fintiques

Bible, in Latin. [Johann Gutenberg, Johann Fust & Peter Schoeffer, Mainz, c. 1455

The first substantial volume to come from a printing-press in the Western world was, appropriately, the Bible.
This edition of the Latin text as established by St. Jerome and known as the Vulgate was planned and printed (whether wholly or in part only) by Johann Gutenberg of Mainz, the inventor (between 1440 and 1450) of the process of printing with movable types which is still in use today.
History can show no more pregnant mechanical innovation than Gutenberg’s. Its potentially for infinite multiplication of written word revolutionized man’s capacity for the exchange of ideas.

Printing and the Mind of Man, 1963

The Gutenberg Bible represents a pivotal innovation in European printing history, transforming books from arduous hand-copied luxuries to everyday objects, produced en masse. Published in Mainz around 1455, copies were printed on vellum and parchment, intentionally lacking rubrication or other embellishment. Now representing a pinnacle of modern bibliology (in both religious and secular senses), the 42-line Bible is featured heavily in cultural institutions as a showpiece. This has not limited the commercial desirability of a Gutenberg Bible, with leaves of previously split volumes appearing periodically on the market, commanding healthy prices.

Complete Volumes

The Bible is somewhat peculiar in the world of book collecting: it has a well documented print run, with significant knowledge on the condition and provenance of each book known to exist. The widespread fame of the Bible and its intended role as a piece for posterity make it unlikely for errant copies to reappear. Each piece is a jewel in its respective collection, and is an exemplar of the status of the book in the history of human knowledge and technology. No known complete copy resides in private hands, rendering what some refer to as the ‘holy grail’ of book collecting all but unobtainable.

The British Library Incunabula Short Title Catalogue lists¹ (carrying on Ilona Hubay’s seminal catalogue) and Clausen Books’ Gutenberg Census² list 49 copies of Gutenberg Bibles held in public and semi-public institutions. Of the known existing copies 11 exist of the 30 printed on vellum, and 37 of those 150 printed on paper. The below chart shows the location of each of the known Bibles, and their printing medium, with further information accessible via Chart Studio.

Locations of known Gutenberg Bibles

The Gutenberg Bible was produced on a subscription basis, worth approximately 3 years of a clerk’s wage, and is assumed to have been predominantly purchased by patrons as gifts for religious or public organisations. The long, fabled history of the Gutenberg Bibles has seen disappearances, reappearances, thefts, and quests for acquisition³, however sales of the complete Bible are scarce, with the most recent in 1987 to storied Japanese dealer Maruzen for $4.9 million⁴, plus buyers premium (approximately equivalent to $11 million in 2020).

Fragments

The Bible was a enticing target for splitting and distribution, as both a notable and highly desirable piece, but also due to its fragile and frequently imperfect condition. The breaking of books for sale as leaves is largely undocumented, however the 1921 splitting of a imperfect copy by a New York dealer highlights the economic benefits that lead to an otherwise distasteful treatment of printed books. Taking the Mannheim Gutenberg Bible, missing fifty leaves, Gabriel Wells split the book selling each leaf with an accompanying essay, ‘A Noble Fragment’ for US $150 (approximately equivalent to $2,000 in 2020)⁵. The ethical implications were considered in John Carter’s ABC of Books, and are explored eruditely by Adam Hooks of the University of Iowa’s Center for the Book⁶. The splitting of such a book is usually met with a shudder, however in addition to making fine specimens of such an important imprint available to a broader range of scholarship and appreciation, the fragments also prove useful for pricing purposes. Fragments from the split Gutenberg Bible more frequently available on the market, with over 40 appearing in the last two decades. The below chart shows comparative fragment prices appearing in a range of auction houses, with more information available via Chart Studio.

