Financial Deregulation is Dead
Welcome back!
Financial deregulation is dead as the focus switches back to greater regulation within economies to stop the current global financial crisis occuring again.
The deregulation of the last thirty years around the world unleashed a period of unexpected economic expansion throughout the globe as financial markets were opened up, tariffs reduced or abolished, currencies unhedged to the gold price and so forth.
These changes coincided with a greater focus on reduction of risks especially within the banking industry as less capital was deployed within the banking system as banks leveraged to seek stronger return on equity through investments.
Now as the world sits on the brink of financial oblivion the spectre of greater financial regulation is well and truly back on the table.
The G20 summit to be held in November with the world’s leaders will focus on among other issues the focus of imposing financial regulation upon their respective economies. No longer is financial deregulation king but financial regulation.
Once the washup is done from this global financial crisis we can expect to see a greater focus on financial security first and foremost among global financial institutions and a tougher regulations imposed by governments to minimise the risk of this occuring again.
Chief among items likely to be discussed will be the nature of the hedge fund business and the focus on short selling by hedge funds and the likely impact this has on the confidence and performance of financial markets.
They will also discuss plans to create liquidity in markets after recent stimulus packages flagged throughout Europe and the US.
Either way expect more the talk to be about financial regulation for the next decade, not deregulation.
Mortgage Funds block redemptions
The Australian Mortgage Funds are in a stay of disarray at the moment as a host of major funds have blocked redemptions of mortgage funds to prevent a run on funds that will not only destroy the funds but also seriously damage the long term results of the funds.
Earlier in the week the Challenger Howard Mortgage Fund worth $2.8 billion suspended redemptions. They have now been joined by Australian Unity, AXA Asia Pacific Holdings and Perpetual
The suspension of redemptions has sent fear through the economy as pensioners and long term investors had recently been withdrawing funds in some cases in excess of ten fold on normal levels due to the government guarantee on bank deposits.
The Australian Governement recently announced a plan to guarantee all bank deposits but mortgage funds were not included. This has caused people to run for the doors drawing investments from such funds and transferring into the safety of bank deposits.
No doubt in coming days these mortgage funds will be joined by others as the fear spreading through the economy will continue for a while to come as people see dollars in the bank as the only safe investment.
Have you had your funds suspended for redemption by the mortgage funds? Share your thoughts in our comments section.
Global Financial Crisis bites hard in Europe, Asia & US
The global financial crisis continues to bite hard around the world as more bad news is reported each day throughout Europe, US and Asia.
To give an idea how bad things are Wachovia, the big US bank unveiled a US $23.9 billion third quarter loss after writing down US $18.7 billion in goodwill and US $6.6 billion in credit losses.
Wachovia also projected an additional US $26.1 billion in mortgage related losses in 2009. Wachovia is currently preparing to be taken over by Wells Fargo.
Meanwhile, in Europe Hungary increased it’s interest rtes by 3 per cent to 11.5% to maintain it’s peg to the Euro currency. This is likely to continue throughout Eastern Europe to stem capital outflows.
This has followed heavy selling across currencies such as Russia, Turkey, India, Argentina etc. The currency sell-off has affected virtually every currency in the world including heavyweights the Yen, Euro and Pound as all currencies have depreciated against the USD.
The Yen carry-trade which has financed so much of the global investment binge has the hedge funds has started to be unwound as funds have deserted the Yen for the safety of the USD.
The contagion that is inflicting the world has definately impacted Australia with the sharemarket today hitting four year lows as the All Ordinaries fell under 4000 again. The AUD has also fallen heavily from near parity to below 65c since July.
It should be noted that while Australia has felt some pain it is nothing compared to some other countries around the world and it is hard to realise if most people realise still how lucky and insulated we have been.
At this stage it is up in the air how well Australia will survive in 2009. I suspect the bad times have only just begun should China not be able to quickly re-establish momentum in their economy.
AUD Currency continues to struggle
The Australian dollar continues to struggle today currently selling for 67c against the USD at the time of writing. The fall in the AUD has been dramatic after peaking around 97c in late July the AUD hit a low around 63c on last week.
The AUD fall has been dramatic and was not something envisaged in June or July when the USD was heavily under pressure and the AUD was looking like meeting parity to the USD.
How quick times change as the world economic crisis took hold and investors started heading for the exits the AUD was smashed. The Australian dollar has risen in recent years on the back the growing economic prosperity of Asia, in particular China which Australia has been a recipient of their amazing economic growth.
The mineral boom was a huge driver in what was seen as a miracle economy and the high interest rates on offer drove inflows into the AUD.
The question for most Australian’s is how far can the AUD go? This is not an easy question to answer as investors have become very negative towards the Australian economy and funds have flown into the safety of the USD.
The ongoing expectation of further rate cuts by the RBA continue to put pressure on the currency as further rate cuts over the remainder of 2008 have been built into money markets.
While a falling AUD is not good for Australian’s travelling overseas it could be seen as a boom for international tourists to our shores and also exporters. The only problem with this is travel is dramatically down around the world due to the economic crisis and consumers have cut back spending.
Next to rise will be consumer goods such as electrical equipment that has become as much as 30-40% cheaper due to the previously high AUD. With imports like to rise dramatically this will all put pressure on inflation.
The double whammy in 2009 could be rising inflation due to the falling AUD at the same time as falling domestic and global growth pushes the RBA to cut interest rates further which exacerbates the AUD fall as funds flow out of Australia.
It should be noted the RBA expect the inflation rate to fall but if it does not and inflation still hovers around 5% or even increases then Australia could be heading to a disastrous situation.
What do you think will happen in 2009? Share your thoughts through our comments section.