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Monday Message Board

October 27th, 2008

It’s time once again for the Monday Message Board. Post your thoughts on any issue. Civilised discussion only. Please avoid snarks and trolling and strictly no coarse language.

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  1. TerjeP (say tay-a)
    October 27th, 2008 at 17:26 | #1

    The “Discrediting Credit Agencies” article seemed to lose steam so I’ll repeat my last comment here.

    ~

    Wayne Swan has moved to ensure that the credit rating agencies won’t become unemployed.

    http://www.theaustralian.news.com.au/story/0,25197,24546412-601,00.html

    But the system will be optional, with the decision to take the guarantee resting with the financial institution.

    The amended guarantee system will also be extended to wholesale funding with the fee to be based on the eligible institutions’ credit ratings.

  2. Arthur Gnome
    October 27th, 2008 at 20:12 | #2

    Alan Kohler has put the boot in:

    Prime Minister Kevin Rudd and Treasurer Wayne Swan don’t seem to understand what is happening, or what they have done.

    Unless they are to go down in history as bumbling fools who wrecked the Australian economy, they must instantly, this morning, put a universal price on the deposit guarantee that was announced on October 12.

  3. TerjeP
    October 27th, 2008 at 20:37 | #3

    Kohler seems to be suggesting that the risk free rate of return should be 0%. I think that figure is still possibly a bit high.

    A good article Arthur.

  4. Jill Rush
    October 27th, 2008 at 22:00 | #4

    Arthur Gnome – I don’t think Alan Kohler understands what is happening either.

    There are a lot of critics and yet there are those who accepted a risky investment in the hope of high returns. That risk is now evident and it is hard to see the argument as to why the ordinary taxpayer should prop up the entire financial sector. This action would have many more unintended consequences than the action that has already been taken by the Government.

    If the government followed all the advice given by those who saw nothing wrong with the global financial system a few months ago they would indeed be bumbling fools. I am conforted by the fact that they are not being pressured into rash actions by Malcolm Turnbull and commentators trying to maintain relevance.

  5. rog
    October 27th, 2008 at 22:27 | #5

    Jill Rush

    banks do not normally do pensions, they usually offload that function to one of the managed funds.

    The govt, by discriminating against these managed funds, ( ref: go see Centrelink) has dislocated the financial world

  6. October 28th, 2008 at 01:22 | #6

    From the FT:

    http://www.ft.com/cms/s/0/3c241b54-a380-11dd-942c-000077b07658.html

    “Western banks may still not have produced reliable accounts of their balance sheets, suggesting more write-downs and capital injections could be necessary, according to Heizo Takenaka, the former Japanese economy minister often credited with ending the country’s 10-year banking crisis.�

    And, from the FT as well:

    http://www.ft.com/cms/s/0/f47b1240-a37e-11dd-942c-000077b07658.html

    “Funds and other counterparties of Lehman face having their positions with the fallen bank frozen for “some time� because of the complexity of resolving individual positions. For funds facing possible redemptions, they may have to sell other assets and these distressed sales drives markets down further. “It becomes a vicious circle,� says Mr Lomas.�

    So, we still have two huge problems:

    1) The amount of losses is not yet known.
    2) Collecting and settling losses could take more time than anticipated, because of the complexity of the trades and transactions.

    It is still too early to determine the total cost of the crisis, and, until some general figure emerges and the markets begin to accept it, we’re in for a rough ride.

  7. Donald Oats
    October 28th, 2008 at 01:53 | #7

    Pictures of Cleveland (Ohio, USA) foreclosed, deserted, boarded up and decoppered homes being bulldozed – ain’t life grand? Whole communities devastated for the want of a little bit of regulatory oversight. Did anyone bother to ask why loans were being made to high risk borrowers, especially with reset rates that almost guarantee eventual default? A system, in which that type of behaviour is developing, needs a metaphorical swift kick up the backside and a stern talking-to.

