomes the latest casualty in the escalating trade tensions with China.

Mills in China are being told to stop buying Australian cotton as speculation grows that a hefty tariff is about to be slapped on the trade.

Government sources have told the ABC the cotton industry could face tariffs as high as 40 per cent, a sanction that could make the trade with China unviable.

Under China’s current trade rules the Chinese Government determines how much cotton each mill can import through a quota system.

But the ABC understands spinning mills have been warned not to use Australian product, or risk their quotas being slashed.

Without the government endorsement, these mills could be forced to pay 40 per cent more to buy Australian cotton.

The Australian industry has become increasingly nervous about the $800 million market, which typically accounts for 65 per cent of the cotton grown nationwide.

“Devastating blow.” Get over it. Cotton should just do what coal’s doing, in light of similar attacks.

That is, shrugging it off and saying “whatever.”

BHP’s Chinese customers have asked the miner for relief from coal purchase contracts in the wake of Beijing’s move to crack down on foreign coal imports.

The requests for deferral come amid uncertainty over whether China is seeking to limit purchases of foreign coal of all origins, or whether Australian miners are being specifically targeted under an extension of geopolitical trade tensions.

BHP chairman Ken MacKenzie said he would be concerned if Australian coal was being discriminated against.

But Mr MacKenzie said he was generally “not overly concerned” about the impact that trade tensions would have on demand for BHP's products, but he was concerned about the impact on ”the economic cycle”.

”Our concern around some of these geopolitical tensions and trade wars that are going on is the impact it could have on global growth, and in a post-Covid world that probably has even more concern,” he said.

Are you catching that? BHP doesn’t care if China doesn’t buy its coal. All it cares about if total global demand for coal goes down.

Why?

Senator Matt Canavan gets it:

National Party Senator Matt Canavan said Australian exported about 20 per cent of its coal to China.

“It’s a sizeable market but it’s not our biggest market,” he told Sky News, adding the largest market for thermal coal was Japan.

“We only actually produce about 5 per cent of the world’s coal, so if China decides to buy its coal from different countries, well, those other countries will be exporting less coal and we’ll fill a market gap in those places.

If China buys Brazilian coal, we’ll just sell to whoever Brazil was selling to.

That’s the thing about commodities. It doesn’t really matter where they end up. And that’s why BHP is so relaxed.

The real madness is here is that we allowed a single market to buy up 65% of our cotton output.

That’s nuts. That’s a strategic vulnerability.

But thankfully, we’re on the slow (and noisy) road back.

So chill, everyone.

JG

RBA: “We’re happy to inflate house prices”

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The RBA has changed its tune. Look out.

Rates are going to get cheaper.

That was the key take-away from a speech from the RBA Governor Phil Lowe last week, which I’ve seen at least one commentator describe as “the most dovish speech ever.”

(If you’re new to the lexicon, dovish means inclined to rate cuts, hawkish means inclined to rate hikes.)

So yeah, it seems pretty clear to me that the RBA will cut rates a fraction lower at their November meeting, they’ll extend the TFF (cheap money for banks), and maybe even try and crunch the longer end of the yield curve.

That is, our super cheap money is about to get even cheaper.

But I’ll talk more about that, but there were a few interesting things in his speech I wanted to pull out.

First, I noted last week that the Covid crisis is having a disproportionately strong impact on small and medium sized businesses.

The RBA actually has clear data on that, which shows the huge hit to SME revenue, while big business has largely sailed through the crisis unscathed, and then saw a big bounce in sales once the money started flowing into the system. 

(I’m sure they’re going to hand back all the money they took in Jobkeeper. That’s totally going to happen.)

The other thing ol Phil noted was that even though incomes are holding up, households have bunkered. Consumption has tanked and savings have spiked to the highest level on record.

As he notes, the really interesting question is what they do with all that money once the crisis passes. Might make for a nice deposit on a house, for example.

He also notes that part of that saving spree is heading in to mortgage and offset accounts, as people pay down debt.

And he also notes that even though our government debt has exploded, it’s still pretty small in the scheme of things.

So, we can be relaxed about that.

And we can be extra relaxed about it because the RBA is just buying up all the debt anyway, as their balance sheet doubles:

But the key take-aways were around the direction of monetary policy.

First up, they now reckon that more rate cuts could be useful:

When the pandemic was at its worst and there were severe restrictions on activity we judged that there was little to be gained from further monetary easing. The solutions to the problems the country faced lay elsewhere. As the economy opens up, though, it is reasonable to expect that further monetary easing would get more traction than was the case earlier.

