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Oh, John Cain, you’ve done it again

Oh, John Cain, you’ve done it again
by Malcolm B Duncan

There are two stories out today that are extremely disturbing:

http://www.abc.net.au/news/stories/2008/10/12/2388681.htm?section=justin

http://www.abc.net.au/news/stories/2008/10/12/2388671.htm?section=justin

While I am no free-marketeer and believe that a level of regulation is necessary to protect the public, I do not believe that there should be a level of intervention to protect the private speculator. If you want to invest in a company owned by, let’s call him Allen Sharescrip, you deserve everything you get. If, however, your compulsory superannuation is invested in his company by some cretin aged 12 and-a-half with an MBA from Harvard and a concomitant North American accent, you deserve all the help we can give you.

This announcement by the Prime Minister, if correctly reported, is a recipe for disaster because of its open-endedness. The agreement of the Leader of the Opposition is equally rash. To guarantee deposits for the big four with substantial assets makes some limited sense but to give an open-ended guarantee to all deposits for everything is as rash as a baby’s bum in a heat-wave.

It’s sounding like the Ruddy Government is so new that it has forgotten the Pyramids – even the Pharaohs stopped building them.

Stand by for the entry of the Hyxos. Next? Just wait for the announcement of the re-introduction of rent control – my policy at the last State election.

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Bank guarantee

Just a thought. Seems to me, that the guarantee of bank deposits should have been confined to those existing at a certain date. I might be wrong, but I think that would have stopped the flight of funds from the sharemarket perhaps, and also from the unguaranteed investment funds. If I am right, it could still be done.

No doubt there will be some difference of opinion.

Meanwhile it is evident that the continuance of party politics severely hinders our democracy from efficiently handling the financial crisis. I expect that in a Secret Ballot Parliament the Hon Malcolm Turnbull would probably be Treasurer and go with Kevin Rudd to the world Summit! Of course, he could still go, at the invitation of Kevin Rudd.That would really be bipartisan!

It is no doubt, too much to hope for a grand coalition government as in Britain during the Second World War. But of course, we are not at war, although the financial crisis will cause widespread social damage in the world not that far short of war.

Who knows how it will all work out, with party politics choking the world's governments.

Yup, no avoiding it

Justin Obodie: "I agree, a long way to go yet."

Yup, me too. Even with the credit lines loosening up a bit, too much damage has been done already.

Oddly, about a year ago I was talking with my brother in law, and we were saying we thought the US economy was bumping along a trough even back then.

What we've got now, though, is a perfect storm.

Safe as bloody houses

Eliot: "Also, I bet some bankers are gonna end up in jail, Enron style."

I reckon the evil looking Richard Fuld of Lehman Brothers may be the perfect sacrificial lamb. That'll teach for doing business with that Chavez guy.

Malcolm: "The fundamental structural weakness in the lending market has a very long way to go before it bottoms out."

I agree, a long way to go yet.

The following  was written by Nouriel Roubini ( 9 Oct.), you can read more here but you will have to register. If you do you will get daily updates and critical appraisals of policy decisions etc. There is also a blog and fortunately the contributors in geneal have much to offer.

Roubini states:

At this point severe damage is done and one cannot rule out a systemic collapse and a global depression. It will take a significant change in leadership of economic policy and very radical, coordinated policy actions among all advanced and emerging market economies to avoid this economic and financial disaster. Urgent and immediate necessary actions that need to be done globally (with some variants across countries depending on the severity of the problem and the overall resources available to the sovereigns) include:

- another rapid round of policy rate cuts of the order of at least 150 basis points on average globally;

- a temporary blanket guarantee of all deposits while a triage between insolvent financial institutions that need to be shut down and distressed but solvent institutions that need to be partially nationalized with injections of public capital is made;

- a rapid reduction of the debt burden of insolvent households preceded by a temporary freeze on all foreclosures;

- massive and unlimited provision of liquidity to solvent financial institutions; - public provision of credit to the solvent parts of the corporate sector to avoid a short-term debt refinancing crisis for solvent but illiquid corporations and small businesses;

- a massive direct government fiscal stimulus packages that includes public works, infrastructure spending, unemployment benefits, tax rebates to lower income households and provision of grants to strapped and crunched state and local government;

- a rapid resolution of the banking problems via triage, public recapitalization of financial institutions and reduction of the debt burden of distressed households and borrowers;

- an agreement between lender and creditor countries running current account surpluses and borrowing and debtor countries running current account deficits to maintain an orderly financing of deficits and a recycling of the surpluses of creditors to avoid a disorderly adjustment of such imbalances.

I would like to see the powers that be put all that together.

Anyway thanks to Mr Rudd it looks as though my $27.27 cents is safe as houses.

People without a clue

Malcolm B Duncan"And all the dopey bloody Greens can talk about is climate change.   How do we pay for it?   At least if the climate changes it will save us a few quid". 

The Australian Government talks about putting a tax on investment - can you believe it? Banks won't lend, and people are madly throwing doubt on investment (which has a lag time) - at a time taxes should be cut. It's just incredibly absurd!

Ah it's open season here my friend...

It’s sounding like the Ruddy Government is so new that it has forgotten the Pyramids – even the Pharaohs stopped building them.

Stand by for the entry of the Hyxos.

Ha, ha, ha. Perhaps Kevvie believes he is Rameses II and is leading us on to victory over the forces of Muwatallis, Hattusillis and Uhri-Teshub, those grasping Anatolian managers of the Hittite invade and investment clan?