USD Equivalent Price Auction Resulst of ‘Notable Fragments’, 2000 to 2020

Valuation remains a challenge even with an increased data set – some fragments will be inherently more valuable than others due to content⁷ – the page containing Genesis 1:1 will command a significantly higher price than some of the less popular books, such as Leviticus, Numbers, or the least commercially successful, a fragment from Job. Old Testament fragments most frequently appear on the market, particularly parts of the books of Kings, Psalms, and Acts.

Pricing

Further difficulty arises when attempting to place a value on a complete volume: the dearth of directly comparable auction history, coupled with the idiosyncrasies of each copy and the the historical importance of the 42-line Bible make for significant problems for standard valuation assessment. Extrapolation of prices simply in line with inflation provides a useful basis, but only applies a time-value of money, omitting a time-value of history, scarcity, and depth of market interest.

Prices of fragments appear to have plateaued, however using these as indicators of potential value of a complete Bible would only establish a theoretical floor price. Estimates of USD $35 million⁸ have been been quoted for a complete Gutenberg Bible, being the 643 leaves⁹ valued at, on average, approximately $55,000. This is consistent with the approximate average value of fragments realised at auction. For a complete book internal variability in fragment prices and the inestimable premium on completeness hinder any firm historic valuation based on fragments alone. For example, other sources make unsubstantiated claims the a complete 42-line Bible would achieve over $100 million at auction¹⁰. The limited pool of buyers with interest and means to acquire a complete Bible would significantly impact pricing considerations should one ever come to open market again. Rather than valuation on a replacement basis, auction valuation is more likely to suggest the appetite and resources of potential buyers.

Understanding the market value, or even insurance assessed price of such an item is challenge that applies to many rare books: the item itself is simultaneously mass produced, but unique in its history and presence. The Gutenberg Bible is an interesting case whereby valuation relies on a sum-of-its-parts approach as a starting basis, given the lack of instances in the market.

Exerting the largest influence in the history of Western printing, the Gutenberg Bible will continue to be the pinnacle of any collection on printing, and forever give rise to asking how does one value the priceless?

References

1. Biblia latina, 42 Lines. British Library, Incunabula Short Title Catalogue.
2. Gutenberg Bible Census. Clausen Books.
3. The Quest to Acquire the Oldest, Most Expensive Book on the Planet. Excerpt from The Lost Gutenberg by Margaret Leslie Davis.
4. Gutenberg Bible Sold for Record $5.39 Million Associated Press, 23 October 1987.
5. Bible. Latin. (Gutenberg Bible: Book of Esther). Sothebys, Catalogue From the Collection of the Library of the Jewish Theological Seminary.
6. Breaking Gutenberg Apart. Anchora, Adam G. Hooks.
7. The Five Least Favorite Books of the Bible. Christian Today, Joseph Hartropp, 27 January 2017.
8. 7 Things You May Not Know About the Gutenberg Bible. History.com, Evan Andrews.
9. The gatherings. Treasures in Full – The Gutenberg Bible. British Library.
10. The 1455 Gutenberg Bible: The First Book Ever Printed. Greatsite Marketing.

The New York Times recently reported on international backlash from AbeBooks vendors as the company sought to limit its operations by jettisoning sellers in a range of countries including South Korea, Hungary, the Czech Republic and Russia. AbeBooks provided justification that the closure of a third-party payment provider would limit the ability of the company to provide service to a number of countries. The impact on such booksellers cannot be understated, with small businesses frequently relying on AbeBooks as their only online presence. The impact on such dealers could be fatal to businesses, however this decision may shed light on the operating environment of the world’s largest online marketplace devoted to scarce printed matter.