They’re also pretty relaxed about the potential for super-cheap money to create asset-bubbles.

A second issue is the possible effect of further monetary easing on financial stability and longer-term macroeconomic stability. This is an issue that we have paid close attention to in the past when we were considering reducing interest rates in a relatively robust economic environment… To the extent that an easing of monetary policy helps people get jobs it will help private sector balance sheets and lessen the number of problem loans. In so doing, it can reduce financial stability risks.

That is, we don’t mind inflating house prices, so long as people have jobs.

So that’s why it’s a super-dovish speech.

The economy is still struggling. More rate cuts will be useful. We don’t care if asset prices inflate.

Let’s get this party started!

JG

No BS: Caught in a regret loop?

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A depressed woman sitting alone is a dark tunnel with light at the other end.

Caught in a regret loop, I saw that they were a total fantasy…

I found myself wallowing in a bit of regret recently.

It might be something in the ether. I’ve got a few mates who have gone back to certain turning points in their lives, and taken a wistful look down a road that might have been.

Maybe it’s the nature of Covid – a great big stop sign in the road of life. Maybe it’s just what happens when you’re cooped up inside all day.

Anyway, at first I’m like, “Oh, this is a productive use of my time. I’m taking stock of how some big life decisions panned out, so I can learn from them and make better decisions.”

I think this is a good approach to have to life (in theory). I think with every investment decision you should make a note of your thinking so you can go back and check it against reality.

(What was I thinking when I invested in Pets.com?)

Otherwise you never learn.

But I don’t think this is what I was actually doing. I think lockdown was just getting to me, and it was nothing but a bit of wistful escapism.

But I started watching my regrets and I noticed something.

What I found was that I was comparing my current life to a hypothetical life based on another life choice – making different financial decisions, different romantic choices, different creative pursuits.

But I noticed something.

The picture I had of my current life was pretty accurate (I think!). I had a sense for all the awesome stuff, and I was very aware of everything that wasn’t awesome – the annoying and aggravating stuff.

However, the picture of I had of my ‘alternate life’ didn’t have any of this nuance. When I imagined it, all I saw was how awesome it was. To the extent I saw any downside at all, I tended to minimise it or dismiss it as not that much of a problem.

I think that’s something about human nature – we’re good at imagining how awesome something might be. We’re not good at imagining the challenges and work involved.

But what that all gave me was an apples and oranges comparison. I was comparing my current life warts and all, to an alternate life which had no warts at all.

So of course I’m going to wistfully long for that alternate life. That alternate life doesn’t have any problems. Everything’s awesome there. All the time.

But obviously it’s a total fantasy.

And so regret is nothing but a longing for a life that is completely unrealistic.

The reality, I try to remind myself, is that any life path has problems. All it has are different problems.

And so it’s really unknowable whether it would be ‘better’ or not.

And in the end, I also know that it doesn’t really matter. Happiness is mine to create. It’s an inside job.

And so yeah, regrets. Total waste of time. You’re comparing your current life to a life that has no basis in reality.

Don’t bother.

Do some push ups instead.

JG.

A grim outlook for SMEs

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A lot of small business are not going to survive this.

One of the things that I don’t think the budget did enough of – and I think it will be forced to do more of – is support small business.

There was a report yesterday from Judo bank who reckon that 8%, or 160,000 small to medium sized businesses are not going to survive Covid.

That’s a pretty grim stat.

The RBA was singing a similar tune last week in their Financial Stability Review, saying that the road ahead looks tough: 

Overall, businesses entered 2020 in good financial shape, but have since experienced sharp falls in revenue. Most have withstood the economic contraction so far, with the support of government initiatives and private lenders. As the downturn persists and the support starts to unwind, however, it is likely that business failures will rise.

Many businesses have faced enormous disruptions to their trading. In aggregate, small business revenue has fallen by 15 per cent since March, with larger declines for businesses operating in Victoria (Graph 2.1).

That’s a pretty brutal story. Average revenue declines of over 15%. And look at how wide-spread it is. I never would have guessed that SMEs in the agricultural sector would see their sales slashed by almost 10%. Hmm. I guess many food producers are tied to the fortunes of the dining industry…

The RBA note that so far, this hasn’t been a huge problem because government support packages have evened out the bumps, and their cashflow positions are holding up. Never-the-less, SMEs are building up cash reserves, preparing for the worst:

Business cash buffers have increased markedly since the start of the year. Before the pandemic, around half of Australian businesses had enough cash on hand to pay their expenses for less than one month (Graph 2.2). By June 2020, more than 40 per cent of businesses reported they had sufficient savings to cover their current expenses for more than six months, partly due to the level of income support. Large corporates appear particularly well placed in terms of cash buffers, having significantly increased their cash holdings during the pandemic, including through reducing expenses and drawing down credit lines.

