NEWS UPDATE: Victorian researcher criticises Treasury bank guarantee

A Victorian University researcher, Andy Schmulow, believes the Treasury scheme to guarantee domestic bank deposits and charge investors an insurance premium may lead to the collapse of the economy.

“Already we are seeing investors flooding money into Australian banks while clearing out of non-bank financial institutions. The outflow of funds from these institutions could see some of them becoming technically insolvent virtually overnight,” Schmulow said.

There would be depositor panic in the market, with a loss of confidence causing massive withdrawals among other banks and lenders, according to Schmulow.

The decision by AXA and Perpetual to suspend withdrawals would add to the panic.

“When these large institutions have to tell people, ‘We’re in so much trouble we are going to have to stop you having access to your money’, that message doesn’t exactly restore confidence,” Schmulow said.

The proposal to charge investors premiums needs to be set by the market, Schmulow said.

“Even a first year economics student can tell you that only the market can accurately price such a premium. The Government is not equipped to carry out this function and therefore cannot determine the price for doing so; attempting to is like courting disaster.”

Schmulow has suggested the G20 emergency economic summit might suggest a banking proposal that would not require the complete policing of trans-national banks.

“By subcontracting the policing function to insurers, it would reduce pressure on the Government to regulate effectively and would achieve its aims without the need for excessive bureaucracy,” he said.