The Impact on Amazon

Acquired in 2008 by Amazon, AbeBooks has filled a much needed void in the rare book industry: an online marketplace connecting buyers with sellers at a cost significantly undercutting the creation and maintenance of standalone online stores. AbeBooks has capitalised on the fractured, diverse nature of the rare book trade and has brought together dealers and customers with the sole focus of trade in secondhand and rare books. In pursuit of offering the widest possible selection of book purchasing avenues, the site was acquired by behemoth Amazon. The acquisition by Amazon left AbeBooks as an independent subsidiary, with minimal impact on the structure of AbeBooks itself. At the time of the acquisition some outlets speculated on the prospect of growth in AbeBooks as part of Amazon’s extended online offerings, with concern over the level of integration that would be achieved by Amazon. The impact on the share price of Amazon, however is largely unremarkable. Chart 1 shows the announcement of the AbeBooks purchase, highlighted in red, and the minimal impact on share price. In context of the broader year, the share price change is essentially negligible when considering returns. This proves expected, given the comparative sizes of the companies at takeover, in addition to the high level of similarity between the business offerings of the two companies.

Chart 1

Gaining a picture of the impact of the AbeBooks decision on Amazon, however, proves untenable. In the midst of criticism regarding free delivery over the Christmas period, breakdowns in Saudi relations, and potential anti-trust investigations, recent declines in Amazon share price can hardly be analysed for the exclusive impact of the AbeBooks announcement on the company overall. It should, however, be said that in light of these concurrent events few investors would be particularly interested in the loss of revenue of  small subsidiary. Ultimately, the impact of AbeBooks’ decision hardly impacts on Amazon: loss of revenue would be negligible, and reputational damage insignificant. In conjunction with the stated operational independence of AbeBooks, it can be surmised that decision making hinges more so on financial performance than integration.

Operational Challenges

The suggestion that the closure of a third-party payment service necessitates shuttering business operations in numerous countries presents a curious justification. The proliferation of online payment services would suggest transition to an alternative would be viable, and given the impact on customers and dealers, vital. With much of AbeBooks service infrastructure aging rapidly, capital expenditure on such operational services is becoming less a luxury and more a necessity. Public information regarding AbeBooks position within the Amazon conglomerate are scarce, as the site operates as a non-core outlet of the book division, an area which is becoming less essential to the firm’s profits. In light of the acknowledged (and treasured) network benefits that pervade the book trade the decision to unilaterally discontinue business relationships in potentially profitable developing markets proves peculiar, unless significant capital expenditure limitations are assumed.

But will Amazon listen?

The impact of over 450 rare book dealers publicly denouncing AbeBooks, whilst monumental in the site’s history, is unlikely to be keeping Jeff Bezos awake at night. In assistance of the booksellers cause, however, is the distance between Amazon and AbeBooks. Such independence can see pressure directed towards AbeBooks to affect change, rather than the vast corporate machinery of Amazon. Such an operational difficulty would cut to the core of AbeBooks infrastructure, however for a corporation such as Amazon, this may only represent an annoyance. The significant hindrance, however, is the cost associated with transition in line with AbeBooks existing terms and conditions. The continuation of the marketplace will rely on a sympathetic transition to alternative payment providers, an area which dealers may have influence.

The niche trade of the rare book world survives in significant measure to collegiality and cooperation between dealers in order to achieve economies of scale reducing costs, and drawing attention. Investing to continue vendor relationships is necessary for any online marketplace, particularly in such an interconnected sector.  It should be conceded that any business in a seeming contraction must make difficult decisions at the expense of its customer base, however as the leading online marketplace for rare books with an increasing pool of payment service providers the decision remains puzzling.  With dealers protesting in droves via #bannedbooksellersweek, pulling books from AbeBooks and competitor Biblio leaping upon the opportunity, AbeBooks may seen this decision as a series misstep in a tight knot community. Such a decision provides a significant mark against AbeBooks commitment to the rare book trade, and one which is unlikely to be immediately forgotten.

Like any secondhand good, trade in antiques presents challenges in authentication of item ownership in the market. Items considered antiques can have long and vibrant histories, turning an item from a utilitarian or decorative object into history or culture made manifest. Even in a world where provenance is king, issues can appear and result in challenges for dealers and collectors. Examples traverse the antique sector, from monumental transnational disputes, to attempts at modern rectification of historical injustices and frequently capture the public gaze. These instances, whilst very rare, stand out as significant risks for antique collectors and dealers.