That said, many businesses are struggling to stay afloat:

At least 10–15 per cent of small businesses in the hardest-hit industries still do not have enough cash on hand to meet their monthly expenses. These businesses are in a tenuous position and are particularly vulnerable to a further deterioration in trading conditions or the removal of support measures. Survey evidence indicates that about one-quarter of small businesses currently receiving income support would close if the support measures were removed now, before an improvement in trading conditions.

And inevitably, small businesses are going to close…

Business failures will increase, although there is a high degree of uncertainty about the magnitude and timing. It will depend on the strength of the economic recovery, which will be influenced by the duration and severity of future COVID-19 related disruptions, and the timing and extent of the unwinding of the various support measures. Bankruptcies and insolvencies are currently very low because of the income support, loan repayment deferrals and temporary insolvency relief (Graph 2.4).

So we may be looking at the calm before the storm. So far, businesses are staying afloat. But the real test is going to be when the support packages like JobKeeper et al start to unwind, and SMEs are going to have to fend for themselves. 

I’d like to think that we won’t be leaving SMEs to the wolves, and that would mean even more money coming out of the RBA’s bottomless bag of money, but I don’t think it’s a certainty.

It’s one of the tragedies about being small. When Qantas goes belly-up, everyone complains because they own Qantas shares. When your local café closes, it’s never going to make front page news.

So spare a thought for your local businesses. They need your support more than ever.

JG

Why the boom timing surprised everyone

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The finance data shows the boom taking root, coast to coast.

I’ve been saying a little while that we shouldn’t be surprised if this boom gets a run on quicker than most people expect.

So far we’ve had a massive policy response that was aimed to combat a collapse in household incomes.

Only thing is, household incomes didn’t collapse.

Or if they did collapse, it tended to be in lower-income cohorts (think hospitality workers for example), and these cohorts weren’t your home-buying cohorts anyway.

So in terms of housing demand, you’ve seen households with steady financial positions receive a big boost from the government, either through direct cash injections, or through substantially lower interest rates.

Now, you probably would have expected those households to be tucking that money away – saving it – in anticipation of easing economic conditions.

And they have been doing that.

But they’ve also been going out and buying houses. (That’s what the data I’m about to show you tells us.)

And that makes sense when you think about it. Yes, buying a house is a big financial decision. But if households are looking for stability and certainty, owning your own home is one of the best ways to deliver that.

And so we have seen a surge in home buying, particularly from first home buyers.

And we’re seeing this surge show up in the finance approvals data – how many new home loans are being minted each month.

And what that data shows is that approvals positively surged in the month of August, up over 12% in the month.

Finance approvals have shrugged off the impact of Covid altogether, and are up a very impressive 9% since March.

This is pretty amazing really. This actually points to a market that’s running pretty hot – and I don’t think anyone expected that.

I mean, I knew it was coming. You can’t throw that much money around without it having an impact. But still, less than six months into the worst recession since the Great Depression, it’s still surprising.

Now, the interesting thing here is that finance approvals is one of the best leading indicators of price growth we have.

And so if you go around the capital cities, you can see that it’s pointing to decent price growth in the short-term outlook.

Like Sydney. Sydney and Melbourne have been hardest hit, since they both rely on immigration pretty heavily. But still, the approvals data are pointing to price growth support around the 6-8% p.a level.

In Melbourne, I’d expect price growth to recover back to similar levels, especially as the lockdown restrictions continue to ease.

In Brisbane, the relationship isn’t as tight, but we could possibly see prices pushing past 8% p.a.

In Perth, I don’t think they’ve actually lined these series up quite right, and I’d expect price growth to turn positive again very soon, after spending quite a long time underwater.

And in Adelaide… well, nothing ever happens in Adelaide. But the trend is upwards.

So there you have it. Six months into what could easily be a depression, house prices look set to grow at around 6-8% p.a…

And the trend is going higher still.

JG

No BS: My hot take on the budget

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The shape of the country of Australia in the colours of its national australian dollar currency recessed into an isolated white surface

The Budget was massive, but I think we have more in store.

What do I make of this week’s budget?

It’s massive. But there’s more coming.

That’s what I reckon.