    The cynic in me wonders whether the building developers buy back the bulldozed-and-cleared land from the “owners” at a bargain price – and build another set of houses when the market is ready for it. The bulldozing of houses must be helping wonderfully in reducing the housing stock overhang of 10-11 months worth. Well, eventually.

  8. observa
    October 28th, 2008 at 02:07 | #8

    I know the 48 hours isn’t up so I’ll leave it up to John on that (no links promsise) but here goes-

    Time is of the essence now, given the increasing cataclysmic news on emerging market meltdown. Our deposit institutions appear safe but some failures may be on the cards due to exceptional circumstances and hence some emergency, last resort confidence building measure is most preferable, with maxm taxpayer recourse if the worst occurs. Clearly we haven’t got time for AAA or BB- assessments and they’re worthless anyway, so sensible back of the envelope it must be.

    Now there has always been that bank licence commercial advantage lurking in the background (even bigger now with takeovers pending) so we could kill two birds with one stone here. We should be able to work out gross profitability to deposit base ratio for bank, building soc, CU sectors and charge insurance accordingly on all deposit bases to whittle away that licence marketplace advantage. ie presumably banks would pay the highest proportion of their profit/dollar of deposit base as govt insurance. The insurance rate is temporarily set for one year (renewable again if needed) and is voluntary, although that’s an offer no deposit institution could refuse for obvious reasons (aint choice grand?) The insurance fee and interest could be accrued as a liability to the taxpayer for up to one year, with the taxpayer having first call on this in the event of administration or failure. That way the institutions can keep scarce capital or pay as they go(monthly?), as they wish. Up to each institution and the shareholders. This produces a level playing field between ALL deposits and at the same time extracts the economic rent that is currently being enjoyed at the expense of the rest of the finance industry. The fee could be up to the total profit of the institution’s deposit base if need be (adjustable as the developing crisis requires) with perhaps a credit for any CEO salary package reductions voluntarily forgone.(again, aint choice grand?) Can you think of any better to be implemented in double quick time before we’re all off to Centrelink?

  9. TerjeP (say tay-a)
    October 28th, 2008 at 08:43 | #9

    The government previously proposed a grand firewall for Australia (along the lines of the Chinese firewall) with an opt out option. They are now saying the opt out option will mean that they still cut you off from the world but not as much.

    Please don’t let the government close down the free flow of information across the Internet. There are more effective and less invasive ways to protect our children.

    I know that a lot of you care about civil liberties and free speech. Please consider lending your name to the cause:-

    http://alsblog.wordpress.com/2008/10/26/no-clean-feed/

    If you’re on facebook you can join the facebook version of the cause:-

    http://apps.facebook.com/causes/130495?m=b7b99169&recruiter_id=6758475

    Please help send a message. Time is of the essence.

  10. observa
    October 28th, 2008 at 09:34 | #10

    Actually when you think about it, depositary institutions and our deposits (and aren’t all deposits ‘good’) are really at risk from ‘bad’ money (ie that monopoly or funny money)driving them all to the wall. That’s essentially the problem now with deleveraging going on and those past inherited bad practices. Bad money is inextricably mixed with the good and to give a blanket deposit guarantee(or lots of $1 less than $1mill) is to imlicitly guarantee all bad loans in the mix and a free ride to bad banking. In that respect borrowers of such deposits are largely not differentiated at present on price(ie interest rate) depending on security but rather on the ability to repay (ie income), which is subject to chillier winds of the marketplace at present. With interest rates falling perhaps now is the time to redress that imbalance with a structured deposit guarantee system. Here’s some more thoughts on that.

    Now the initial $20k deposit guarantee was not a bad idea in the sense that it allowed most to carry on quickly in the event of an institutional failure, although $20k may be pitiful for many business and commercial purposes. Another alternative was for Govt to bailout bad assets (pretty dumb from a taxpayer point of view, not to mention perpetuating bad lending) The answer may lie in insuring any depositors to whatever level they choose, charging for it and thereby whittling away that bank licence economic rent. After all we all have some captive transaction balances there for the banks’ in particular to free ride upon to some extent. To offer insurance to all takers and price it appropriately is to look at asset quality backing them and then the devil’s in the detail.

