Saturday, October 11, 2008

What is Australia doing?

Almost all of what's needed, according to the 5-point Plan of Action agreed at the G-7 Finance Ministers and Central Bank Governors meeting:

"Washington— The G-7 agrees today that the current situation calls for urgent and exceptional action. We commit to continue working together to stabilize financial markets and restore the flow of credit, to support global economic growth. We agree to:

1. Take decisive action and use all available tools to support systemically important financial institutions and prevent their failure.

2. Take all necessary steps to unfreeze credit and money markets and ensure that banks and other financial institutions have broad access to liquidity and funding.

3. Ensure that our banks and other major financial intermediaries, as needed, can raise capital from public as well as private sources, in sufficient amounts to re-establish confidence and permit them to continue lending to households and businesses.

4. Ensure that our respective national deposit insurance and guarantee programs are robust and consistent so that our retail depositors will continue to have confidence in the safety of their deposits.

5. Take action, where appropriate, to restart the secondary markets for mortgages and other securitized assets. Accurate valuation and transparent disclosure of assets and consistent implementation of high quality accounting standards are necessary.

The actions should be taken in ways that protect taxpayers and avoid potentially damaging effects on other countries. We will use macroeconomic policy tools as necessary and appropriate. We strongly support the IMF’s critical role in assisting countries affected by this turmoil. We will accelerate full implementation of the Financial Stability Forum recommendations and we are committed to the pressing need for reform of the financial system. We will strengthen further our cooperation and work with others to accomplish this plan."

On point 1 - we are advancing banks money through the Future Fund and stand ready to do much more; on point 2 - the Reserve Bank is ensuring there's foreign exchange to go around and doing much more; point 3 is the same as point 1; on point 4 - Rudd may have made a mistake by not agreeing to guarantee all bank deposits; and on point 5 - the government has used $4 billion of the surplus to buy securitised mortgages, and will doubtless do more.

All up B plus, perhaps even A minus. All that would be needed to get a perfect score from the G7 would be to properly guarantee all bank deposits.

Meanwhile, there's a professor of economics from the University of Chicago who argues that things aren't that bad at all.

I think he underrates the extent to which we all depend on a working financial system these days.

It's like information technology. Sure we got by without it in earlier decades, but could we now, given the extent to which it has become part of everything we do?

HT: Steven Levitt

Below the fold are Adam Carr's unflatering observations about the G7 Plan of Action.

No matter how sweet and reassuring they are – the G7 are going to need more than words if they are serious about addressing the crisis. No new ideas have been floated yet but the rhetoric was tough - the G7 statement said “the current situation calls for urgent and exceptional action” and that all tools available would be used to prevent large financial intuitions from failure. One of my favourite quotes to come out of the meeting was from the Italian Economy minister “I always said that Basel 2 was stupid…now the others are agreeing with me”. Gotta laugh where you can. It’s notable that the Italians didn’t sign the text of the statement because they felt it didn’t contain any concrete proposals for dealing with the crisis. In the meantime, two more US banks went under and S&P issued a couple of depressing reports suggesting firstly; if the state of California can’t raise $4bn in the next month or two they’ll have to downgrade their A+ credit rating, and secondly; the large US automakers face bankruptcy if credit conditions don’t ease.

Adam Carr
Senior Economist
ICAP (Australia)