First up, the headline numbers are huge. We’re looking at a budget deficit of almost half a trillion dollars. We are still well and truly in unchartered territory here. No one could have ever imagined that the Australian government would be handing down that kind of deficit a year ago, let alone a “debt and deficits disaster” Coalition government.

But this is where we’re at.

It’s a huge amount of money.

But I still think there’s more coming.

And I say that because the two key centre-pieces of the budget – the wage subsidy for young workers, and the instant asset write-offs for business investment – are activity generated.

That is, they rely on the private sector doing stuff for them to come into effect.

So if you’re going to give companies a subsidy if they employed a 19-35 year old from the ranks of the unemployed, that requires firms to actual go out and hire people.

While this measure is estimated to be worth billions of dollars, it is theoretically possible that if no firms employed no new workers, that the total cost to the budget would be a doughnut $0.

Same story with the asset write down. If firms invest, there might be a certain tax advantage for that. But if no firms invest in no new things, then the measure is worthless.

That means that this free-spending budget actually needs a catalyst before it become active.

And what’s the catalyst?

Economic activity itself. It needs firms to hire and invest. If they don’t, then there’s nothing.

So this epic budget positions itself as a rocket pack strapped to the top of an economy that’s already moving.

But what if the economy isn’t moving?

It’s possible.

The government’s projections for growth and jobs were characteristically over-optimistic, but not wildly so.

But still, there’s a lot of money exiting the economy right now, as the governments front-line support measures – particularly JobKeeper and the JobSeeker supplement – are already being wound back.

This chart from the AFR shows you what the ‘fiscal cliff’ we’ve been hearing about for so long is now looking like:

And that’s at a time where private demand has already fallen through the floor, and public spending is the only thing propping up the economy.

And so what you’ve got is about $30 billion worth of direct government spending being replaced by a wage subsidy worth $4bn, and an asset write-down worth $27bn.

So it kinda balances out, right?

Well, no, not exactly.

It’s a bit apples and oranges because you’re replacing a direct cash injection, with indirect support that’s conditional on firms taking the risks involved in hiring and investing.

What it means is that if the economy is already recovering and continues to recover, and firms are happy to hire and invest, then we should get a reasonably smooth transition.

But if they don’t – if firms and households are still spooked – especially as JobKeeper winds up – they we might end up with a very bumpy transition.

In the short term, that will lead to two things. The first is that the government will decide it needs to support the economy more directly, and it will go back to mainlining money straight into the economy.

The second is that it will call in the RBA artillery, and we’ll get further rate cuts and reduced mortgage rates.

My guess is we’ll get both.

My hunch, based on what I know about animal spirits, is that everyone will want to take a wait-and-see approach, and the government we’ll be forced to intervene more aggressively.

In the long run, that means even more money finding it’s way into the system, and we’ll have an even bigger rebound boom baked into the outlook.

So that’s my take on the budget.

It’s huge. It’s massive.

And it’s only round one.

JG.

Why most people go home empty handed

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Some of us spend our whole lives waiting…

There is never any more perfection than there is now. There never was. There never will be.

And there is never any more opportunity than there is now. Never any more love and affection available to you than there is right now.

It’s right here.

And you might say, c’mon Jon. I’ve been locked down in a Melbourne with two young kids. This is a nightmare.

And I’m sure that’s true. But what were you doing pre-covid?

Were you celebrating your freedom – you ability to walk to the shops whenever you want? You’re ability to have a coffee in a café whenever you wanted? The way you could get up early and take the kids to the park?

Were you doing that? Or were you worrying about the future? Were you worrying about how you were going to afford that overseas holiday, or the renos or whether it might be time to change jobs and try you hand at something new?

Were you having the time of your life, or were you just living?

We can spend our whole lives ‘just living’.

We can spend our whole lives ‘just living’ and waiting for perfection to come, or waiting for the right opportunities to come, or waiting for the love and affection that life seemed to promise us was always just around the corner.

Somehow, some way, we have to stop our endless hunger and searching, and learn to enjoy the perfection and juice that’s available to us right now. Life is never going to slow us down or offer us something so perfect and beautiful that our worrying mind is completely overcome and we experience a naïve and innocent joy.

(That’s what drugs are for.)

We have to take this responsibility and do it ourselves.

But this is the key.

It’s not about blinding ourselves to life’s difficulties or frustrations. It’s not about pretending that they’re not there.

It’s about coming to understand that the things that annoy us or sadden us or freeze us in fear or hurt our hearts – these things are part of the perfection.

