The author has been described by News Ltd as an "iconoclast", "Svengali", a pollie's "economist muse", and "pungently accurate". Fairfax says he is a "Renaissance man" and "one of Australia’s most respected analysts." Stephen Koukoulas concludes that he is "85% right", and "would make a great Opposition leader." Terry McCrann claims the author thinks "‘nuance’ is a trendy village in the south of France", but can be "scintillating" when he thinks "clearly". The ACTU reckons he’s "an enigma wrapped in a Bloomberg terminal, wrapped in some apparently well-honed abs."

Friday, July 16, 2010

Idea: Why we need exchange-traded debt markets

During my speech to the Whitlam Institute yesterday I proposed the following idea, which is something I have discussed previously here:

"Let me conclude by offering a few ideas.

Perhaps the most interesting is the role of credit or debt capital in our economy. At several trillion dollars, Australian debt markets are much larger and, importantly, more hazardous to taxpayers than equity markets. But in contrast to listed and exchange-novated equity markets, mortgages to households and loans to businesses are non-transparent “over the counter” instruments.

This means that debt capital is lightly regulated and policymakers know little about the details of individual transactions. Compare this with equities, where every single transaction is tracked and recorded by the ASX and ASIC.

More significantly, equity markets are rarely the underlying cause of crises. It is the default, foreclosure and consequent asset price risks induced by high levels of leverage that are more often than not responsible for financial calamites.

So I have recently proposed a simple idea. The RBA’s told me they like it. APRA would presumably love it. And it would dramatically improve our regulators’ ability to track the changing role of debt in our economy, and help prevent the deterioration of lending standards that precede the build up of speculative bubbles.

In short, I’ve argued we should create a centralized, novating exchange for all credit transactions. Much like we have for equities. This would mean that every single personal, business and residential credit transaction would require the transmission of a detailed data packet to the clearinghouse managed by, say, APRA, documenting the transactions’ vital statistics.

All of the technology exists to allow us to immediately implement this idea. And it would revolutionise government’s ability to manage risk in the economy, and, particularly, monitor the new moral hazards that the taxpayer guarantees have introduced into the financial system."