    Now deposit asset backing largely consists of bank shareholder equity and RE backing of their loan book. (Most business loans are backed by RE mortgages now) In troubled times and given the historically high RE prices, taxpayer insurance needs to look hard at those asset prices. In that sense it might assess that any current mortgage that is covered by say 60% rateable valuation, is gilt edged asset backing along with any bank equity. The Govt offers deposit insurance to all comers on the basis of progressively taking over the first call security of tranches of such mortgage assets (note, not the income) Arbitrage then occurs by the banks as to what they charge depositors for Govt insurance of last resort and borrowers depending on their loan equity cover, or the extra cost of raising equity capital to facilitate same. Clearly some interest rate rises for current 85%, 90% valuation lending will occur, but that could be ameliorated by banks being required to hold those interest rates steady at the next rate fall and passing on even lower rates to quality asset holders. This is all voluntary stuff allowing depositors to choose levels of deposit insurance and banks to set the prices depending on overall supply and demand, with the taxpayer acting as last resort underwriters (eg like LLoyds Names) Any thoughts?

  11. Damocles
    October 28th, 2008 at 09:34 | #11

    Yes what the government is proposing is EXACTLY THE SAME as jailing people for blog posts criticisng government policy.

    You and the other Catallaxy posters need to stop posting anywhere on the internet and decamp to a compound in the outback to plan the revolution.

  12. observa
    October 28th, 2008 at 11:23 | #12

    Further thought about the broad macroeconomics here, is that in the nation’s improved property values we may have the perfect commodity based monetary system. Well, just as soon as we can get rid of horrid distortions like progressive income tax, capital gains, negative gearing and stamp duty of course. But first things first and see if we can wean those neo-Keynesians off fiat money from thin air.

    RE might fit the bill here perfectly because we have those trusty souls at the Valuer General’s constantly monitoring the exchange rate, whilst being perfectly policed by every owner on account of the base for those ubiquitous rates and taxes. What more ying and yang could our monetary authorities ask for eh? That’ll keep all the bastards honest. Then every bank computer has the true monetary base (value less borrowings=true equity) at the click of a mouse for the monetary authorities to work with in guaranteeing that deposit base. They can then adjust the base downwards from time to time to reflect impending risk, thereby adjusting and monitoring real money supply. Then leave the price of forgone consumption and associated animal spirits to the marketplace. Solid, redeemable money with little oversight admin cost, leaving the fringe to play around with their irredeemable fiat money if they so choose.

  13. October 28th, 2008 at 11:45 | #13

    Damocles – what are you trying to say?

  14. BilB
    October 28th, 2008 at 16:33 | #14

    Pre crisis crisis. Lyme disease.

    http://www.canlyme.com/nyalert.html

  15. MH
    October 28th, 2008 at 17:23 | #15

    Malcolm sounds more and more like the good doctor, day by day. Save the rich, abandon the climate and god save the queen.

  16. smiths
    October 29th, 2008 at 11:32 | #16

    blah blah blah housing shortage housing shortage …

    A post-boom property glut is dogging outlying suburbs and regional cities to the south of Perth.

    “There’s a lot of listings around,” said Cameron Kusher, senior research analyst with national property monitors RP Data.