Your worries about the future – all your plans and hopes and frustrated ambitions – these are part of the perfection.

And the way your loves ones hurt you, or annoy you, or run hot and cold with their affection and care – this is part of the perfection too.

It’s happening now. It’s always happening now.

And until you can see this, and until you can learn to celebrate the gifts that life has to offer in the midst of everything else, then you will spend your whole life waiting.

You will spend your whole life waiting for the right moment to savour the beauty life has to offer you, or the opportunities that are here right now, or the love and affection that is already available to you.

And one day, it will be too late.

Your time will be up.

And you’ll go home empty handed.

JG.

A conspiracy theory worth $70K

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A shocking theory about what’s driving the new banking policy.

I was talking to a banking industry insider the other day about the irresponsible lending obligations, and I’ve got a bit of a conspiracy theory for you.

But first, let’s zoom out a little bit.

So I noted last week that the government has reversed the responsible lending obligations on banks, in an attempt to free up the flow of credit into the market.

While the policy details are still landing, it now seems that banks will no longer be on the hook if a borrower takes on more debt than they can handle.

That gives banks the power to take mortgage applications at face value, and to rely on spending benchmarks, rather than going through and calculating a borrower’s actual living expenses.

Now, obviously anything that gets the credit flowing more quickly is a boost for property prices.

In fact, one analyst reckons it could add $70K to the median house price in Australia.

The average buyer could expect to have an extra $70,000 to spend on a home after changes to responsible lending rules, one consumer expert says, in a move that could push up property prices.

Responsible lending laws are set to be wound back in a bid to allow banks to lend money to customers more easily, Federal Treasurer Josh Frydenberg announced last week.

Although the details of the change are not yet clear, customer expenses have been in the spotlight after banks clamped down on lending practices under scrutiny from the financial services royal commission, refusing to grant loans to borrowers who spent too much on Uber trips or takeaway.

If requirements to assess borrowers’ expenses ease, an average buyer may see a jump in their purchasing power by about $70,000, Canstar group executive of financial services Steve Mickenbecker says.

Based on an average income of about $80,000 and a 20 per cent deposit, he said a would-be buyer might have the amount they could borrow increase from $440,000 to about $510,000.

“I don’t have a crystal ball for this,” he said. “That’s a hypothetical number.

“The banks were grilled rather ferociously over their assessment of lending [during the financial services royal commission], in particular their assessment on people’s budgets.

“[They] will be likely to move some distance from that and return to formulaic thinking.”

I think that could be right. Remember when the APRA restrictions came in, prices fell about 10% over the next 18 months. So a 10% rebound is definitely within the realms of possibility.

But where is this coming from?

Remember, no one was talking about this a month ago. No one thought these changes coming.

But my mate has a theory.

He reckons that the big banks are worried about the borrowers they currently have on deferral. Remember about 20% of them are ghosting the banks – they’re not returning calls.

So the big banks are wanting to off-load these customers on to other banks, before the crap really hits the fan.

But there’s a problem. These borrowers are problematic by definition, and if a smaller lender looked too closely at their situation, they wouldn’t want to lend to them, and that would leave them stuck on the big bank’s books.

The solution?

Remove the requirement to look closely at their situation.

Remove the responsible lending obligations, let these borrowers mis-represent themselves to their new lender, and bon-voyage – it’s no longer a problem for the big banks.

Maybe, these changes are purely about helping the big banks offload their worst customers onto smaller, unsuspecting banks, and preserve their profit margins.

What do you think?

We’re in the realm of conspiracy theory here, but you know, I wouldn’t put it past them.

Banking profits are banking profits, after all.

Oh, did I mention there are space lizards involved?

JG

No BS: Have you tried blaming capitalism?

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If you’re blame yourself, you only make it worse

Do things suck right now?

Are you stressed to the point of dysfunction? Are your relationships coming off the rails? Are you feeling like life is just a gruelling and meaningless sh!t-show? A misery matinée?

Are you feeling like you just can’t get ahead, and just can’t see anyway that you’re going to get ahead, or even just squeeze out a weekend for yourself?

I get it. Life is hard.

And the real tragedy is that people then go and blame themselves for feeling like this. They take it on. If they’re not able to keep up with the work load, they blame themselves for not having enough stamina and energy.

If they don’t have the time and space to make a relationship work, they think that they themselves are broken.

And if they can’t get clear of the stress for long enough to actually feel happy, they think they must have a chemical imbalance or something, and that they’re the only ones on the planet who haven’t got this whole game figured out.

