Double bubble trouble:where will it end?

Wayne Swan and Guy Debelle are, certainly, right.

There is no doubt that Australia does have “a well regulated banking system, capable of withstanding the fallout from…international developments,” as the Treasurer says.

Mr Debelle’s remarks are forceful, too, if a little more technical. But that is to be expected of a Reserve Bank Deputy Governor, who has special responsibility for financial markets.

Debelle surprised no-one, at a credit summit in Sydney yesterday, when he admitted that global credit markets had been “turbulent” over the past year.

But he saw reason for hope, too.

“While there have been areas of dislocation in the Australian credit market, there have also been areas of strength,” he said.

Such as?

Mr Debelle answered that question, too.

“The process of re-intermediation has seen strong issuance by financials, particularly the major banks,” he explained.

“This has substituted for the dislocation in asset backed corporate bond markets.”

In both cases, these words are comforting.

Especially so, after two of Australia’s big four banks, the NAB and the ANZ,  announced that they are increasing their provision for bad debts.

Equally, though, it might be said that neither of these men is telling the whole story.

We can’t blame them for that.

These troubles spring, primarily from the US credit crunch.

That, in turn, arose from what the US economist, Paul Krugman, calls the “double bubble.”

Mortgage originators, in the US, lent recklessly, on a huge scale.

That produced both a lending bubble, then a bubble in US property prices.

Predictably, both bubbles burst, with disastrous results, which have still to be fully played out.

Krugman has hailed the rescue of Fannie Mae and Freddie Mac as “good news.”

But he adds “it won’t change the fact that that this decade’s double bubble in housing prices and loose lending has been a disaster for millions of Americans.”

And not just them.

As we have now seen, the collateral damage has already spread to two, well regulated, Australian banks.

But what happens, now?

A reporter, who attended a brief press conference, that Mr Swan held in Canberra yesterday, asked a particularly succicnt question.

“Bank lending,” he said, “has fallen by about 20 per cent so far this year.

“Do you think that increases the risk of a hard landing for the Australian economy?”

The Treasurer’s response was blunt, but not entirely convincing.

“No.

“I don’t necessarily accept that at all,” he said.

Once again, it is hard to blame him.

The full story of the credit crunch has yet to be told.

So what can be done?

Krugman says the financial regulation, which flowed from the Great Depression of the 1930s, must now be updated, to suit current conditions.

“The desperate rescue efforts of the past year make expanded regulation even more urgent,” he says.

But can the US Fed chief, Ben Bernanke, rise to that challenge?

That is still not known.