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favouring the banks, whilst ..... « Previous | |Next »
October 27, 2008

The financial crisis is not over is it? It is developing a trajectory of its own that is swirling through the global economy even affecting whole countries.

In Australia things look okay on the surface. The banks have been protected through a blanket government deposit guarantee, but not the mortgage trust funds. The exclusion of the shadow banking system does mean that we have a flight to the guarantee and frozen redemptions in the managed fund industry.

Another hiccup is that the credit unions or building societies have to pay more than the banks for government guarantees over $1million. The reason is that credit unions or building societies are not rated by external rating agencies, even though they account for 12% of household deposits. However, the Australian Prudential and Regulatory Authority monitors all deposit-taking institutions to the same requirements of capital, liquidity and governance. So why exclude credit unions?

Pettybanks.jpg Petty

This favouring of the banking sector enables them to increase their competitive advantage vis-a-vis the non-bank financial institutions. It looks as if the stability of the banks overrides every other concern including that of competition.The banks would really love to see the demise of their non-bank competitors.

Maybe the fees charged by the government are so expensive ( 0.7% for AA-rated large banks to 1.5% for BBB-rated small banks and credit unions) that they will not be used. Still there will be financial flows in the sub-$1million segment from the no cover to the covered zone. So things look as if they are under control.

On the global economic front things looks darker. There is a growing growing realization that Asia's heavy reliance on exports, which has driven Asia's powerful growth, is now turning into a problem. The decline in consumer spending in the U.S. and Europe is starting to hit deeply at Asian manufacturing companies that depend on sales to the rest of the world, and they are now rapidly scaling down their capital spending. Exports as an economic engine has its limitations, and these limits impact on Australia whose economic growth has been funded by a commodity boom caused by rising demand in the capitalist world.

On the global currency front things look stormy, as a currency crisis seems to be looming in the form of an uncontrolled depreciation of emerging-market currencies, including the Australian dollar. The Economist says:

The emerging markets which...enter the crisis from very different positions, are vulnerable to the financial crisis in at least three ways. Their exports of goods and services will suffer as the world economy slows. Their net imports of capital will also falter, forcing countries that live beyond their means to cut spending. And even some countries that live roughly within their means have gross liabilities to the rest of the world that are difficult to roll over. In this third group, the banks are short of dollars even if the country as a whole is not.

The risk here in is a surge in capital flight from those developing countries that rely on foreign funding to cover huge current account deficits, back to their home base in the US or Europe. The fall in the Brazilian and Australian currencies, plus Argentina' problems, does indicate a panicked capital flight.

So we have the formation of a deep recession in the advanced countries that is coupled with a currency crisis. that does not look good. China could help by investing some of its serves in the Australia dollar---as Brad Sester suggests. Probably not according to Will Hutton:

Authoritarian Asian capitalism is not about to triumph over the Western liberal variant. China needs to change profoundly if it is to join the first rank of nations as their equal. Meanwhile, don't look to it - or the rest of Asia - to soften recession. The West made this mess. It must clear it up itself.

| Posted by Gary Sauer-Thompson at 8:27 AM |