Citizens Electoral Council of Australia

Media Release Thursday, 15 December 2016

Craig Isherwood‚ National Secretary
PO Box 376‚ COBURG‚ VIC 3058
Phone: 1800 636 432
Email: cec@cecaust.com.au
Website: http://cec.cecaust.com.au

Murray’s ‘Tulip Bubble’ comparison highlights need for Glass-Steagall

Former Commonwealth Bank boss and chairman of the 2014 Financial System Inquiry David Murray has just likened Australia’s housing market to the 17th-century Dutch Tulip Bubble. “The economy’s vulnerable because there’s a bubble in the housing market”, Murray told Sky News on 1 December. “All the signs of a bubble are there. Many of the signs are the same as the Dutch tulips.” (Emphasis added.)

Host Peter Switzer interrupted: “Now you’re scaring me, David!” Murray responded: “Well, they are—people’s behaviour, people’s defensiveness about any correction in that market, all those signs are there.” Perhaps out of sympathy for his host, or because he may have shocked himself, he then hurriedly said “if the economy tracks along okay, it might turn out that this thing sorts itself out.” No, Mr Murray! The experience of previous bubbles tell a different story.

The Tulip Bubble

The most famous speculative bubble dates from the early 17th century in Holland, and was called the Tulip Bubble. Tulips, which arrived in the Netherlands from Turkey in 1593, became a craze among aristocrats within a few years, and soon an object of speculation. Individuals kept bidding up the price of the bulbs, which, in fact, were never even seen by their purchasers. Buying and selling contracts for tulip bulbs in itself became a major business.

The rate of increase in the price dwarfs that of the late 1990s dot.com mania for companies that had never made a profit, or even a product. In 1623, a single Semper Augustus bulb (the most valued variety) sold for the equivalent of US$525; by 1625, the price was up to $1,575; by 1633, it hit $2,900; in 1637, three such bulbs sold for $16,000. These prices compared to the average annual Dutch income of $79.

By February 1637, the collapse was on. Thousands of investors were bankrupted, many of them members of the middle class, who lost their life savings. The resulting turmoil turned the craze into a byword for speculative insanity. An experienced financial expert, David Murray knew exactly what he was saying when he said it, but what he doesn’t want to admit—whether out of denial or fear of sparking panic—is the implication for the big banks. They have concentrated most of their business, more than 60 per cent, in the housing market, and if there is a crash, they will be wiped out.

Time for Glass-Steagall

It is a basic fact of both finance and physics that all bubbles burst. Rather than waiting for a devastating bust such as occurred in the US, UK, Ireland, Spain, and other nations in 2008, the government must avert such a crisis through an orderly reorganisation of the mortgage market. Further, the government must quarantine essential financial services from the upheaval that this action will trigger in the mortgage-backed securities market, by imposing a full separation of retail banking from investment banking, modelled on the 1933 Glass-Steagall Act which protected the US banking system for 66 years until its corrupt repeal in 1999.

When he conducted the Financial System Inquiry in 2014 Murray rejected the need for a Glass-Steagall separation of banks to protect Australian depositors and home-buyers from a crash—now that he’s compared the property bubble to the tulip mania, has he changed his mind?

Click here to sign the petition: Break up the big banks now—pass Glass-Steagall!

Click here for a free copy of the CEC’s pamphlet Glass-Steagall Now!, which explains the dangers lurking in Australia’s banking system that only a full Glass-Steagall separation can fix.

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