Swan responds to market turbulence

Can governments prevent market crashes – and – if so – should they try?

It might well be argued that the Fed’s brave intervention, in US markets, has already done that.

Ben Bernanke took some risks, when he intervened to support the buy-out of the investment bank, Bearn Stearns. That was virtually unprecedented.

Although the US market has, at least apparently, steadied since then, the full history of of that move – and others supporting the US economy -  has still to be written.

What we do know, though is what happed, back in 1929, when the authorities did stand back.

That’s right. The Great Depression.

The Rudd government in Canberra is signalling an interventionist stance, too.

The Treasurer, Wayne Swan, brought a package of measures, designed to enhance the stablity of Australia’s financial system, into federal parliament yesterday.

He detailed Australia’s response to international recommendations on financial market turbulence.

In essence, these involve:-

• Stronger oversight of capital liquidity and risk management
• Enhanced transparency and valuation
• Strengthening official responses to risk and
• Robust arrangements for dealing with stress in the financial system.

He said these proposals are still being developed, in consultation with finance ministers in other countries.

Swan also declared the government’s support for the so-called four pillars policy, which, effectively, rules out mergers between any of Australia’s four big banks.

“Although Australia’s financial system remains sound, in the face of significant turbulence on global financial markets, the Rudd government is determined to provide as much certainty and protection to customers as possible,” he said.

“Accordingly the government will introduce legislation to establish a Financial Claims Scheme,” he said.

He said this could help depositors and policy holders in “the unlikely event that a financial institution fails.”

Try that line on Opes investors.

Further details, though, can be obtained at www.treasurer.gov.au

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Economy flat, but worries continue

Figures released today reflect a flat economy.

The Australian Bureau of Statistics reported that retail sales, throughout Australia, fell by 0.2 per cent in April.

And the Housing Industry Association said new home sales in April failed to recover from the weak results seen in the first three months of this calender year.

They rose by just 0.1 per cent.

The association’s chief economist, Harley Dale, said higher interest rates, combined with higher grocery and fuel bills, are making new homes much less affordable.

Another report, produced by the Australian Industry Group, shows that the manufacturing sector is also subdued.

It’s manufacturing performance indicator fell 1.5 points in May.

These indicators, taken together, would seem to suggest that there will be no further rate rises, in the near future.

Especialy as the Westpac Melbourne Institute’s leading indicator, which was released last week, signalled that the Australian economy is about to come to “an abrupt halt.”

However, that judgement might well prove to be premature.

The Reserve Bank is still very worried about Australia’s inflation rate, which has already hit 4.2 per cent.

And it fears that sharply rising prices for Australia’s iron ore and coal could well leave the nation’s economy flooded with money.

And that, in turn could set off even higher inflation.

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Big numbers this week

Australians will get a much better idea of how the nation’s economy is travelling, from figures that are to be released this week.

The retail trade statistics for April will be released later today, will be a key indicator.

The business indicators, for the March quarter, which the Statistician will also release today, will be closely watched, as well.

And economists won’t be ignoring the Reserve Bank’s index of commodity prices, which is also due out today, either.

HBOSA economist Alan Langford, says they will be very significant, because they will incorporate the second month of phased increases in coal and iron ore prices.

These rises, from already elevated levels, will be massive, Langford says.

And the Reserve Bank fears they will flood the Australian economy with money, when inflation – at 4.2 per cent – is already a major problem.

Building approval figures for April, which are to be released tomorrow, will be also be an important indicator.

Reserve Bank economists will also be closely studying the Balance of Payments figures for the March quarter that the Statistician is to release tomorrow. Another big current account deficit could contribute, ultimately, to another rise in Australia’s official interest rates.

That’s because it could be taken as a sign that the Australian economy is not slowing as fast as the Reserve Bank hopes.

However, the March quarter is some way back, now. And even a big current account deficit could be discounted, to some extent, because of that.

The March quarter National Accounts, which are to be released on Wednesday, will give a broader, more comprehensive picture of the economy, even though that, too, will be a little dated.

