New home sales slide in February

March 30, 2010 By Leave a Comment

A leading private survey shows new home sales dipped last month, suggesting more housing shortages and price increases.

The Housing Industry Association’s new home sales report shows a 5.2 per cent decline in sales of newly constructed dwellings in February which largely offset a strong gain in January.

The survey reflects sales of the country’s largest residential home builders and is a barometer of how many new dwellings are being built.

The association’s chief economist, Harley Dale, says last month’s fall is a sign the home building recovery is losing steam as interest rates rise and the effects of Federal Government’s First Home Owners Boost pass.

He also says the Reserve Bank’s moves to counter a house price bubble by raising rates may backfire if government policy does not change to support more new home building.

“The higher interest rates go, then, perversely, the more difficult it’s actually going to be to boost new home building sustainably and remove some of that pressure on existing home values,” he said.

Dr Dale says one of the biggest factors pushing up home prices and preventing more new housing supply is the taxation bias towards existing dwellings.

“We need to look at the taxation of new home building which is far higher than taxation on existing properties, so we’re perversely pushing people away from new home building and putting more pressure on the existing housing stock,” he said.

The biggest decline in February came in unit and townhouse sales which slid 9.4 per cent compared to a 4.7 per cent decline in sales of detached houses.

Detached home sales fell the most in New South Wales (down 9 per cent), while Victoria recorded the only gain (a rise of 16.1 per cent).

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Business confidence bouncing back

March 30, 2010 By Leave a Comment

The Townsville Chamber of Commerce says business confidence should return to the region during the second half of this year.

Chamber president John Carey says while several industries felt the effects of last year’s weaker economy, the situation is slowly turning around.

He says a return to confidence will lead to more jobs across the north.

“I think there’s a level of cautious optimism, for example, especially in the construction industry,” he said.

“But for the building [of] the education revolution there’d be some people looking for work.”

Several industries were affected by the global financial crisis last year, with a number of projects put on hold or scrapped.

But Mr Carey says a level of cautious optimism is returning to the north.

“I think that people understand that things are picking up slowly and we won’t see a return to the good times … until the second half of this year,” he said.

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Greek bailout proposal raises central bank’s ire

March 27, 2010 By Leave a Comment

European leaders have hammered out a controversial deal that could see the International Monetary Fund involved in any Greek bailout.

The proposed IMF involvement is a victory for the German chancellor Angela Merkel who had opposed any direct financial aid from her own government.

However, the agreement has sparked tensions with the president of the powerful European Central Bank. He warns that even talk of an IMF rescue is a bad precedent for the European Union.

Throughout the Greek crisis the German chancellor Angela Merkel has argued that German taxpayers should not be penalised for the mismanagement and incompetence of the Greek Government.

Today she won the battle against France, which had been pushing for an independently funded EU solution.

After hammering out the deal in Brussels, Ms Merkel assured the cynics that the IMF would only be engaged if all else fails.

“I suggest that we envisage a combination of IMF and bilateral help if the situation arises where Greece can’t obtain any money itself,” she said.

“I think it’s important that we focus on this as a last resort and we can then consider things further. But I want us to learn from this because, in actual fact, we don’t want to get into such a situation.”

Despite today’s agreement, the Greek prime minister George Papandreou maintains the problem can be solved without any outside help, and that his unpopular austerity measures will rein in the nation’s $440 billion debt.

“Greece will move ahead in a positive and in the right direction. Of course today the challenge is a European one,” he said.

If activated, the IMF assistance could provide an immediate injection of $33 billion to assist Greece in meeting the interest on its sovereign debt repayments.

The Swedish prime minister Fredrik Reinfeldt says the EU should take any help it can get from the IMF.

“They have the resources, the knowledge, the experience which I think is needed because if you don’t basically in the structures of the economy solve your problems they will come back,” he said.

“That has to be done by Greece themselves. And that, in my experience, is also what the IMF can provide. And if that’s the German position, it has support from Sweden.”

However, Angela Merkel’s victory has angered the president of the European Central Bank, Jean-Claude Trichet. The world’s second-most powerful central banker says it is a bad idea and that the EU needs to resolve the crisis on its own.

“Everything that means the members of the eurozone are giving away their responsibility is bad. If the IMF or any other organisation takes responsibility instead of the eurogroup or the governments it’s very, very bad,” he said.

Even so, the deal provided a shot in the arm for European shares which hit an 18-month closing high on the news.

While the euro fell to a new 10-month low against the US dollar, European traders like Oliver Roth are relieved in the short term.

“The stock exchange doesn’t [care] right now if it’s the IMF or it’s the membership, the members of the EU who are the active part of it [a bailout],” he said.

“For us it is important for the sake of the currency that Greece has to be disciplined for the budget and that they’re saving money to be a part of the rescue.”

But in the immediate case of Greece, the outlook remains bleak according to the head of the world’s biggest bond fund Pimco.

This morning Bill Gross was asked about his Greek investment strategy and he says it is right to be scared.

“Well we stay away from it. You know there are simply much more attractive alternatives elsewhere that stand a better chance of solvency, so to speak, and of getting your money back.”

