Australian firms will get advantages from the Federal government’s proposed carbon trading scheme, if other countries follow, eventually.

And given the grim warnings, that the world’s scientists are delivering, on the perils of global warming, it seems very likely that they will.

These are, perhaps, the key points to emerge from a background briefing, that Treasury officials gave yesterday, on their modelling of proposed carbon trading schemes.
The officials, who spoke on background, admitted that some critics believe their assumptions are optimistic.

But they insisted that those assumptions had been subjected to sensitivity testing, to ensure that they are robust.

The officials made no secret of the fact that the proposed scheme will involve cost increases.

But they said that, in most cases, these would be moderate, both for industry and families at home.

Australian families would face bigger electricity and gas bills.

The Treasury model estimates that electricity prices would rise by $4 to $5 a week, for a typical Australian family.

And gas bills would rise by about $2 a week.

But what’s on the plus side?

Good times ahead.
In a foreword to the report, the Treasurer, Wayne Swan says:”Climate change poses a clear risk to Australia’s future prosperity.”

Mr Swan warns, too, that the only way of reducing that risk is making significant reductions in the nation’s greenhouse gas emissions.

You can get the whole report, at:- http://www.treasury.gov.au/lowpollutionfuture/

Australian house prices probably won’t crash, like those in the United States.

That’s the opinion of Reserve Bank Deputy Governor, Ric Battelino.

He explained why, while addressing a conference on bankruptcy in Sydney yesterday.

Mr Battelino said America had almost one year’s supply of newly built homes, ready for sale, at the end of last year.

“US house prices stopped rising essentially because the supply of houses overtook demand,”  he added.
Mr Batellino said there was no similar “overhang” in Australia.

“In fact the consensus is that there is currently a shortage of dwellings,” he added.

Mr Battelino said US builders had been forced to sell homes, in a falling market.

He said , too, that the situation in the United States had been made worse because lending standards had deteriorated.

Mr Batellino said that had not happened to anywhere near the same extent in Australia.

He said Australians should not lose heart, in the current financial crisis.

Indeed real household disposable family income had been rising at an average rate of 6.1 per cent a year, over the five year period, before the present crisis hit.

“The growth in household incomes in Australia greatly exceeded that in any other developed economy,” Mr  Batellino said.

He said there is no reason, even now,  to doubt that past patterns will be repeated and that growth will pick up.

“Australia remains, after all, a very dynamic economy,” Mr Batellino said.

The drought assistance programs that the Federal government provides for  Australian farmers should be redirected, according to the Productivity Commission.

In a report just released, the commission suggests that the government should introduce risk management procedures instead.

“In an assessment of existing drought programs, the Commission found that, when measured against policy objectives relating to self-reliance, preparedness and climate change management, the programs have many shortcomings,” the report said.

In particular, the Commission said the current exceptional circumstances declaration process is “inequitable and divisive.”

It said, too, that  interest subsidies and payments for the transport of fodder and livestock are “ineffective” and can “perversely encourage poor farm practices.”

The commission said also that farm families, trapped in hardship, could miss out on relief if their farms were outside drought declared areas.

Commissioner Mike Wood said that while drought is not new to dry land farming, current conditions are similar to those encountered both at the time of Federation and in the 1940s.

“Yet despite the severity of the conditions, most farmers have been self reliant and have not received drought assistance,” Commissioner Wood said.

He proposed that all farm families facing hardship, not just those in drought declared areas, should have access to temporary income support, through a scheme designed specifically for farm conditions.

Farmers who wanted to leave the land should be eligible for retraining, the Commission said.

The report is available at http://www.pc.gov.au/

Good news, in financial affairs, is a rare commodity at present.

But you can, confidently, expect some today.

The Federal Treasury has been modelling the costs of curbing carbon use, in Australia.

And there has already been some inspired leaking, on the subject.

Not only will these costs be moderate, on the Treasury’s count.

But the modelling might also suggest ways in which Australian companies can get ahead of the game, in environmental affairs.

The Rudd government has a  lot at stake here.

It is now clear that reducing carbon emissions has become a necessity.

But the way that is done still leaves room for debate.

The Rudd government has already invested a great deal of its credibility in its proposed emissions trading scheme.

So, if it bungles the introduction of that scheme, the Kevin Rudd  can expect to pay a very high price.

The government’s survival is very much at issue, here.

The former Prime Minister, John Howard, aligned himself very closely with climate change sceptics.

So far, there has been very little sign that his second successor, Malcolm Turnbull, will try a different path.