The Westpac-Melbourne Institute leading indicator, which was released last week, contained grim news.

Westpac economists said it signalled that the Australian economy is heading for an “abrupt halt.”

That might please Reserve Bank economists. But very few other people were smiling at that news.

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Swan flies out for OECD and G8 meetings

Wayne Swan is leaving Canberra’s bitterly cold winter behind this week as he jets out for a series of meetings on global economic issues in warmer climates.

The Treasurer will be addressing an OECD Ministerial Council Meeting in Paris on Wednesday and Thursday this week, local time. The economics of climate change is a major agenda item.

He has also been invited to address a G8 Finance Ministers’ Outreach Meeting in Osaka late next week.

“This is only the second time an Australian Treasurer has been invited to participate in the G8 Finance Ministers’ Outreach Meeting,” he said.

“I will participate in a working dinner to discuss the macroeconomic outlook, including food and commodity prices and a working breakfast to discuss climate change,” Swan added.

He said these meetings were being held while the Australian economy is being buffeted by strong forces in the global economy.

“At the same time, demand for Australian commodities from China in particular has pushed the terms of trade to generational highs at a time of elevated inflation both at home and abroad,” Swan added.

“During this trip, I will also meet with my counterparts from Mexico, Norway, the UK, People’s Republic of China, Japan, the Russian Federation, Italy, the USA, the Republic of Korea, Thailand, Brazil, Indonesia and Canada,” Swan said.

“I will also be discussing the Rudd Government’s central economic objective of using our fiscal strength to invest in our infrastructure, in education, skills and training – areas which are essential to support our continued expansion,” he said.

This had been badly neglected in recent years.

Swan also said that while he is In the UK, he will address key British business leaders.

He said China is now Australia’s biggest trading partner and its second largest export destination after Japan.

” Economic policy decisions made in Beijing over the coming decades will increasingly shape our external environment,” he said.

“My visit will build critical institutional relationships and set the stage for greater cooperation between our two economies in the future,” he added.

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Rudd hopes for a better week

Kevin Rudd is hoping he has a better week in parliament this week, than he had last week.

We should, too, regardless of which political party, if any, we might support.

Australia’s reputation, as a modern, sophisticated nation, is at stake.

Rudd has now starkly revealed just how much still has much to learn about how the political process actually works.

It can be much cruder, than we might like to believe. Rudd’s own actions illustrate that.

When a radio reporter asked him what he thought of a photograph that Bill Henson had taken of a young Aboriginal girl, the Prime Minister’s answer came straight from his heart. He declared  the photograph of the naked girl to be “revolting.”

That’s understandable, particularly in view of the abuse so many young Aboriginal women suffer.

But Rudd did not forsee that, within days, Federal police would be raiding art galleries throughout the country, including the National Gallery in Canberra, seizing “dirty pictures.”

Prosecutors are now under great pressure to follow up, by prosecuting those galleries, for holding – even if not exhibiting – those pictures.

What next? Burly police men, with sledge hammers, knocking “offensive” appendages off copies of Michelangelo’s David?

Even zealots in the Vatican have ultimately admitted that similar action there was a mistake.

Rudd would certainly never have imagined, when he made that remark, that the police raids would follow.

Now, though, he knows what happens.

He will learn, too, that all this will damage his government’s reputation, around the world.

The government’s attempt to micro-manage fuel prices, through its Fuel Watch scheme, will be politically expensive, too.

It cannot, ultimately, do much about those prices. They are set by basic forces, such as supply and demand.

And last week’s woes aren’t over yet.
Voters will still be discussing “dirty pictures” and petrol prices this week, when they might have been looking, instead,  at the quality of the opposition, which, as usual, is abysmal.

We need to look no further than the Opposition’s Deputy Leader, Julie Bishop, to establish that.

As the Rudd government issued a preliminary report over the weekend, trying to draw together the threads of its highly inclusive 2020 summit, Bishop responded by saying that its paper looked like “noodle nation,” all over again.

No sign of a mental giant at work there.

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