We Play A Waiting Game
Sun Herald
Sunday November 2, 2008
As the financial crisis deepens and frozen funds prove troublesome, the 'R' word still threatens.
AMID the continuing flow of awful news - money still frozen in our mortgage funds, more signs of recession in America - Australia's home buyers are looking forward to some cheer on Tuesday, apart from anything they may win on the Melbourne Cup.After that whopping one percentage point cut in rates in October, more relief is expected, though there is a diversity of opinion about how much. A popular view is that official rates could fall by 0.5 of a percentage point.Well, you say, that's good if it'sright. But will I keep my job? Because when things get really tough, for quite a lot of people loss of employment becomes more of a threat to the mortgage than the level of interest rates.Australia's economic debate is now whether we can do what many countries have not been able to - avoid recession. The Government and Reserve Bank are - and have to be - publicly hopeful we can but they are hedging their bets. Reserve Bank deputy governor Ric Battellino warned on Thursday: "The impact of global developments is particularly uncertain." The Government is deeply worried. Prime Minister Kevin Rudd says keeping growth positive in Australia will be "very tough". Even if two quarters of negative growth - the definition of recession - are staved off next year, it is likely to be a close-run thing and unemployment is certain to rise.The Olivier Job Index was down 4.42 per cent for October, with almostevery industry falling and an accelerating rate of decline. Robert Olivier, a director of the Olivier Group, said that NSW "had a shocking month", with the number of job ads down 8 per cent. "Sydney's been hit by the drop in financial services jobs, while the State Government deficit means spending cutbacks over the medium term," he said.The Government is doing a lot of jawboning, including urging the banks to practise mutual obligation. The banks had their guarantee - they should support the wider financial system and, therefore, the national interest, Rudd said. But ANZ chief economist Saul Eslake said the Government should appeal to companies "to resist the knee-jerk instinct to sack people ... Provided people keep their jobs, lower interest rates will reduce the risk of rising mortgage defaults and falling house prices. But if companies go on a sacking spree, then Australia will end up looking a lot more like the US than it needs to."As the economic crisis deepens worldwide, Rudd and his ministers are concerned about the lack of reliable instant data on what is happening here. Inevitably, official figures lag behind a fast-changing reality. Outside the Government, everyone is waiting for the Mid-Year Economic and Fiscal Outlook later this month. That is the budget update: it will tell us the state of the much-diminished surplus and whether the budget is likely to go into the red in 2009-10. The Government is spending half this financial year's surplus on its cash-splash. As well, the surplus is being squeezed on the revenue side by the slowdown. We'll also see the latest growth estimates and jobs outlook. It willbea moment of truth for the Government, which has been able to deflect questions about the precise state of affairs by saying we must wait for these figures.Rudd is desperate to keep "ahead of the curve", which is why the bank deposits guarantee was delivered quickly and in unqualified form, and the spending package was so big. Inevitably, doing more rather than less so you don't undershoot involves the risk of overshooting. We have already seen the difficulties with the deposit guarantee. Even that old bogey, inflation - which at an annual rate of 5percent is high but has seemed a second-order problem that's likely to fade - is still disturbing the Reserve Bank. Battellino gave the pointed reminder: "There is still a big task ahead to bring inflation down and this could limit room for manoeuvre on monetary policy". That is, we shouldn't get too carried away on interest rates.Rudd is spending several hours a day on what he calls "the GFC", the global financial crisis. Every morning there is a meeting - with some participants on a conference call - of Rudd, Treasurer Wayne Swan (plus sometimes other ministers) and officials, at which they review what's happened in the world overnight and set work in train.The mortgage fund crisis has turned into a nightmare for the Government, which last week held the line against the funds' call to be brought under the guarantee for banks, building societies and credit unions. But it struggled with how to find a way to free up the mega-billions frozen in these funds. First they were encouraged to become banks, which is impractical; then the banks were encouraged to buy their securities at market prices to improve their liquidity, which didn't appeal to the banks.On Friday the Australian Securities and Investments Commission announced arrangements to let people in "hardship" take out money. Eligible cases are strictly limited: where a person can't meet living costs; to cover serious medical costs, funeral expenses or threatened foreclosure; where someone is permanently incapacitated.Frozen funds will continue to bug the Government until it finds better answers or enough confidence returns into the system for the funds to get back to normal business. There's the trouble. Confidence is the elusive medicine that's desperately needed. But with so much gloom pouring in from overseas, it is hard to see confidence being buoyed in Australia, whatever the Government says and does.
© 2008 Sun Herald