The world of antiquarian books is not exempt from such occurrences, as shown by the recent legal dispute regarding books allegedly stolen from Pittsburgh’s Carnegie Library These books, handled by leading London dealers Maggs Bros and Peter Harrington, have since be recouped and repatriated. This article will look at the deaccession process and its downfalls, as well as review the risks for dealers and their clients.

The deaccession trap

Public institutions and libraries are repositories for local history as well as broader society and humanity. Stories, art, knowledge, and craft are held as a public good, usually in pursuit of predetermined objectives. As collections grow it may be necessary to refocus the collection, and place unappreciated items into the market through a deaccessionment. Most typically due to practical or financial constraints, items may be sold to shrink the collection, however stingent processes for deaccessionment have only recently been broadly adopted (Miller, 2018).

Library’s are unique institutions to galleries or museums, as they frequently serve a lending purpose to the general public. From the early chained bindings of continental Europe, the issue of book theft has plagued lending libraries leading to a number of measures. The vast majority of books removed from a library frequently hold little value in and of themselves. Rare book collections, however, rarely circulate to the general public, and the theft or misappropriation of such cultural artifacts is not uncommon.

Example of library deaccessionment stamp

As the American Library Association notes, libraries processes have become increasingly complex and sophisticated, however this doesn’t immediately imply accuracy and completeness. Digitization of library catalogues provide a useful opportunity for libraries to maintain real time records, however for materials either not catalogued, removed prior to digitisation, problems persist. The traditional signs of deaccessionment, stamps, (both ink and in blind) may be removed or applied incorrectly. Similarly, internal or external malfeasance may result in theft or significant damage in pursuit of financial benefit. The need for increased protection of culturally and commercially valuable items held by public institutions continues to challenge libraries. Early ad-hoc deaccessionment processes coupled with limited scope for regular collection audits see vulnerability in a system that can place both dealers and purchasers at risk.

The risk to dealers

Beyond criminal proceedings of those directly involved in theft of articles from institutions, reputational damage to individual dealers and the wide trade stand as the greatest risk when dealing with such items. Notorious thefts from the Girolamini Library and the Swedish Royal Library drew significant media attention, with inferences of complicity leveled against dealers. Dubious business practices erode trust in the antique dealing community, as well as individual dealers, however a risk assessment must be made by dealers before engaging with such books.

The least burdensome approach is to refuse to deal in any material bearing library marks. Such stock would rarely constitute the majority of a dealer’s stock, and would most likely only represent a margin loss of profit margin. Choosing to deal with stock that bears library marks represents a challenge for dealers as libraries rarely maintained standard deaccessionment markings, nor adequately available records to verify proper process. Contacting institutions is a viable option, however given the contentious nature of deaccessionment coupled with lack of recordkeeping, this does not provide a panacea. Given the limitations presented, dealers may seek to limit their reputational exposure at purchase as well as sale. The maintenance of sale and purchase documentation is essential, and would prove critical to authorities should issues arise. Retention of catalogue listings, demonstrating the degree of care given to research and noting conditional factors and library markings is also essential. The International League of Antiquarian Booksellers’ database of stolen books is a useful (but limited) source for further investigation of suspect items. Finally, as exemplified by the actions taken by Maggs and Peter Harrington, shouldering the burden of restitution highlights the integrity of the dealer and their commitment to the wider trade, as well as avoiding gain benefit from the proceeds of crime.

The risk to collectors

Most collectors would gloss over the possibility of a purchased book being illegaly removed from a collection. It is worth considering, however, as a collector’s library grows. Even though a piece may be purchased bona fide, circumstances may see the piece seized for evidence or possibly even repatriated dependent on jurisdiction. Such extreme outcomes as tremendously rare, however may place the collector in a position of significant financial loss.