The next few weeks – and months – will be critical.

If the Rudd government can convince Australian business that its worst fears, about the cost of combating climate change, are unfounded, it will have made great progress.

That would, certainly, undercut the opposition, very nicely.

Mr Turnbull, though, is undoubtedly a very clever political operator.

So no-one will be watching the Treasury modelling today more closely than the current Liberal leader.

We can never escape the impact of poor timing.

That is just one of the givens, when it comes to personal finance.

And nothing illustrates that quite so clearly as a credit crisis.

The causes of the present crisis were quite simple.

US banks made loans to people who had no hope of repaying them.

That fact was sliced and diced into complex financial products, which were then traded on world markets.

But, if bad meat is used, sausages will still smell.

Older Australians have been hit, particularly hard, in the fall out.

Sixty five year olds, entering retirement, are finding that their superannuation pay-outs will be smaller than they had a right to expect.

And many 70 year olds, who tried to make their money work that little bit harder for them, by putting it into market related investment funds, are finding themselves facing desperate situations.

Putting cash in the bank doesn’t necessarily help, either.

Not with the $A falling as sharply as it has, over recent weeks.

So what are the lessons of the present crisis?

That, unfortunately, is not absolutely clear yet.

One thing, though, is certain.

That is that this is the time to do some hard thinking.

As the old song says, the fundamental things apply, as time goes by.

The first rule, perhaps, is to make sure that your investments fit your aims.

Australia’s superannuation funds, probably, will be less eager to invest in shares in future, than they have been in the past.

The Federal government has already moved to take advantage of that re-assessment.

It is truying to persuade superannuation funds to invest in government backed infrastructure developments, such as new ports and railways.

These are long term investments, it says.

Just like superannuation funds.

Watch any supermarket checkout in Australia and you will see a string of customers paying for their groceries with credit cards.

That ’s not recommended personal financing.

But it is, precisely, what makes a new development in the United States quite worrying.

American banks have started curbing their credit card limits.

The New York Times reports that even people with strong credit ratings are being hit.

Will the same thing happen in Australia?

There has been no sign of that occurring here, yet.

But if Australian banks did follow suit, there would be consequences.

The consumer shock would be so great that the Australian economy would, almost certainly, sink into outright recession.

That could happen anyway.

The full impact of the global credit crisis still has to work its way through the Australian economy.

A curb on credit cards, though, would virtually remove all doubt.

The government, clearly, had that in mind,when it guaranteed both bank deposits and interbank lending, earlier this month.

As the Treasurer, Wayne Swan, acknowledged yesterday, the government was aware that there would be unintended consequences, such as more investment funds freezing withdrawals.

But it was eager to avert bigger threats.

And a sudden brake on consumer spending, set off, perhaps, by new curbs on credit cards, was among those potential threats.

We had all better hope that our plastic does not become less fantastic.

In some of his strongest language yet, Kevin Rudd last night explained what his government is doing – and is likely to do – about the global economic crisis.

Addressing business and community leaders in Melbourne, the Prime Minister also spelt out just how serious – and dangerous – the  current crisis is.

At the distinct risk of sounding unpleasantly macho, Rudd warned that Australia is sailing into “unchartered waters.”

He said, too, that the government’s “challenge” is “keeping ahead of the curve, while building both confidence and the national economy.

Rudd also took a fierce swipe at the Opposition Leader, Malcolm Turnbull, saying the government would approach this challenge “through decisive policy action” in the “national interest,” not by “undermining confidence through partisan political manoeuvering.”

That won’t be easy. However,  Rudd delivered a clear message.

“Australia has exhibited great resilience in the shockwaves of the global financial crisis,” he said.

Mr Rudd  signaled fresh action, both at home and abroad.

He also gave the first clear indication of what the government might do, to help older investors, who find themselves in hardship, because their market linked investments have been frozen.  (See next story)

And he thanked President Bush for calling a G20 meeting, to draw up new international plans, to deal with the crisis.

Diplomatically, Mr Rudd chose not to mention the fact that George W Bush has apparently not heard of the G20, before Mr Rudd, himself, reminded him of it, in a weekend telephone call.

The Prime Minister, incidentally,  has had a plan for global economic reform in his briefcase, for some months now.

Whether he will get a chance to present it, at the G20 meeting in Washington on November 15 is still, very much, an open question.

The G20 includes China, India, Indonesia and Australia.

It was established after the 1997 Asian financial crisis.