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Reserve Bank defends transparency on rates policy

March 27, 2010 By Leave a Comment

The Governor of the Reserve Bank has shrugged off concerns about transparency regarding its interest rate decisions.

After a speech about global financial developments in Sydney this morning, Glenn Stevens said that prior to the economic downturn, financial markets and economists were too relaxed about when central banks would move rates.

“One of the problems in the pre-crisis risk build-up period was arguably a little bit too much comfort being taken by financial markets and borrowers generally, that the central bank would never hurt them or surprise them,” he said.

“But we have certainly never made a commitment that there’ll not be surprises and nor should we and nor should any central bank in my opinion.”

In February, the RBA shocked economists and financial markets by leaving the cash rate on hold after three consecutive monthly rises at the end of last year.

Mr Stevens said the Reserve Bank’s decisions should be thought about within an agreed framework.

“I think that framework remains in place, certainly in our case,” he said.

“It’s possibly more difficult elsewhere, where unconventional things have had to be done and everybody’s working in unfamiliar territory.

“But here, we’ve got the same framework, the same objective, the same modus operandi, but there’ll still be the occasional controversy over did they or didn’t they or will they or wont’ they in this particular month,” he added.

“I don’t think actually think from an overall perspective that’s all that big a deal, frankly.”

Mr Stevens also rejected suggestions that increased demand from foreign investors and temporary residents is driving up Australian property prices.

When asked whether the abolition of restrictions on property purchases by temporary residents and foreign investors had led to house price inflation, he said there were no hard facts to support that theory.

“While there probably is some more prominence of foreign buyers, it’s most likely still a very small share of overall turnover,” Mr Stevens said.

“Mostly what’s pushing up housing prices over the past 15 months or more, is Australians, who are seeking to get or to upgrade their accommodation.”

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‘Peak debt’ approaching as house prices outstrip incomes

March 26, 2010 By Leave a Comment

The growth in household debt and house prices in Australia is unsustainable and the nation must at some stage hit “peak debt’, according to a senior partner in one of the world’s biggest management consultancies.

“In the past ten years our household debt has grown much faster and to a much higher level than it is in places like the the UK and the US where we tend to look at them and say, ‘my goodness, look at that incredibly high level of household debt’,” Michael Rennie, managing partner of McKinsey and Co for Australia and New Zealand, told ABC Radio’s PM program.

“You have to ask yourself, ‘when does it become a problem?’”

Asked about predictions that house prices would double this decade, he said:

“They’re saying they are going to double in the next ten years because of supply and demand: that there’s a lack of supply, and demand is going to increase because of the increase in population in the cities, etcetera.

“But you have to ask yourself, if you look at the research that’s been done over the past couple of years by APRA and others on the percentage of households paying more than 30 per cent [of gross household income on mortgage repayments] which is the comfort level for their mortgages, and incomes aren’t going to double, you’ve got to say somewhere along the line that is all not going to add up.

“We hit peak debt at some point. We hit a level that is well above people’s sustainability.”

A global study by McKinsey and Co is also predicting that the world faces at least five more years of constrained growth as economies “deleverage”, or unwind excessive levels of debt.

Although China will partially insulate Australia, we will not be immune, and it will hit exports.

“About 21 per cent of our goods exports and about 27 per cent of our services exports in the past five years have gone to countries that are going to go through this deleveraging in the next five years,” Michael Rennie says.

His comments come as new estimates from the ABS show a surge in Australia’s population.

More than 450,000 people were added to the population, which grew by 2.1 per cent last year to almost 23 million.

Economists say the rapid population growth will underpin growth in GDP and bolster house prices.

But Michael Rennie argues that, even with the population growth, it is impossible for house prices to keep outstripping incomes.

The growth in population will also add to overall demand and could encourage the RBA to lift interest rates.

“We can imagine this scenario where there is tightening monetary policy ….meaning that people are going to pay more for their mortgages; interest rates are going to go up,” he explained.

“At the same time, you have a supply and demand issue with housing which means the price of houses is going to go up.

“A the same time, incomes are not going to go up at the same level and, at some time, all those three are going to come together and it is not going to be sustainable.”

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Reserve Bank indicates more rate hikes on the way

March 26, 2010 By Leave a Comment

The Reserve Bank says the economic outlook for Australia appears considerably brighter than that of many other advanced economies.

The RBA says the current debt problems in Europe highlight the fact that many governments have a long way to go to escape their financial predicaments.

In a speech to the Australian Industry Group economic forum in Sydney, the Reserve Bank’s assistant governor, Philip Lowe, said many countries are dealing with large deficits and an ageing population is putting pressure on budgets.

Dr Lowe said in the years ahead, significant steps will have to be taken to bring public finances into line.

“The flexibility that they have to determine the timing and size of these steps is limited by the fact they went into the current downturn with already high levels of debt,” he said.

“As a results of the poor starting point, many are now treading a very narrow path.

“On the one hand, tightening fiscal policy in the very near term risks derailing the recovery, while not doing so risks a damaging loss of confidence.”

The RBA says its quick response to changing economic conditions has given it the flexibility to deal with any potential global economic upsets and that, while the outlook for Australia is mostly positive, there are still risks.