Some actions to be taken to prevent unforeseen restitution of unique pieces include:

• Understand your rights. To prevent unscrupulous dealings taking advantage of unknowing customers many governments have introduced consumer protection laws. Regulator and legislation such as the UK Consumer Rights Act, Australian Consumer Law, the Canadian Office of Consumer Affairs, European Union member states take varying approaches but consumers are typically protected to some extent from unfair trading practices.
• Work with reputable dealers. Whilst even the best dealers can make mistakes, or lack complete knowledge about an item, the firm’s standing in the collecting community can provide valuable comfort to purchasers. Trade organisations such as CINOA, ILAB, and national bodies maintain codes of conduct which bind members to act with integrity, and frequently provide
• Understand terms of trade. Like any contract, terms of a transaction can be both explicit and implicit. Dealers will of include terms of trade on their invoice, or usually on their website, which frequently include guarantees and return conditions.  Consumer protection terms may also be implied via statute or by law, however the guarantees made by a dealer should be explicit at time of purchase

This article does not constitute legal advice

We are, as I have said, one equation short.

– The General Theory of Employment, Interest and Money. Book 5, Appendix to Chapter 19, p. 276

As with the art market, the rare book market faces distinct challenges from other asset classes. The heterogeneity of works disallows creation of any useful market index; illiquidity sees distortions to any underlying price; and lack of central exchanges and significant private dealings preclude accurate price research. These observations are almost unhelpfully economic to a dealer – they have to make do with the information that’s available. This article will look at one of the seminal publications of economics, Keynes’ The General Theory of Employment, Interest and Money, and look at its historical prices over the last 10 years as well as its availability in the market today.

The General Theory

Considered his magnum opus, The General Theory of Employment, Interest and Money cemented John Maynard Keynes (1833-1946) as one of economics’ leading luminaries. Revolutionising macroeconomics, The General Theory birthed Keynesian economics, arguing in favour of government interventionism, and questioning the basis of free market economics. Wide-reaching in its impact and application, The General Theory has been recognised in Muir’s Printing and the Mind of Man.

An unassuming book, The General Theory remains popular with collectors, and as such appears in the market not infrequently. It can be regarded as a quintessential modern first edition, where condition and ownership history are key. Minute differences in condition can dramatically affect price, and every piece is unique. Whilst preclusive to deterministic pricing, The General Theory appears frequently enough in the market that comparisons may be drawn. Furthermore, as an established economist and author at time of publication, first editions Keynes’ General Theory maintain reasonable levels of conditionally similarity as the pieces were typically respected from their creation.

At auction

Auction results form the most readily available records on which a market price can be based. The below shows a sample of 61 historical sales from 1998 to 2017. Prices have been adjusted to values equivalent to the 2017 British Pound.

As one would expect, The General Theory appeared in the British market significantly more often than in the US market, however realised prices are on average 25% higher in the British market.

These records form the starting point for most pricing exercises, as they represent a realised transaction, setting a market price for the individual piece. They do, however, carry significant limitations. As generalist, high-turnover organisations auction houses catalogues typically have limited information, particularly regarding condition. Similarly, whilst the above has been RPI adjusted, auctions are intrinsically representative of the economic climate in which it is based. The limited sample set does provide for rigorous decomposition of these effects, nor establishment of an underlying deterministic pricing model.

For private sale

Broadening the scope of available observations, a sample of 33 dealer-offered copies was compiled, and presented below.

Whilst compellingly similar to the distribution of auction results, significant limitations exist with comparison of dealer prices with auction results. At a fundamental level auction results represent completed transactions, with prices reflective actual demand in the market. Dealer prices, however, cannot be viewed as independent and true reflections of the market. Auction records form the basis of retail pricing, as forming cost price or as a logical basis for valuation. Object idiosyncrasies, commercial margins, and ancillary expenses provide ample opportunity for discrepancy.

It is arguable that relationship between auction results and retail price setting is not one-way. Auction estimates play an important framing effect on bidders (Goeree, Offerman, 2003). Valuers will seek to apply an estimate designed to promote sale, in competition with existing retailers and in context of past public results.

