Thursday, May 8, 2008/
When the credit crisis ends and the RBA starts cutting rates, it’s a fair bet the banks will keep mortgage rates high. COLIN BENJAMIN
By Colin Benjamin
As the Aussie dollar creeps towards a short-term parity with the greenback, oil heads towards unpleasant highs above $US125 and speculators start to query their investment in gold and food commodities, it’s time to ask; what is next for banks and financial institutions?
We can be sure of only one thing – brokers will not be reducing their profit-making, self-protective stance even when the RBA finally starts to place a halt on rate rises if Wayne Swan delivers promised cuts at the top end of town.
Both Europe and America are rapidly slowing down, costs of business are going to force a lot of small business to the wall, and the central banks are likely to be forced to make even more interventions to prop up failed “free market leaders”.
As I have argued in these columns earlier, we need to ask questions about allowing the big bank pushers, who are making a fortune out of the rollercoaster volatility ride and now the short/long dodgem game. Every day they continue to reassure us that the worst is over and invite us to get back on to the big dipper.
How can we believe the regulators are going to do more than play “mirror” with promises that they will look into it, when the profits and staff bonus plans of these big banks rely on mugs paying the price of market failure?
While we are now getting access to the mind of the RBA board in a timelier manner through the release of its minutes, there is no such transparency on the part of the big banks in their relationship with exposed financial institutions. As Bernard de Longevialle argues (Financial Times 7 May) the recent turmoil in credit markets has thrust the prudential regime of banks firmly into the spotlight.
Remember the way that HSBC took on $35 billion of debt on to its books to bring two structured investment funds (SIVs) on to its balance sheet to prevent a forced liquidation of what it called “high-quality assets.” The banking giant assured everyone that earnings would not be materially affected, and would not impact on its future capital requirements because existing investors will continue to bear all economic risk from actual losses.
Only now are we learning that this may well be the next big casualty of the lack of truth, trust and transparency on a global scale.
Banks are not going to help out SMEs seeking transition funding in the same way that they turned their back on ABC Learning, when issues of capital adequacy were on the client’s side of the ledger. We are seeing three out of the four pillars crumble in the face of rising costs of capital and they are not about to wait for Glenn Stevens to find an excuse to hang on to more of the homeowner’s money.
Way back in 2002, Richard Russell of Dow Theort Letter newsletter said, and was later quoted in the Wall Street Journal’s Market Watch, that: “Bear markets have always ended one way – in exhaustion. Exhaustion is characterised by black bearishness, usually low volume, and great values in blue chip stocks (the market for secondary stocks almost ceases to exist). So let me put it gently, we’re not there yet… This bear market has followed the greatest, the longest, and the most wildly speculative bull market in history. It’s illogical to believe that this bear market has ended after erasing only 38% off the peak price of the Dow.”
When the Treasurer and Finance Minister have given us the bad news about the rising Aussie dollar, the cuts we have to have, and the protection they are offering to those who are facing the housing rate rises, maybe they can turn their attention to challenging the myths of the ASX and ASIC working in the interests of working families.
Dr Colin Benjamin is Entrepreneurship and Strategic Thinking Consultant at Marshall Place Associates, which offers a range of strategic thinking tools that open up possibilities for individuals and organisations committed to applying the processes of innovation, creativity and entrepreneurship. Contact: CEO Dr Jane Shelton.
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