World leaders scrambling to rethink financial regulation might pause to consider Australia, where a poorly conceived policy has gone from beggar-thy-neighbor to beggar-thyself in two weeks flat.
On October 12, Prime Minister Kevin Rudd announced that government -- read: taxpayers -- would fully insure 1.2 trillion Australian dollars ($741 billion) in deposits held at eligible financial institutions such as local banks. The move was meant to cut the risk of capital flight to other countries that had adopted or expanded such guarantees in preceding days.
Mr. Rudd's move had an effect, but not the one he intended. Depositors big and small immediately moved funds from uninsured to insured savings vehicles. Branches of foreign banks and mortgage unit trusts -- a breed of mutual fund that invests in prime mortgages -- were particularly hard hit. Some managers of uninsured investment funds have frozen withdrawals temporarily to stanch the outflow, a blow to retail investors who suddenly find they can't access their principal.
The Rudd government backtracked on Friday, capping the deposit guarantee at A$1 million and including foreign banks with branches in Australia in the program. It's an embarrassing reversal for Mr. Rudd and might have been prevented with a little forethought. While the opposition Liberals had proposed an A$100,000 cap when the idea for deposit insurance first surfaced this month, Mr. Rudd unveiled his proposal with no advance warning and no formal debate.
Perhaps Mr. Rudd felt global events warranted swift action. But now, having insured in haste, Canberra is forced to repent at leisure. At least Mr. Rudd is providing his peers around the world a valuable lesson: A financial panic doesn't suspend the law of unintended consequences.
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