The General Theory of pricing

Pricing idiosyncratic assets such as books, artwork, or antiques has been suggested as more an art than science. The romanticism associated with such a phrase belies the underlying pricing difficulties in a market riddled with feedback loops. It is true that any attempt to statistically decompose a deterministic price model would encounter layers of statistical simultaneity. However, the iterative, ad-hoc methodology practiced in industry appears less epistemically pleasing when interrogated at the individual player level. An informative framework can be developed when pricing decisions are considered in the context of decisions made under uncertainty.

As players in the market update their pricing expectations, a standard economic model would contend that some notional equilibrium would be reached. Implicit to this is the assumption of a wide and unceasing demand. Such a niche market, deeply affected by whims of individual collectors, can see demand shrink or disappear with unknowable speed. Dealer’s have summarised this capriciousness with the adage that their ‘stock is only worth as much as someone is willing to pay’. With this in consideration, advertised prices can be considered a the dealer placing a bet on their likelihood of sale (in the sense of Annie Duke’s Thinking in Bets: Making Smarter Decisions When You Don’t Have All the Facts).

The General Theory sought to relax assumptions made by classical economists in order to provide an alternative framework through which to view political economy. As a collectible, it provides a useful case study to review the antiquarian book market. Far from a theoretically perfect market, antique pricing and valuation stands as a subjective and mercurial process steeped in uncertainty. When unchallenged, the antique industry can appear to be built on valuation through near mystical divination, as presented in some popular television series. In a similar vein, a cottage industry of enthusiasts produce a variety of pseudo-deterministic models to provide persuasive price guides premised on some supposed intrinsic worth. Inherent to these divergent approaches is the presence of uncertainty.

Transitioning to an uncertainty driven framework for valuation allows a clearer perspective on the incorporation of information in pricing, as well as the incentives of market players. Compared to more homogeneous and efficient markets, the structure of the antique market sees uncertainty play a nuanced role, for which dealers and buyers must account for when making purchasing decisions. Criticism may be leveled against such a framework as it does not provide an explicit model for profit derivation, and comparatively limits the impact of skill and knowledge. Relaxing assumptions of certainty may seem rudimentary to some readers, however it is valuable given the proclivity of buyers to rely on antiques as a store of value. As Keynes noted:

It would be foolish, in forming our expectations, to attach great weight to matters which are very uncertain

– The General Theory of Employment, Interest and Money. Book 4, Appendix to Chapter 2, Section 2, p. 148

Analysis Limitations

• Auction records are not consistently reported as inclusive or exclusive of premiums.
• Auction records are limited in granularity to the year. As such, yearly average exchange rates have been used at 4% above the interbank rate (the typical cash exchange rate). Sourced from OANDA.
• Retail prices were converted to British pounds at the prevailing rate, however dealers frequently maintain items listed in multiple currencies, or across different platforms resulting in different prices.

References

Goeree, J. K. and Offerman, T. (2003), Competitive Bidding in Auctions with Private and Common Values. The Economic Journal, 113: 598-613. doi:10.1111/1468-0297.t01-1-00142

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Today, the Australian Greens announced a desire for the Reserve Bank of Australia (RBA) to originate home loans to increase the rate of home ownership in Australia. The Greens’ proposal seeks to allow up to 60% of a home’s value to be borrowed at low rates, capped at AUD $500,000.  This article will look to some of the questions raised by such a proposal in the context of the modern banking environment.

Déjà vu

Without historical context this proposal could either appear as a blindly obvious initiative, perplexing as to why it’s never occurred before. As with much in life, however, it has. Australia’s largest bank by assets, the Commonwealth Bank of Australia, started with this exact purpose in the early twentieth century. Originally operating as commercial bank, it quickly evolved to serve Australia’s need for a central bank. This dichotomous entity was found wanting, and legislation was soon passed creating two entities: the Commonwealth Bank of Australia, acting any modern commercial bank ; and the Reserve Bank of Australia, taking on the mantle of central bank.