Dr Lowe says the RBA’s preference in regard to monetary policy is to act quickly, then take time to evaluate and make further adjustments if necessary.

“The alternative of waiting to see how these myriad risks evolve before adjusting policy runs the significant downside of moving too late, particularly given that the economy is starting this upswing with less spare capacity than in previous upswings,” he said.

“Fortunately in Australia we’ve had the policy flexibility to respond to changing events, and so far this has served us very well.”

The Reserve Bank also again indicated it will keep raising interest rates until they reach a more normal level.

“The important thing is the level of interest rates that borrowers face, not the cash rate,” Dr Lowe said.

“At the moment the mortgage rate is still around 50 basis points below the average of the last decade and a half.”

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RBA praises Australia’s world-beating economy

March 26, 2010 By Leave a Comment

A Reserve Bank report has again highlighted how different Australia’s experience of the financial crisis has been from other developed nations.

But while the report’s assessment of the Australian economy is glowing, it also says there are a range of international risks still threatening global financial stability.

The RBA has again highlighted the impact of stimulus – both the Federal Government’s fiscal stimulus and the bank’s own interest rate cuts.

Figures from the bank and Bureau of Statistics show employee wages fell 2.6 per cent in real terms last year as working hours were cut and wage rates stagnated.

However the report shows that government and RBA largesse more than compensated.

“Disposable incomes were boosted by accommodative fiscal and monetary policy settings,” the report noted.

“As a result, total disposable income per household increased by 3.5 per cent in real terms, and 6.6 per cent in nominal terms, over the same period.”

The recovery in the second half of 2009 has had the greatest positive effects on households with high levels of assets.

The RBA report says net worth per household increased by 11 per cent in 2009, driven largely by a 10 per cent increase in house prices which make up around 60 per cent of the nation’s aggregate household assets.

The news is perhaps not so good for younger people who have suffered from the highest rates of unemployment during the financial crisis and tend not to own a house outright.

Younger people have also benefited least from the 30 per cent recovery in share prices last year, which has given the greatest boost to those with the largest superannuation balances.

The Reserve Bank has also acknowledged the negative impact of its historically low interest rates on people with large bank savings, a group comprising many self-funded retirees.

“Lower rates would have put downward pressure on the incomes of those households holding more interest-bearing assets than liabilities,” the report said.

Debt increase

The overall improvement in household finances has also tempted more households into greater debt.

The Reserve Bank figures show growth in borrowing accelerated to an annualised rate of 8.3 per cent in the six months to January 2010 compared with 4.7 per cent in the six months to January 2009.

Most of that increase has been driven by a 10 per cent per annum growth in the amount of home loans, although credit card debt has started to rise again after remaining broadly flat in 2008 and the first half of 2009.

Despite this burgeoning debt, the Reserve Bank says current estimates are of about 27,000 households nationwide more than 90 days in arrears on their home loan repayments, only slightly higher than the estimated 23,000 at the end of 2008.

The corporate sector also recovered in the second half of last year.

The Reserve Bank says the profits of Australia’s 200 largest listed companies were around 20 per cent higher in the second half of last year compared with the first half.

But profits remained 15 per cent below levels seen in the second half of 2008.

Global concerns

Outside Australia, however, the news is not so rosy.

The Reserve Bank says there are still concerns about the level of bad debts in the US.

“The rise in charge-offs for business loans has been similar to recent downturns, but charge-offs for household loans are well above the peaks of the past 20 years,” the RBA’s report noted.

It also notes that business loan write-offs in the UK and Europe increased last year.

Globally, the bank says, the default rate on corporate “speculative-grade” debt rose above recent peaks to the highest level since the Great Depression.

The good news, says the RBA, is that the 40 per cent fall in US and UK commercial property prices appears to have bottomed out. The bad news is that the rate of loan defaults generally remains high for a number of years after the crash in prices.

The situation of US housing finance is no better, with around 8 per cent of American home loans classified as “non-performing”.

The RBA says this high default rate is likely to result in further write-offs for American, British and European banks.

It also says the sovereign debt crisis in Greece and the so-called PIIGS (Portugal, Ireland, Italy, Greece and Spain) countries poses risks to financial stability.

In contrast, the RBA’s main concern with developing economies is the emergence of asset prices bubbles of a similar kind to those that burst in the developed economies over the past three years with disastrous results.

Lending growth in China was running at 27 per cent for the year to February (compare that to what is considered a strong 8.3 per cent in Australia).

The bank says China’s recent moves to tighten lending standards are slowing the rate of loan growth, but it will be hoping the lending is being reined in before too many asset price bubbles have been formed.

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Diversify or die: economists warn on mining dependence

March 25, 2010 By Leave a Comment

The Finance Minister, Lindsay Tanner, has warned that Australia needs to reduce its reliance on mining by revitalising other export industries.

He told ABC local radio that he was worried that a former expansion in tourism, education and wine exports had gone into reverse.

Lindsay Tanner was asked whether Australia’s economy is too dependent on China. This is what he said:

“I wouldn’t so much say China but I would say that we do need to reinvigorate the breadth of our exports,” he told ABC radio 774 in Melbourne.

“We have had a worrying period over the past decade or so where the diversification of our exports in the ’90s kind of stagnated.