Our misery is compounded by the idea that we’ve only got ourselves to blame.

But, maybe that’s not true.

Maybe you’re not to blame.

Maybe capitalism’s to blame..?

Maybe you should try blaming capitalism. I think it will make you feel a lot better.

Now, I’m not trying to get into a first year Uni d1ck-measuring contest here about whether capitalism is better than socialism.

I’m actually a huge fan of capitalism. I think it’s an amazing tool that’s done epic things for humanity in the last couple of hundred years.

And in the broad sweep of history, I think Milton Friedman is probably right when he says, “Capitalism is the worst possible system… with the exception of all the other systems we’ve ever tried.”

And I personally think that capitalism does a great job of incentivising economic activity, but governance… not so much.

But whatever. I don’t have a horse in this race.

But I do think it’s useful to acknowledge that the systems we have, haven’t been fully optimised for helping us live happy, healthy and meaningful lives.

Ha! That’s probably the understatement of the year.

The way things are – in the world as it is – these things are actually incredibly challenging.

It’s hard to find space to go deep with your kids and your partner when you’re working two jobs to pay rent.

You know, maybe your kids don’t have learning difficulties. Maybe you and the wife aren’t fundamentally incompatible. Maybe you’re just living in a time and in an age and in a system where you just don’t have space to give these things the time they actually need.

My only point is, go easy on yourself. Don’t make it all about you.

If you’re struggling to keep up and keep your head above water – to make everything work. That’s not about you.

Part of the blame (at least!) lies with this weird misery-matinee we’ve somehow created for ourselves.

I’m not saying settle here either. It’s a crazy-arse system, but there are always things you can do.

My only point is, don’t internalise it. Don’t ignore the context. Don’t make it all about you.

Try blaming others for a while. It might make you feel a lot better.

JG.

Fed Economist goes full anarchist

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The western economic model is under attack from all fronts.

Legendary hedge-fund manager Ray Dalio says that inequality will end up being one of the defining investment themes over the next 20 years.

His idea is that capitalism – or whatever (waving vaguely at everything) this is – is not a system that naturally distributes wealth equally or fairly.

In fact, given current settings, it seems entirely designed to funnel wealth towards the top of the pyramid.

(It’s probably not an accident.)

But how long can that go on? How long can you keep pushing the middle classes down into poverty?

It’s not infinite right?

So the question is when does the ‘awakening’ come? When do enough people realise that they’re pawns in a game they can never win, and decide turn their sights from ‘winning’ to ‘destroying’ instead?

Dalio has been saying this for a while, but then Covid comes, and now Dalio has another example he can point to. The crisis response has, in the developed world, made a decent fist of keeping the middle classes afloat (although they’ll have to pay back those mortgage deferrals at some point).

However it has also funnelled money into the pockets of billionaires at an staggering rate.

And you have to wonder, since this is exactly what happened during the GFC – is that maybe this unfair crisis response is actually part of the game-design, and that actually, maybe, the crises themselves are part of the game design too.

This is no longer a fringe argument anymore – not something confined to the Universities and their tweed-coat professors.

There’s Dalio. And there’s characters like Neel Kashkari. He’s President of the Minneapolis Fed, which, given the size of America, puts him on par with our own RBA Governor Phil Lowe.

What’s he reckon?

It’s absurd.

“How can the financial system possibly be this fragile?”

“The funding markets that almost collapsed in March raise important and complex policy questions… It is not as simple as addressing the risks of too-big-to-fail banks, where the clear and straightforward solution is to force them to fund themselves with more equity.”

…“You might not realize it, but the banks got a lot of help.”

There’s a couple of nuanced points he’s making there. But they’re important.

First, when banks are part of everything we do, when we bail out the everything, we bail out the banks.

When we’re giving people a cash-handout to stop them defaulting on their mortgage or other debts, then what we’re really doing is giving the banks a handout.

The people are just an intermediary between the government and the financial sector.

So even if we’re not giving money to banks directly – although given things like the Term Funding Facility here in Australia, we are actually doing that too – but even if we don’t give money to the banks directly, it still ends up in their pockets.

So why would banks care if we end up in a crisis? They’ve got money coming at them from all directions.

It’s baked into the system.

And the solution? The very least we should do, according to Kashkari, is “to force them to fund themselves with more equity.”

That is, make them put some money aside for a rainy day, since very rainy days seem to come around every ten years or so.

Fair call.

But given the free-kicks the politicians are handing out these days, I wouldn’t be holding my breath.

JG