    “Obviously there’s been a lot of stock injected in those areas in recent years, and developers in particular have found it hard to move stock over the past 18 to 24 months.”

    http://www.watoday.com.au/wa-news/property-glut-dogs-perths-southern-suburbs-20081028-5a75.html

    so much for that load of rubbish

  17. smiths
    October 29th, 2008 at 12:08 | #17

    now,
    before anyone accuses me of a conspiracy theory,
    i should like to point out that the following assertions are made by,
    Arindra jit Dube, UC Berkeley; Ethan Kaplan, Stockholm University; and Suresh Naidu, Harvard University

    This paper estimates the effect of secret United States decisions to overthrow foreign
    governments on the stock market prices of well-connected companies that stood to benefit from regime change.
    First, we provide indirect evidence of organizational leaks from the CIA and/or other parts of the executive branch to financial markets. Second, we provide evidence that covert interventions provided arbitrage opportunities for traders of companies with connections to the
    CIA.

    http://www.slate.com/id/2203121/pagenum/all/

  18. smiths
    October 29th, 2008 at 12:21 | #18

    oh yeah, this ones for you damocles,

    US Home Prices Post Record Decline

    http://online.wsj.com/article/SB122519826778275869.html?mod=googlenews_wsj

  19. Nick K
    October 29th, 2008 at 16:05 | #19

    Re: Arthur Gnome at 2,

    The Rudd government’s economic management credentials are looking flimsier by the day.

    The government has assured people that our banks are strong, well-capitalised and soundly regulated. Then their bank deposit guarantee led to the flight of funds from the non-guaranteed managed funds to the banks. This in turn led to the freeze on redemptions for many of these institutions.

    So, if you follow the government’s logic through it begs the question. Why was there such a compelling need to guarantee deposits when the banks were soundly managed, profitable and well-capitalised (according to the government)? And if the banks are so sound, doesn’t this mean the government has effectively created a whole lot of unnecessary problems for the sake of guaranteeing something they said was safe anyway?

    The flight of funds to the banks from managed funds is an example of how government insurance leads to adverse selection. It also illustrates how attempts by governments to guarantee greater security often have the perverse effect of actually creating more insecurity.

  20. Damocles
    October 29th, 2008 at 23:06 | #20

    “Damocles – what are you trying to say?”

    I’m trying to say that I’m very,very tired of the incessant hyperbole and melodrama on the interent.

    I’m sick of 9-11 “Truthers”

    I’m sick of hearing how we’re on the verge of the next Great Depression.

    I’m sick of hearing how Obama is a Radical Muslim Socialist Black Racist and McCain is a psychotic warmonegr.

    And I’m sick of the fact that people can’t criticise the Australian government’s web-filtering proposal without invoking the Chinese Great Firewall.

    It’s bad policy and it’s political pandering – it isn’t the start of Kev Rudd’s bloody-handed reign of terror.

  21. MH
    October 30th, 2008 at 09:47 | #21

    Stupidity≠Conspiracy.

  22. Crispin Bennett
    October 30th, 2008 at 09:58 | #22

    Damocles: oh, hear hear!

  23. Damocles
    October 31st, 2008 at 04:15 | #23

    Rudd is actively encouraging the major banks to bail out the investment funds:

    http://www.abc.net.au/news/stories/2008/10/31/2406221.htm?section=justin

    This follows an earlier suggestion that some fund managers could apply to become ADIs and take advantage of the government guarantee scheme.

    This might actually be realistic for Challanger and for MacBank’s cash management and credit card operations. (MacBank’s merchant banking operations are probably too risky to qualify.)

    It would be unsurprising at this point to see CBA buy the rest of Aussie Home Loans and some of the foreign bansk selling their local operations to Australian banks.

  24. Damocles
    October 31st, 2008 at 04:19 | #24

    @18 – this ones for Smiths, if house prices in (a subset of cities in) the US fell by 17.7% year on year and 1.1% in August, is the decline:

    a. accelerating

    b. decelerating

    Answer in one word please.

  25. jimbomel
    November 3rd, 2008 at 11:32 | #25

    Hi guys,

    I am new to this forum johnquiggin.com and hope that you can
    give me an advice on the forex – I am looking for an introduction
    for noobs. I have already some knowledge about shares. (Hope this is the right category.)

    Any help is so much appreciated. Most important question: can a noob make money on the forex exchange market?

    Thanks,
    Jim

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