“So we had a huge growth in tourism, in education, in specialised manufacturing, in wine, in pharmaceuticals – all kinds of things that helped us to diminish our enormous reliance on minerals, and that’s kind of almost gone into reverse in recent times.

“So it’s not so much that there’s one country that we’re dependent on. It’s that we have I think to some extent too many eggs in that basket.”

The Finance Minister says Australia needs to diversify its exports.

“Minerals are always going to be critical for Australia. There’s no question about that,” he added.

“But our strategy of improving infrastructure and skills and lifting out productivity very much has in mind the need to revive our performance in some of our other exports which have been languishing.”

Dollar damage

What the Finance Minister did not say is that the decline in the export industries that boomed in the 1990s has gone hand in hand with the boom in mining.

“One of the corollaries of the present mining boom is a very high value of the Australian dollar that is hurting the competitiveness of sectors such as agriculture, manufacturing, tourism and education,” said Saul Eslake, the director of the Productivity Growth Program at the Grattan Institute, a policy think tank affiliated with Melbourne University.

“Although the mining industry is generating a lot of prosperity for Australians at the moment, and will do in the foreseeable future, nonetheless the mining industry can’t possibly guarantee prosperity for the vast majority of Australians given that it accounts for less than 3 per cent of total employment.”

Warren Hogan succeeded Saul Eslake as chief economist at the ANZ Bank and he shares his concerns.

“Our real effective exchange rate is at a 30 year high, and this, of course, is a major constraint strategically on this economy,” he explained.

“When you have a commodity boom that drives up your currency because you’re seeing certain of your exports go up in price it puts pressure on other sectors.

“Manufacturing but, I think more importantly in Australia’s case, I’m worried about tourism and I’m worried about education exports. This is the classic Dutch disease. And you know I don’t think many Australians would be happy to think that all we sell is iron ore and coal.”

The term Dutch disease was coined in the 1970s. It described the effect of a huge natural gas reserve discovered in the 1950s which drove up the currency and killed Dutch manufacturing.

It has become synonymous with mineral booms that destroy other export sectors, and it is a real risk for Australia.

“The mining boom, though it may well go on for more than a decade, isn’t going to go on indefinitely any more than previous mining booms have,” Mr Eslake added.

“Future generations of Australians are going to look for other sectors of the economy for their employment prospects long after this present mining boom has come to an end.”

The danger is they will no longer be there by the time the mining boom ends and the currency edges lower.

Industry policy revival?

Frank Gelber, the chief economist with forecasting firm BIS Shrapnel told PM last week that, without intervention, Australia risks becoming a quarry.

“We’re running down the rest of the economy. We’re specialising in minerals, and this is all very nice when we’ve got very high minerals prices and very strong demand,” he said.

“But minerals prices don’t always boom and demand isn’t always strong. The lessons of the last 50 years should have taught us that.”

He is calling on the Federal Government to resurrect unfashionable ideas such as industry policy to help other sectors survive.

“What we need to do is to try to impede the demise of the other tradables industries. Does it mean some sort of an industry policy again? Yes it does.”

However, that concept is anathema to the Department of Treasury.

Back in 2006 the Treasury Secretary, Ken Henry, predicted a commodities super cycle lasting up to 50 years.

He said it would see capital labour relocate to the mining states, enriching those areas and stripping wealth from others, and government policy should be judged on whether or not it backed the trend.

“Proposals that seek to resist the changes should themselves be resisted,” Dr Henry said.

Lindsay Tanner is not talking about resisting the mining boom, and he is not using the phrase “industry policy”.

But if the government wants to maintain a diverse economy and a diverse export base it will have to start asking some hard policy questions, and it may have to buck the Treasury line.

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Australia too reliant on resources: Tanner

March 24, 2010 By Leave a Comment

The Federal Finance Minister says Australia has become too reliant on resources and needs to expand its export base.

Lindsay Tanner says there has been a “worrying period” over the last decade where resources have increased their domination of Australia’s exports.

Lindsay Tanner says the 1990s saw great diversification, with strong exports across a range of sectors, and he says there needs to be a return to that kind of diversification.

“We had a huge growth in tourism, in education, in specialised manufacturing, in wine, in pharmaceuticals that helped us to diminish our enormous reliance on minerals,” he told ABC radio 774 in Melbourne.

“That’s kind of almost gone into reverse in recent times. So it’s not so much that there’s one country that we’re dependent on, it’s that we have, I think to some extent, too many eggs in that basket.”

Mr Tanner says Australia’s future prosperity should not be pinned to one industry, and the Government is looking at ways to boost productivity in other sectors.

“Minerals are always going to be critical for Australia, there’s no question about that,” he added.

“But our strategy of improving infrastructure and skills and lifting our productivity very much has in mind the need to revive our performance in some of our other aspects which have been languishing and, also, to strengthen newer areas like financial services.”

Mining can’t guarantee prosperity

One of Australia’s leading economists says he has some sympathy with Mr Tanner’s view.

The Grattan Institute’s program director for productivity growth Saul Eslake says, while the mining boom certainly has contributed to wealth creation and an increase in tax revenues, it also has some negative side-effects.