As Private Briefing readers will know, Mr Bush is insisting on a declaration in favour of free trade, at that meeting.

That shouldn’t be too hard to arrange, so long as this lame duck President is prepared to be flexible on a few other things, as well.

Things like greater transparency, common rules and better management of the world’s financial systems.

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Kevin Rudd has outlined a two part strategy for dealing with the present investment fund crisis.

The first part would be the establishment of hardship provisions, for investors with special problems.

The second would be turning some of the more conservative managed investment funds into authorised deposit institutions, or quasi banks.

But funds seeking that privilege would have to meet very tough conditions.

Nothing has been settled yet.

But the position of mainly elderly investors, in managed investment funds, is causing problems.

Yes, they did accept extra risk, to get a higher return.

And Mr Rudd, himself, said, once again, last night that this means the government cannot simply guarantee investments in managed funds, as it has with ordinary deposits in banks, building societies and other authorised deposit  taking institutions.

However he recognises, too, that elderly investors, who can’t get the new false teeth they desperately need, are a political problem for his government.

That’s why he is asking managed funds, which have frozen capital withdrawals, to consider hardship provisions.

This request, of course, poses problems for the funds, in desperate circumstances, like the present global financial crisis.

To misquote Sir Humphrey Appleby, “you can have as much hardship as you are prepared to pay for.”

That is, if hardship provisions did exist, some investors would certainly invoke them, to “get their money back.”

And that, in turn, would threaten the survival of those funds.

What, though, of managed funds gaining accreditation as authorised deposit takers?

That’s a novel idea, at least in Australia.

So what is Mr Rudd saying about that?

“Subject to the successful application of these financial institutions (which means meeting prudential standards) they will, of course, be covered by government guarantee,”  he said.

That means Australia would get investment banks.

Pity, though, that memories of Lehman Brothers collapse are so fresh.

Australian business is back in conditions similar to that of the 1991 recession.

Mostly, that is.

The National Australia Bank’s quarterly survey, released yesterday, does show that the mining and business service sectors are still “strong.”

But it adds:”condtitions in most other sectors turned poor.”

So what does that mean, exactly?

The bank says business conditions in Australian continued to deteriorate “markedly and unexpectedly” in the September quarter.

That followed declines in the two previous quarters.

“All three components of current business conditions deteriorated,” the bank said.

“Both sales and profits recorded double digit declines,” the bank added.

It noted that there were still gains in the job market.

But these, too, “moderated” the bank said.

There were “sizeable falls” in the manufacturing, retailing, wholesaling, transport and finance sectors, the NAB said.

The global financial crisis is now hitting Australia hard.

World oil prices hit a new low overnight, falling $US1.48 to $US62.67 a barrel.

So when will prices, at Australia’s petrol pumps, follow suit?

The $A isn’t helping.

Although it was selling at 98US cents, just a few months ago, its price was down to just 60.82 US cents, a short time ago.

The Reserve Bank’s open market operations, over recent days, haven’t yet put a firm floor under the little Aussie battler.
And, so far, the fall in world oil prices has had little, if any, impact at Australian service stations.

Your correspondent, for example, has been spending $70 to fill the tank of his car, for some weeks now.

That did fall, at the last fill, but only to $66.

Ouch.

And the knowledge that other Australian motorists are sharing this pain isn’t helping all that much.

Unleaded petrol has been selling for 138.5 cents a litre, at many Australian service stations, over recent weeks.

And the Age is predicting that Melbourne motorists could see pump prices close to 130 cents a litre as early as next week.

The Federal government wanted to help by introducing a national fuel watch scheme, similar to one that has been operating in Western Australia, for some years.

But that was defeated in the Senate.

Watch out, though, as petrol prices start to fall.

Australia’s major newspapers are always eager to promote their developing websites.

So they might start operating less ambitious, but still useful price watch schemes of their own.

A former Treasury Chief, Sir Frederick Wheeler, once described the department he led as “a ferment of competing ideas.”

That might still be true under the leadership of his successor, Ken Henry.

All that brain power, though, has so far failed to come up with a solution to a serious problem the government now faces.

That is what it can do to help the mostly older people, who have invested in managed investment funds, that have now frozen their accounts.

The Commonwealth Bank offshoot, Colonial Mutual, is simply the latest of some 15 funds, that have taken this drastic step.

Representatives of those funds, who met Treasury officials to discuss this situation yesterday, described that meeting as positive.

However, it has not yet produced a clear result.