I am no banker, but, I had thought Australian banks' deposit reserves were - by US standards at least -  well regulated? Then again, looking at the nose dive of the ANZ in recent years, that might not be much comfort.

The short soundtrack to the mess.... 

Ah, it's open season here my friend
It always is; it always has been
Welcome, welcome to the U.S.A.
We're partying fools in the autumn of our heyday
And though we're running out of everything
We can't afford to quit
Before this binge is over
We've got to squeeze off one more hit
We're workin' it
Workin' it

Soon you will be dancing face-to-face
With the limits of ambition and the scars of the marketplace
Welcome to the land of flame and fizz
Where you will learn that packaging is all that heaven is...

Father Park

Move along folks. Nothing to see here.

Treasurer Malcolm Turnbull and his spokesperson, Kevin Rudd, are right to give the kinds of assurances implicit in the deposit guarantee.

Providing lender of last resort facilities is a well established principle in central banking, and I'm really surprised that governments need to make these sorts of announcements in this day and age about guaranteeing the deposit bases of saving banks (of all things), but we live in panicky times I suppose.

Anyway, everyone should keep an eye now on two things:

1) whether there's a bounce on Wall Street today, because it closed not too far down on Friday

2) and any new data on US economic activity.

If those two aren't too bad, the immediate panic has bottomed out is my guess (or at least I hope so).

At the end of the day, I bet the consensus is we need more transparent, and more real time, accounting practices especially in the USA (where it matters) and Europe.  Nobody's got a clue what happens in China.

Also, I bet some bankers are gonna end up in jail, Enron style.

How quickly?

Eliot Ramsey, I hope you are right about the bankers but I don't think you are right about the bottoming.   The fundamental structural weakness in the lending market has a very long way to go before it bottoms out.    I'm glad I don't have any assets or any significant superannuation.

Ian MacDougall, I guess we are all principally concentrating on major world events of the past: the depression of the 30s and so on.   You may not have noticed because you were not in Sydney but John Laws with a stupid comment on his radio show caused a run on St George Building Society some years ago which nearly sent it bust.   Cain stupidly bailed out the Pyramid Building Society and Victorians paid for it for years afterwards through a fuel levy.    Imagine what levying fuel in the current climate would do.

The open-endedness of this guarantee has the potential for absolute disaster.  The fundamentals of the secondary mortgage market are so weak (and have always been) that he better be down cashing the cheque right now.  The borrowers are the very people I represent and rich politicians do not have a clue what their lives are like.   To promise, and effectively this is what Rudd has done, that the greed of the lenders should be underwritten by the taxpayer is to send entirely the wrong message.    One does not change the system without changing the culture.   Most of these people (the lenders) should be left to burn.   What we should be doing is guaranteeing people's deposits and their shelter by re-establishing a State-owned, State-guaranteed Bank which returns its profits to the State to underwrite the looming disaster.   

Nugget who?

Why are we underwriting the wankers who work for Macquarie Bank?   Well, we know why: got to look after the "mates" like Carr and Hewson.   It's rather a pity really because if we hadn't done it, the people could have picked up the airport they built in Sydney rather cheaply.   Might even have turned a profit in a while.

And all the dopey bloody Greens can talk about is climate change.   How do we pay for it?   At least if the climate changes it will save us a few quid. 

Disturbing news?

Malcolm, you say that the news that Rudd has guaranteed all bank deposits is "disturbing". I suggest that news of a run on a bank would be even more disturbing than Rudd on a particularly verbose day.

I have never seen a situation where banks were so badly hit by wild rumours and self-fulfilling prophecies that they were barring the doors against creditors wanting their cash out, but an idea of what one is like can be had from this photo. It was taken by the greatest photographer of all time (well, to my judgement and knowledge);  not Bill Henson but Henri Cartier-Bresson. Admittedly the circumstances of the crowd in the photo (Shanghai, 1949) were a bit different  from what we face here, but events along similar lines did happen more widely in 1929.

I cannot see what alternative Rudd had. The limit of $20,000 security on deposits was just an invitation for those with more to stage their own run, with no queue of small depositors and little old ladies with passbook accounts like my grandmother obstructing their progress towards the teller's window or the manager's office.

I look back to the halcyon days when the CBA was owned by the Commonwealth government (which also from memory guaranteed all deposits) and was a bigger operation than all the private banks put together.

I speak with authority on this, as I own two private banks, both of them made of sterling tin and sitting on top of my chest of drawers in the appropriately titled master bedroom. It gives one a sense of security in these uncertain times, does it not?

By the way, rumour has it that the Bank of England will be next to go.

Agreed

Rudd's guarantee-along with his co-PM and Minister for everything, Malcolm Turnbull who is the author of every good policy, is a necessity but something really has to be done to preserve superannuation accounts.

Particularly as the very idea behind compulsorary super is to eventually save the taxpayer and benefit the individual by providing a far better retirement.

What is needed is a government operated supperannuation product that is guaranteed by the government, with private funds for those who can't abide government run entities. And then you can take your choice-a government super fund with perhaps a smaller but more secure return or a privately chosen fund open to the vagaries of market fund managers.

In fact this is such a good idea I'm going to give it to Malcolm T. as he's the bloke who can get these things up and runing. Who needs Rudd ?

 

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