He says the recent boom in mining activity may actually be damaging some of the sectors of the economy that Lindsay Tanner wants to revive.

“The mining industry can’t possibly guarantee prosperity for the vast majority of Australians, given that it accounts for less than 3 per cent of total employment,” Mr Eslake told ABC News Online.

“One of the corollaries of the present mining boom is a very high value of the Australian dollar that is hurting the competitiveness of sectors such as agriculture, manufacturing, tourism and education, most of which employ considerably more Australians than the mining industry does.”

He says the currency impacts will be exacerbated by wage pressures as Australia’s economy nears full-employment again.

“Growth in demand from the mining sector could well put upward pressure on wages in other sectors of the economy contributing, in the context of a strong exchange rate, to a further squeeze on the profitability of employers in other parts of the economy and thus diminishing the viability of those industries.”

Mr Eslake says, while the damage to those other industries could be long-lasting, the current mining boom has a finite lifespan.

The danger is that, when the mining boom does come to an end, there will be few other internationally competitive export industries left standing to provide employment alternatives.

“The mining boom, though it may well go on for more than a decade, isn’t going to go on indefinitely any more than previous mining booms have, and future generations of Australians are going to look for other sectors of the economy for their employment prospects long after this present mining boom has come to an end,” he noted.

Mr Eslake says a resource rent charge is likely to be one tax canvassed by the Henry Review, which is due to be released before the Federal Budget is handed down in May.

He says, while the Government would not want to actively constrain the mining sector, shifting the tax burden to those resources companies that are highly profitable by introducing a resource rent tax to replace the current mining duties would make sense.

“There are reasonable arguments for moving away from a production based system of taxing the mining industry, one which takes no account of the profitability of individual mine ventures, to one which allows the community to share in high prices as well as increased volumes of production of mineral resources, whilst also ensuring that in periods when commodity prices are very low mining companies are not punitively taxed.”

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CEO report indicates solid industry recovery

March 23, 2010 By Leave a Comment

A poll of Australian chief executives shows growth in the country’s manufacturing, construction and services sectors is expected to be reasonably solid, but uneven in 2010.

The result is contained in the latest CEO survey, Industry in Recovery Mode in 2010, conducted by the Australian Industry Group and Deloitte.

An improvement was expected across all three industries, with particular strength in the services and manufacturing sectors.

The survey also found improving consumer confidence in incomes growth and employment prospects, as well as rising household wealth and exposure to strong growth in China, would drive growth this year.

But the fading effects of the Federal Government’s stimulus and the impact of higher interest rates were likely to hit the construction sector particularly hard.

On average, manufacturers were anticipating a 5.6 per cent increase in the nominal value of sales in 2010 to about $415 billion.

Sales in the services sector were set to rise 6.6 per cent and construction sales were forecast to grow by 2.5 per cent.

Employment in the manufacturing industry was expected to rise 2.9 per cent, service sector employment was due to increase by 2.3 per cent, and the construction sector was set for employment growth of just 0.5 per cent.

Those employers surveyed said the possible re-emergence of skills shortages was a real worry, as the economy returns to growth.

The chief executive of the Australian Industry Group, Heather Ridout says the economy looks set to consolidate this year, but the rebound won’t be as strong as those that occurred after previous downturns.

“Despite the stronger sales and employment expectations, investment trends across these sectors remain soft and conservative,” she said.

“The challenges for policy and for business will be to strengthen the recovery while addressing the ongoing requirement to build on the foundations of longer-term growth.”

The manufacturing partner for Deloitte, Damon Cantwell says 2010 would provide businesses with a range of opportunities to make up ground.

“While 2009 was characterised as a year founded on survival, 2010 offers real opportunities for growth,” he said.

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Bernanke opposes Obama’s Fed reforms

March 19, 2010 By Leave a Comment

A political battle is underway in the United States over president Barack Obama’s new rules to regulate financial firms.

At the heart of the Obama crackdown is the role of the US Federal Reserve. The legislation unveiled earlier this week suggests that the central bank would supervise only the biggest banks, those described as “too big to fail.”

But the Federal Reserve chairman Ben Bernanke says he wants to have control over Main Street as well as Wall Street.

However, Ben Bernanke has faced a grilling in front of Congress, and was constantly reminded that the US Federal Reserve failed to see the global financial meltdown coming.

“There’s been a massive failure on the part of the Fed in my opinion,” said one member of the powerful House Financial Services Committee in Washington.

“I don’t understand why a regulator can’t take a look at a product and say this is so bad, this is so predatory that it shouldn’t be on the market, and we’re not going to allow it to be on the market,” commented another.

“I think we would have had a much better outcome if we would have had people that were doing the job that they were already supposed to be doing,” opined a third.

The world’s most powerful central banker was making no excuses.

“We need to change our culture, our structure and our instructions to examiners and so on to make sure that we do a better job next time,” Ben Bernanke acknowledged.

“So everyone has to do a better job. We are working to do a better job.”

However, Democrat Gary Ackerman was not giving up on the Fed’s flat-footed record in forecasting the global financial crisis.

“How do you miss it and how would have you done it different? Because if you’re not going to do it different, then we’re moving down the wrong direction here,” he said.