Richard Gilbert, the chief executive officer of the Investment and Financial Services Association, told reporters exactly what he had wanted, from that meeting.

His main aim, which the government undoubtedly shares, is to see public confidence in these funds restored.

The less sophisticated investors, though, certainly want more.

They are, clearly, hoping that the government will give their funds  firm guarantees, similar to that it has already given banks, building societies and other approved deposit taking operators.

That is not going to happen.

The Treasurer, Wayne Swan, made that clear yesterday.

He said there is a fundamental difference between deposits and market linked investments.

“There are no instant solutions.” Mr Swan said, bluntly.

But he said, again, that  he has asked the Treasury to see what can be done.

Mr Gilbert, though, remains positive.

“We will send the government further information,” he said.

“And hopefully we’ll be able to restore investor confidence in these very difficult markets.”

The Federal government has hit two of Australia’s biggest miners with an order they had battled to avert.

It has told BHP Billiton and Rio Tinto to open their iron ore rail lines, in the Plibara region of Western Australia, to third parties.

The Treasurer, Wayne Swan, issued that order, which had been sought by the Fortescue Metals Group.

He said the order would go into effect on November 19 and remain in force for 20 years.

Mr Swan also said that, on the evidence presented so far, the National Competition Commission, had recommended that this step be taken.

But he noted that his decision would  not automatically mean that the Pilbara rail lines would be opened up to third party traffic.

He said the parties concerned would have to agree on terms.

If they can’t, the Australian Competition and Consumer Commission could be asked for a binding arbitration.

The commission could even block access, if appropriate terms could not be reached, either through agreement or arbitration.

Rio Tinto is not happy about Mr Swan’s ruling.

It’s head of iron ore, Sam Walsh, told the ABC that third party access would restrict the amount of iron ore his company is able to export.

Expect to hear much talk about “unintended consequences” this week.

And there will be some justification for it.

The Rudd government’s decision to guarantee deposits in Australia’s banks, building societies and credit unions has, predictably, shaken  several investment funds, which were not covered by it.

And some have stopped withdrawals.

That is a very big problem indeed for thousands of mainly older Australians, who depend, very heavily, on those funds, to finance their retirement.

This, of course, was an “unintended consequence” of the decisions the government took on October 12.

In times of crisis, money will always flow from investment funds, like these, which don’t have government guarantees,  into others, which do.
Prime Minister Kevin Rudd has ordered his hard working Treasury Officials to see what they can do, to help these people.

The government’s first thought was that they might be given quick access to whatever might be available through Australia’s Social Security system.

So far, though, the opposition has had little to say about the situation.

But it is likely to become more vocal in its defence of these retiress, as the week gets under way.

Older people, who have saved hard for their retirements, have been hit very hard, by the global economic crisis.

Most are quite conservative.

So far, the government has made no firm announcement on what it might do for them.

A little patience might be wise.

As the Treasury chief, Ken Henry, said last week,financial market packages, like the one the government announced on October 12, seldom – if ever – have all their fine tuning right, from the first day.

Mr Henry says that challenges, like the global economic crisis, can be met.

But that requires adjustment and time.

Self funded retirees, generally, don’t have great reserves to fall back on, especially when investment funds start freezing withdrawals, as some are doing now.

Malcolm Turnbull and Julie Bishop will be tempted to attack the government, if it fails to act quickly.

That would, certainly, be a worthy cause.

But there are other issues at stake, too.

The stability of Australia’s entire financial system is one of them.

On the best estimates, it takes each new migrant some 20 years to repay the “work debt” that he incurs on arrival.

New migrants need homes.

They need transport.

They also usually need need new clothes – and many other things, besides.

And as all economists know, meeting these needs creates work.

New migrants might, indeed,  “take jobs” when they arrive.

But, on balance, they make a lot more.

Predictably, though, with Australia’s unemployment likely to head to 6 per cent next year, calls for cuts in the Federal government’s migration targets are gathering strength.

There may be some reason for that, if only to reduce social tensions.

On economic grounds, though, these arguments, now being advanced by the Federal opposition, as well as the unions, simply don’t hold water.

The opposition’s immigration spokeswoman, Dr Sharman Stone, is urging the Federal government to cut its planned 2008-09 migrant intake, from 190,300, to the 2005-06 level of 142,930.

But the Immigration Minister, Chris Evans, is reluctant.

He is arguing that new migrants are bringing special skills to Australia, that will allow this country to expand its exports.

Mr Evans said the government would base any decision it makes on this matter on the mid year economic forecasts, which are due out next month.