A king’s castle

Home-ownership remains a quintessential piece of Australian identity, from our infatuation with a backyard barbeque, to its influence in modern Australian cinema. To combat the continued decline in home ownership, residential mortgages would be brought back into the realms of government of service provision. The inclusion of home loan lending within the purview of the RBA would see a dramatic change in its current operations. In it’s purest form the Reserve Bank of Australia acts in concert with government to provide stability to the Australian currency, pursue full employment, and foster economic prosperity for Australia (s.8, Part II, Reserve Bank Act 1959). It has a variety of tools at it’s disposal, including the ability to take deposits and lend. In the modern Australian economy it most relevantly plays a vital role in monetary policy implementation through the setting of policy rates and control of the Australian Payments System.

The lending problem

Beyond cosmetic arguments regarding the lack of RBA retail lending infrastructure, the introduction of home loan lending to the central bank raises interesting questions.

To engage in such a scale of lending, any lender must expect some instances of default, regardless of how stringent screening procedures may be. The proposal relies on the private market to provide the remaining loan funds, but how would these interact? Should the government maintain first lien over property, the cost of private funds would dramatically increase given the increased likelihood a private lender takes a haircut in event of a default. Any net increase in the aggregate interest rate can be seen as ineffective policy, as funds become more expensive to access. With increased regulatory capital costs and risk management associated with the standardised approach to capital adequacy, it is hard to see the Greens’ proposal on aggregate being more affordable.

Even in the wake of the Global Financial Crisis, the securitisation of loans in Australia forms a asset management technique for retail banks. As of 2017, AUD denominated residential mortgage-backed securities have returned to pre-GFC levels. But would the RBA seek to make use of the Australian loan securitisation markets, or would the loans be kept on Government books until amortisaton? Should these assets be sold into the RMBS market, they are most likely to be very desirable to institutional investors, such as superannuation funds. This may then cause the higher-risk commercial bank RMBSs to be less desirable and less profitable, putting further upwards pressure on commercial bank interest rates. This process would seem at odds with the intentions of the proposed initiative, but hypothetical retention of mortgages by the RBA brings the question of risk to the fore.

The risk problem

If it is accepted that the loans are not on-sold, the RBA would place itself in an interesting situation. The accumulation of long-lived, illiquid, and risky assets has long been an issue for banks to manage. Whether an implicit government guarantee of solvency exists regarding the RBA proposal is an open question. Should a shock occur to the Australian economy, RBA held loans could prove a useful additional monetary policy tool: the direct control on the economy through interest rate manipulation may prove a boon. Of a same token, however, it may double-down the volatility of the system. Reduced rates are rarely immediately passed on by commercial banks. Should the RBA decrease the target cash rate, in addition to the RBA home loan rate, the likelihood of commercial bank rates following suit would decrease as economic outlooks worsen. The impact of such a dramatic change to the RBA’s monetary policy tools is particularly uncertain.

The interaction of such a bank with international and domestic regulation provides a challenging area for such a proposal to overcome. It is unclear as to whether a home loan originating RBA would be subject to capital adequacy requirements under the Basel Accords. Given the proximity of the RBA to the Government, would capital be considered the holdings of the Australian Government deposited with the RBA? Would capital not be required due to an implicit or explicit government guarantee? The questions of the banks standing in the regulatory sphere become murkier and murkier, as the parameters of the Greens’ proposal are increasing indistinct.

Reserve and Residential Bank of Australia

Housing affordability continues to be one of the biggest economic questions facing contemporary Australia. Innovative policy is required, and courageous ideas sought but that doesn’t allow for relaxed rigour. The modern banking environment has moved well beyond the formative days of the Australian economy, and the worth of an independent, focussed Central Bank should not be underestimated. As with any significant proposed departure from the economic status quo, many questions still beg for answers. Many of the questions of the Greens’ proposal cannot be answered without a firm position on one : How much of a commercial bank do you want the RBA to be?

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