“Well that’s the $64 billion question you just asked,” responded the Fed chairman.

“No it’s a trillion, it’s a multi-trillion dollar question,” corrected Mr Ackerman.

“So there were mistakes and problems throughout the system. Other regulators and the Federal Reserve, private sector and even Congress made mistakes in this crisis,” Ben Bernanke replied.

“We have been doing a lot of soul searching and a lot of changes.”

‘Too-big-to-fail regulator’

However, that might not be enough. Under a proposed crack-down announced earlier this week, the Federal Reserve would be limited to supervising banks with more than $US50 billion in assets. It is part of the biggest regulatory overhaul in the United States since the 1930s.

Ben Bernanke warns a stripped back Fed would be a mistake.

“We are quite concerned by proposals to make the Fed a regulator only of the biggest banks. It makes us essentially the too-big-to-fail regulator. We don’t want that responsibility,” he argued.

“We want to have a connection to Main Street as well as to Wall Street.”

Paul Volcker, who was Fed chairman under presidents Jimmy Carter and Ronald Reagan agrees the US central bank mishandled the lead-up to the crisis.

“There were gaps in regulation, gaps in authority. One was large gaps in the investment banking area, in my opinion, where a lot of the crisis arose,” he said.

But he also says the notion of the Federal Reserve only handing banks regarded as too big to fail could create a false sense of security.

“They [the large banks] should not have any expectation that they’re going to be bailed out,” he added.

The deputy treasury secretary, Neal Wolin, has rebuffed Ben Bernanke’s concerns and says a tighter Fed focus on the big players will be better for consumers.

“I know there are lots of people out there trying to water down these provisions, but I think we want to stand for strong protections,” he said.

“We want to make sure that consumers have transparency, are capable of making choices when they really engage in some of the most consequential financial transactions in their lives.”

The proposed overhaul is now at the centre of a widening debate over the role of the Federal Reserve, in particular its independence from the winds of government.

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Employment myths cloud Social Trends survey

March 19, 2010 By Leave a Comment

It was a case of “lies, damned lies and statistics,” a happy headline, and a gullible media sucked in by the spin.

When the ABS released its latest Australian Social Trends survey, its media release was titled: “Part-time work cushioned Australia’s economic downturn”.

Correct, as far as it goes, and entirely unremarkable: that’s old news and blindingly obvious from the employment figures released each month.

The significance of the Social Trends report is that it undercuts this happy story.

It reveals a far more complex picture of the impact of the economic slowdown on men, women, and young people.

It shows that, even in a downturn ranked by the Reserve Bank as one of the shallowest ever experienced here, young people fared badly.

The prospects for those in the youth labour market deteriorated markedly and the employment outlook for teenagers entering the labour force without qualifications became grim.

More than half of those who left school in 2008 without matriculating couldn’t find a full-time job or a place in further study in 2009.

The share of people under 25 in the workforce fell by 5 percentage points during the latest downturn; a little less severe than the fall in youth employment during the recessions of the early 1980s and 1990s but bad enough.

About a third of those people became unemployed.

A greater share simply dropped out of the labour force.

The result: a rise in the number of young people who are “disengaged” from work and formal education.

On the ABS figures, last year, in the wake of the slump in economic growth, almost one in five people under 25 were neither in full-time work or studying.

History shows that the jobs for young people that disappear during a downturn tend not to come back.

Men, the main breadwinners in most households, also suffered an erosion of full-time employment opportunities.

Part-time employment failed to offset the destruction of full-time employment for male workers and the shedding of full-time male jobs, a typical feature of recessions, led mainly to a rise in joblessness among men.

More than half of the decline in male full-time employment was accounted for by a rise in unemployment, and only around one-third by an increase in part-time employment.

The most feminised of industries was also hit hard.

In this supposed mildest of economic declines, jobs in the retail sector were slashed.

On the official estimate, 51,700 jobs were shed from the retail sector, a decline of about 4 per cent. Full-time jobs accounted for more than two thirds of that decline.

That’s a significantly worse outcome for the retail sector than in the deep recession of 1990-91.

Imagine what would have happened were it not for the $10 billion cash handouts the Federal Government delivered in an effort to boost consumption.

And while a rise in part-time work did “cushion” the destruction of work during the downturn, the cushion was a lot thinner than in the last slowdown in 2001.

Back then, says the ABS, a rise in part-time work was a “defining feature” and more than half the fall in full-time employment was offset by a rise in part time work.

In contrast, in the latest downturn, “it was increasing unemployment, as well as growing part-time employment, that accounted for the bulk of the decline”.

So why would the ABS headline its media release “Part-time work cushioned the downturn”, and why would the media uncritically parrot this line (even, sadly, the ABC’s flagship evening television news bulletin)?

Because it fits the mythology about how Australia rode out the GFC.

The myth is that the unemployment rate stayed pretty low primarily because of “work sharing”.

This congenial narrative – told by the Government, the RBA, the employer groups and the market economists – explains the lower than feared unemployment rate as a product of win-win “flexibility”.

Rather than lay people off, employers cut workers’ hours, showing a combination of benevolence and far-sighted self-interest. Businesses had seen how hard it can be to get skilled labour during the boom years so wisely kept people on in the lean times.

