By Ross Gittins
The $4bn fund aims to protect sound commercial property projects.
THERE'S nothing new about recessions and nothing new about the sorts of things governments should do to minimise the damage.
To this end, we can expect the Reserve Bank board to cut the official interest rate by a further one percentage point at its meeting tomorrow. There's more to come, of course, but not this month.
But if you think you've seen it all before, think again. This recession is different. The recession on Main Street has been precipitated by a global financial crisis emanating from Wall Street.
And the crisis has not yet been resolved. It retains the potential to wreak a lot more damage to the real economy, mainly through the denial of credit to perfectly sound businesses, big and small.
That's why the actions of governments this time have fallen into two distinct categories: measures aimed at repairing the financial side of the economy and more conventional measures aimed at stimulating demand on the real side.
Partly because of the confusion between financial-side and real-side measures, Kevin Rudd's decision to establish a $4 billion fund to support the commercial property sector, derisively dubbed the Ruddbank, has met a sceptical reception.
On the face of it, the idea certainly seems suss. In the coming year lots of businesses will make losses, a fair few will go out backwards, lots will suffer falls in the value of their assets and lots of jobs will be lost.
The Government can't possibly prevent all these bad things happening, but why pick commercial property shopping centres, offices and factories for special protection?
A lot of observers have concluded that the goal of the scheme is to prop up commercial property prices, preventing them from falling as they otherwise would.
This, of course, would be of great benefit to the banks that have lent on the property projects not to mention benefit to the property developers.
Is that what this is about? Is the Rudd Government a soft touch?
Fortunately, the scheme is more defensible that it seems.
The first point is that this is a measure aimed at shoring up the financial side of the economy and keeping credit flowing, not at "supporting jobs" by budgetary stimulus.
Second, this is a contingency measure. It's being put on the shelf now in case it's ever needed, but it's hoped it never will be.
The possibility that's being prepared for is a decision by foreign banks to withdraw their funding of viable commercial properties.
Were the foreigners to pull out of viable deals, their motive would be problems at home that had nothing to do with the soundness of our economy. This would make our businesses innocent victims of the monumental instance of market failure that is the global financial crisis.
Were a viable property project to suffer such a setback, the fund would fill the funding gap left by the departing foreigners. The Government would put up half the money and each of the Big Four banks would put up an eighth.
This is a key proviso. It means all five parties would have to agree that any project to be funded was viable. Each of the five would have a veto and all five would have "skin in the game" each stands to lose if a dud project is financed.
Any finance provided would be on fully commercial terms and so the likelihood is that the facility would generate income for taxpayers rather than costing them anything.
There's no way the facility will prevent commercial property prices falling. Unviable projects aren't eligible and, among the viable projects, only those where a foreign financier had pulled out would be considered.
It's true, however, that if the facility were brought into play, it would be because the sudden withdrawal of foreign funding was about to turn the inevitable decline in commercial property prices and activity into an absolute wipe-out.
In this sense, use of the facility would cause the collapse in property prices and activity to be less than otherwise, with consequently reduced devastation to the balance sheets of property developers and the banks.
This, in turn, would cause fewer jobs to be lost in the property sector and in any other sectors reliant on bank credit.
It's true, too, that use of the facility would cause the banks' profits to fall by less than they otherwise will.
But the banks get special treatment in every balance-sheet recession. And any government that isn't willing to countenance that needs its head examined.