6-12-08, 9:19 am

Original source: The Guardian (Australia)

While talking down the likelihood of a serious financial crash in Australia, the federal government is taking a number of measures to equip it to bail out any financial institution in difficulties and to stave off panic if any such institution appears to be in trouble.

The failure of the US sub-prime mortgage market brought home the fact that no country, no sector of the economy, is necessarily immune from the impact of a crisis somewhere else. The credit squeeze that followed those developments hit financial and other institutions around the world, and fueled distrust between financial conglomerates, and continues to take its toll.

'Since mid September last year the US central bank has found it necessary to cut the cash rate seven times', Treasurer Wayne Swan told the House of Representatives on June 2. 'US consumer confidence is close to a 15-year low. Partly because of that declining confidence, the downturn in the US housing market, which explains so much of the downturn in the US economy overall, continue to deepen.

'The total announced asset write-downs and credit losses as a result of the global credit crisis for US financial institutions and global banks are now estimated to be $380 billion', said Mr Swan.

Political unrest is also of concern to governments as the prices of oil, food, transport and other commodities rise. In Australia, the problem is compounded by rising interest rates.

With every serious financial crisis comes a rash of government reports, new legislative and regulatory measures and debate over policy.

The 1929 crash resulted in tighter controls over the financial sector and governments playing a more interventionary role in the economy. Over the past two decades of economic rationalism (neo-liberalism) governments have eased regulations and tended to leave it to the markets.

Now, in the grip of another serious financial crisis, with the potential to do as much or even more damage than that of the 1929 stock market collapse, governments are frantically trying to shore up the sand banks and minimize the collateral. It is in this context that Wayne Swan last week announced new measures to protect the financial sector in Australia and minimize a political backlash.

Conditions have changed considerably since the 1930s Depression in the hi-tech world of the 21st century. The speed and volume of money circulating globally was unimaginable in those days. The monopolization and sheer concentration of capital and domination of the financial sector over economies, along with new types of financial institutions and highly speculative products, enable the financial conglomerates to manipulate and distort markets as never before.

At the centre of the current debate is the question of what role governments should play. '…efficient and sensibly regulated financial markets can help direct our savings into the most profitable uses, smooth the abrupt dislocations that arise from credit controls, and increase the choices available to households,' the Treasurer told the Australian Business Forum on June 6.

'The 17 year expansions that the UK and Australia have experienced are evidence that open financial markets can contribute to more stable and efficient output growth', he said, reassuring big business that the Rudd government was not about to clamp down on their activities.

In other words, the 'free market' philosophy remains intact, and the government and its regulatory agencies will be there to assist in various ways when crisis looms or hits, and to spot the bad eggs before they do too much damage. Its focus is on more 'surveillance' and 'transparency'!

The government is also proposing a form of deposit insurance to give depositors in credit unions and banks 'prompt access to funds in the unlikely event that such a financial institution should fail'.

There will be a ceiling of $20,000 on the amount paid out to individual depositors. Those people can have quick access to their pay, pension or other money deposited in a savings, checking or fixed term account instead of waiting for a lengthy liquidation process to determine what, if anything, they might receive.

The government will initially pay the money and later recover it, either through funds remaining after liquidation or a levy on the industry. This saves the industry from having to finance an upfront fund in case there is a collapse.

'The Financial Claims Scheme will also cover general insurance claims by households, small businesses and not-for-profit entities, where the insurer has failed', Rudd told the media.

The government will issue bonds. The purpose of these bonds is not to fund government debt but to provide it with the liquidity to invest in various financial products, shore up financial markets and assist in crises.

Despite all the demands for governments to butt out and leave it to the markets, when crisis looms or hits, it is governments and their agencies that these powerful markets turn to for a bail-out. Not surprisingly they have welcomed these particular reforms.

The Rudd government plans to provide Australia’s regulatory bodies with greater powers 'for managing financial instability and distressed financial institutions'. The key institutions involved are the Reserve Bank (which assists through money flows, interest rates, currency trading), the Australian Prudential Regulation Authority (APRA is responsible for regulation of banks and insurance companies) and the Australian Securities and Investments Commission (overseeing the corporate sector).

Successive governments have over recent decades surrendered many of their powers and policy mechanisms to the private sector through such means as privatization and deregulation. With the exception of our central bank (the Reserve Bank of Australia), state-owned banks and insurance companies have been privatized. The $1 trillion plus in superannuation funds (private and industry) are effectively controlled by the private sector.

If these superannuation funds were in the hands of the state, they could be used to not only benefit society through socially desirable investment choices, but also to bring a stabilizing force to the financial sector. If there were state and commonwealth government owned banks and insurance companies, these could also be managed in a less speculative manner and used to force down the fees and interest rates of the private sector.

The government is unfortunately tinkering at the edges — providing a small band-aid for a few people while the bleeding continues to increase.

From The Guardian (Australia)