Employees, showing good sense and “flexibility”, agreed to accept short work-weeks in the hard times so they and their colleagues could keep their jobs.

Anyone with even a skerrick of understanding about how labour markets work in the real world knows that this could only be part of the story.

Celebrated examples aside, as an over-arching explanation for the labour market outcomes during 2008-09, it’s absurd.

Labour markets are heterogeneous. As demand slumped and fear reigned, alongside labour hording, there was job destruction – a complex patchwork of responses by firm and by industry.

The myth that’s become conventional wisdom implies that the jobs that became part-time were the same jobs that were full-time beforehand, employing the same people.

A study of more than 6,500 workers by the Workplace Relations Centre at the University of Sydney highlights a very different dynamic.

It found that large numbers of employees lost their jobs and were re-employed on fewer hours with reduced pay and entitlements.

For many, the result was a shift from ongoing full-time employment to more precarious casual work.

The ABS Social Trends survey confirms that, in every economic downturn since the recession of the early 1990s, there’s been a decline in full-time employment and a rise in part-time jobs.

Although the data in this survey sheds no light on the issue, we know from separate statistics and research that many of those part-time jobs are casual.

So it’s likely that the latest downturn has continued a long-term structural trend – the “casualisation” of the labour market.

That trend was suppressed in Australia during the latter years of the long-boom when the unemployment rate had a four in front of it and there were shortages in skilled labour, but it remains the underlying dynamic.

It is, in part, the result of a business strategy designed to buffer companies from economic shocks.

Cut the share of “permanent” employees on the books, and you can tailor your labour usage to peaks and troughs in demand, and avoid having to pay redundancy when things turn sour.

Announcing its latest first half profit – a record $100 million – the retailer David Jones confirmed that a variation on this strategy was the key to its profits during the downturn.

DJ’s chief executive Mark McInnes said the company hasn’t employed a single full-time retail salesperson since 2004 – so it’s been able to adjust the working hours of it store staff to match sales volumes.

That’s a logical response, and it has certain spin-off macro-economic benefits: it’s far better to have people under-employed than unemployed.

But it’s a less congenial narrative than the story of “work sharing” and “flexibility”.

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Rate rises on the way

March 17, 2010 By Leave a Comment

The Reserve Bank decided to raise interest rates in March because the balance of economic data showed the domestic economy was growing close to its speed limit.

The minutes to the Reserve Bank of Australia’s March policy meeting showed the central bank concluding that, while a fiscal crisis in Europe could roil global markets and the economy if not handled properly, it did not see that as the most likely outcome.

It also noted that domestic house prices were rising strongly almost across the board.

On balance, members concluded, “it remained appropriate for interest rates to move gradually towards normal levels, and that it was timely to take another step in that direction.”

AMP Capital Investors chief economist, Shane Oliver, says he thinks the word gradual means no rate rise in April.

“I get the clear impression that the Reserve Bank is signalling that it’s going to retain this gradual approach and that to me suggests that we’ll have several meetings where absolutely nothing happens,” he told ABC News.

“I think if the Reserve Bank were to raise interest rates in April they might be concerned that that would signal to the market that they’re departing from a gradual approach.”

However, Macquarie’s interest rate strategist, Rory Robertson, says a rate rise in April is as likely as May.

“Some people have grabbed onto the word ‘gradual’ and said well gradual isn’t back-to-back… rate hikes but, in fact, the Reserve Bank used the word gradual in the equivalent minutes in November, when it was just about to deliver a third consecutive rate hike in December,” he told ABC News.

“I think that the market in general is starting to think that the cash rate might be 5 per cent by the end of the year, versus 4 per cent now.

“We’re in March now, so there’s nine more meetings before the end of the year – the market has in mind there might be four more cash rate hikes – so it’s almost a 50-50 chance at any particular meeting.”

Housing, Greece concerns

The Reserve Bank indicated that it is still concerned by the strength of inflation in home prices.

“While housing loan approvals had slowed a little, house prices had gained significant momentum and were continuing to rise strongly for all but the bottom segment of the market,” the board concluded.

The RBA had raised interest rates by 25 basis points to 4.0 per cent in March, marking the fourth time it had tightened policy since October when rates were at a record low of 3.0 per cent.

The moves render Australian rates the highest in the developed world, and underscore the resilience in Australia’s economy.

Australia had survived the world economic crisis relatively unscathed owing to a buoyant property market, a healthy bank sector and strong Chinese demand for its commodity exports.

“Indeed, some recent indicators suggested that growth might already have been running at or close to trend for a few months,” the RBA noted.

Australia’s long-term growth potential is estimated to be around 3.5 per cent, a pace which the RBA expects to see over the next two years.

Healthy consumer spending, a pick-up in housing construction activity, early signs of a recovery in business credit, and a mining boom that should boost the economy over a number of years all underpinned the RBA’s bullish outlook.

On Greece, where a festering fiscal crisis has hammered the euro and dented investors’ demand for riskier assets of late, the RBA noted that the exposure of the global banking sector to Greece were “quite small” in absolute terms.

It said that even for countries with the biggest banking exposure to Greece, the nation only accounted for a small proportion of their total foreign claims.

“The main risk was the possibility of contagion to other sovereigns and perhaps other markets, primarily in the euro area,” the bank noted.

However, the board concluded that it was unlikely this would lead to a renewed bout of turmoil in financial markets.

-Reuters/ABC

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RBA reluctant to regulate credit card fees

March 16, 2010 By Leave a Comment

The Reserve Bank says it is undecided on whether direct regulation or increased competition is needed to reduce the transaction fees that credit card companies charge.

During a speech to a cards and payments conference in Sydney this morning, the RBA’s assistant governor Malcolm Edey said the central bank is a reluctant regulator when it comes to credit cards.

He says the central bank is undecided as to whether it should step in to force another reduction in the transaction fees.

He says credit card interchange fees – the fees banks charge one another when purchases are made by credit card – have fallen since the RBA’s changes three years ago.

In that time they have gone from 95 basis points, which is almost 1 per cent, to an average of 50 basis points, which is half of 1 per cent.

But Dr Edey says even with that reduction, interchange fees are still too high.

“The Reserve Bank is a reluctant regulator. We’d prefer to see fees being held down by competition rather than direct regulation,” he said.

“We believe there’s been good progress in promoting competition over recent years, but it’s not yet clear whether that will be sufficient.”

In August last year, the RBA deferred a decision to make a further reduction on interchange fees to 30 basis points.

“Our general mandate with respect to the payments system is to promote efficiency and stability,” Dr Edey said.

“That includes taking measures to stop fees from rising too far above efficient levels. But our preference is to do that when we can by promoting competition rather than by direct regulation of fees.”

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Strange times for investing

March 16, 2010 By Leave a Comment

Exactly a year ago last week the Australian All Ordinaries Index hit a low of 3,111. It then rose 55.3 per cent in seven months to 4,830 and since then it’s held that level – last Friday it close at 4,831.

Markets don’t often stay so flat for so long, but then again they don’t often go up 55 per cent in seven months either. These are strange times for investing; it feels like anything could happen – well, perhaps anything except another 55 per cent rise.

If share prices stay flat then you only get the dividend – no capital gain – which averages about 3 to 4 per cent, so you might as well put your money on term deposit with a bank where there’s not much risk.

But the indices are just averages. The All Ordinaries might have barely moved over the past quarter, but Sphere Minerals, which is developing an iron ore mine in West Africa went up 132 per cent and WDS Ltd, a pipeline servicing company, has gone down 64 per cent.

More to the point, two big stocks that most investors own – Westpac and Telstra – did the opposite of each other: Westpac has gone up 13 per cent in three months, Telstra has fallen 13 per cent.

So the first thing to bear in mind when anyone talks about “the market” is that there is really no such thing. The market doesn’t exist. A bunch of companies’ shares are bought and sold; some go up in price and some go down; the average is expressed through an artificial price called an index.

Having said that, I’m now going to write about the market (because it’s too tiring to run through each of the 500 companies in the All Ordinaries index).

Within the flat period from mid October to now, there was a modest peak in the market in mid-January as investors around the world became quite optimistic about the Chinese and American economies. Then there was a correction when the Greek government had to raise cash to pay its public servants but found the global markets uninterested. The Greek sovereign debt crisis ensued.

That has now ended with a horror budget from the socialist prime minister George Papandreou followed by an agreement from the European Commission that it would come to Greece’s aid.

As a result, “the market” is now rising again. It’s now within 2 per cent of the January peak and investors are once more happily pricing in a very strong recovery in the developed world economies.

The problem is that the evidence suggests that that will be hard to achieve. In fact investors and stockmarket analysts are much more optimistic than most economists, who are worried about sovereign debt – not just in Greece, but in the United States, Japan and the UK as well.

The analysts’ consensus forecast is that companies in the developed world will see earnings per share in 2011 that are 60 per cent higher than they were in 2009, and almost 10 per cent the previous all-time peak.

It’s true that sharp rebounds usually follow deep recessions, and this one was the second or third deepest in 100 years.

But was also very different: the thing that caused the recession – too much debt – has not gone away, it’s just been transferred from the private sector to the public sector through the greatest and most coordinated fiscal stimulus ever seen. As a result there is still far too much debt, and Greece’s travails are just an early symptom of what’s to come – not default, but what the economists call “fiscal adjustment”.

That means higher taxes and lower spending, if not this year then next year, and the year after, and the year after that.

Within 12 months public sector debt in most developed nations will be at, or close to, 100 per cent of GDP. At this level questions start being asked about a country’s credit rating.

Bond markets get wary of investing and start asking for more interest on government debt. A vicious cycle begins where bond rates go up, which the government can’t afford, so its credit rating falls and bond rates go up some more.

The only way out is default or IMF intervention along with increased taxes or big cuts in government spending – or all of the above.

For that reason “the global market” looks more likely to go down this year, not up. Australia, it’s true, is more aligned to China these days than the US, Japan or Europe but don’t forget China depends on them for exports.

China’s exports have been falling lately, and yesterday Chinese premier Wen Jiabao made a very sobering speech to a press conference at the close of the People’s National Congress, in which he warned of a double-dip recession.

At the moment the market disagrees. Someone is going to be wrong.

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