Friday, October 10, 2008

Banks Need A Guarantee Just As Much As We Do

Amidst the panic of the Global Financial Crisis, there is growing pressure on the Australian Government to provide a guarantee for bank depositors. Indeed, the Government is already planning a measure to guarantee deposits up to $20 000. But that is a pathetic and tokenistic guarantee which provides no certainty for people who have spent a lifetime saving up a nest egg for their later years. But the problem is that it’s not just the customers who need a decent guarantee. It is the banks themselves.

All the available evidence suggests that Australia’s banks are in a sound position, more so than most around the world. For heaven’s sake, you would expect that they are after pocketing record multi billion dollar profits year after year. It’s been twenty years since the last time a major Australian bank even looked like getting a little bit wobbly. Although we’ve all grumbled about excessive bank fees and profits over the years, those profits should mean that the banks remain strong now.

While there is no reason to hold concerns about the capacity of our banks to weather the storm, there is another problem. All around the world, other countries are providing their banks with depositor guarantees, and not for a piddling $20 000. Those guarantees are generally around $200 000. This obviously protects the depositor, but it also protects the bank against a potential run. That means that it will be easier for a bank with such a guarantee to borrow from the international money markets. So for Australian banks without such a guarantee, it becomes even more difficult to access wholesale funds, despite the fact that they remain strong.

Now, it is possible for our banks to get by without access to wholesale money for a time because they do have strong capital reserves. But without that access, the tightening of credit will only get worse, and flow through to even further reductions in consumer spending. When that happens, the prospect of a recession becomes much more likely.

So, the right thing for the Rudd Government to do is to guarantee our bank deposits, not just for our peace of mind, but to keep the banking system functional, and reduce the risk of recession.

Thursday, October 9, 2008

Qantas Incidents Are Symptoms Of A Bigger Problem

Once again, Australia’s favourite airline is in the headlines for all the wrong reasons. The spate of adverse incidents over the past several months ranges from the very serious to the relatively routine, but it is the fact that they keep on happening which is really starting to worry people. So, is there something fundamentally wrong at Qantas, or has this just been a run of bad luck?

Not all of the series of incidents have been serious. Some of them have been relatively normal events which have been identified by safety procedures and addressed in an appropriate manner. Those incidents are an example of the system actually working as it should to identify issues before they become threats. At the same time, legitimate concerns have been raised by Qantas engineers about maintenance standards, and the Civil Aviation Safety Authority has found that the airline is guilty of failing to meet its own benchmarks. Those warnings, coupled with the incidents themselves, cannot fail to cause concern in the travelling public.

Now people generally can be a somewhat superstitious crowd, especially when it comes to the unnatural business of flying. At some point, the fears that people have can take over from common sense and every little incident can become another damning piece of evidence. Already, opinion polls are being reported which indicate that 63% of the general public believe that safety standards have fallen at Qantas. Of course, this is only evidence of what people believe, not what might actually be true, but it still has a very real impact on the wellbeing of the company.

Although the official investigation will take some time, as it rightly should, it appears that this week’s dramatic loss of altitude by a Qantas Airbus 330-300 may have been caused by a computer malfunction. It may be the fault of the design, or some other factor. It has even been suggested that a passenger’s laptop may have interfered with the system, as we are so often warned every time we travel. But the explanation is not going to matter to an increasingly worried travelling public.

Whatever the case in this particular event, the bigger picture remains the same. Qantas has suffered a series of embarrassing and potentially dangerous incidents. People have a tendency to believe that where there is smoke there is fire, and they have been told repeatedly by credible observers that standards are not being met. It’s no surprise that public confidence is falling.

There are wider problems in the aviation world, including the shortage of Air Traffic Controllers, and the increasing pressure to cut costs. It all comes back to one central cause: the mistaken belief that the most cost-effective option is the best option. It’s not, and it never will be. Aviation success in the past was built on the wasteful, inefficient, and costly idea of multiple redundancies in systems at every level and over-engineering. The best option is the one where the cost is set by the standard, not where the standard is set by the cost.

That, by the way, is a philosophy which is true for the entire economy, not just aviation.

Wednesday, October 8, 2008

The Share Market Rollercoaster

The larger than expected interest rate cut of one whole percent has been welcomed as good news for struggling home-buyers. Even better is the expectation that there will be further cuts ahead, although not quite so dramatic. That’s the good news. The bad news is to be found in the reason the decision was made. While the earlier increases in rates were fueled by concerns about rising inflation, the decrease is motivated by the even bigger fear of recession. That’s where the outlook starts to become really scary.

The Reserve Bank has done the right thing, but that still may not be enough to prevent a serious downturn. Global conditions are such that it appears likely there will be a recession whether we like it or not. Almost anything that Australian authorities can do will be to cushion the blow, not to avoid it altogether. So where does that leave ordinary Australians?

With so much uncertainty still ahead, the sensible course is to reduce debt, reduce spending, and increase savings. If you own a house, hang on to it. If you have a job, do your best to keep it. If you still own shares, it might be best to put them in the bottom drawer for a couple of years and wait for them to come good. Selling them now will only turn paper losses into real ones.

That’s a tough call, because shares could well lose even more value before things get better, and there’s always the risk that some individual companies could disappear altogether. But, there are reasons for hanging on. One of them is the difference between property and shares.

House prices are clearly out of step with average incomes, and whatever else happens they need to come down relative to income. It is often said that property is a good investment because everybody needs a place to live, but that also means that for an economy to function everybody needs to be able to afford a place to live. In that way, property prices are tied to community income standards. Those ties can be stretched, as they are now, but can’t be broken without serious social implications.

Share prices, on the other hand, are not constrained in such a way. Share prices are set by the market in response to factors including the potential for a company to grow. Share prices reflect trading conditions and economic activity. It is not necessary for share prices to keep step with incomes or CPI to maintain social cohesion. That’s not to say there is any guarantee; there’s not. It may take a long time for the particular shares you might own to return to the price you paid, if ever. It’s also entirely possible for a bear market to continue for a long time. But those who are suggesting that it will may turn out to be overly pessimistic.

After every disaster, there’s always money to be made from reconstruction.

Tuesday, October 7, 2008

Picture Imperfect

Once again photographer and artist Bill Henson is back in the news, with the revelation that he was allowed to wander about a school playground scouting for models. Once again, controversy has raged with outrage on one side met by indignation on the other. Of course, it would be different if Bill Henson was a “good bloke” It would be different if Bill Henson was a dinky-di beer drinking football star visiting the school to check out the youngsters for their sporting potential. It would be different if Bill Henson was Kyle or Dicko looking for young singers to put on TV. It would be different, but why would it be different?

Quite clearly, the one glaring difference is that Bill Henson takes photos of children without their clothes on. Now, let me be clear. I accept that Bill Henson is an artist, and that he only works with the full permission of parents. I also accept that nakedness doesn’t have to be seen in a sexual context. It’s a fact of life that we are all born naked, and the inhibitions and attitudes that we have about nakedness are imposed by our society and culture. In a purely rational world, nakedness would be just that and nothing more. It wouldn’t mean anything. But we as human beings impose meaning upon it. The truth is that soft drink commercials do more to sexualize images of the human body than Bill Henson does. But that’s not the point.

The point is that, as with the earlier controversy about whether or not Bill Henson’s photography amounts to pornography, those who are genuinely a danger to the safety and wellbeing of children will see this as a green light. They will see it as a legitimization of their twisted proclivities. They will see it as an invitation to disguise what they do as having some sort of artistic intent.

The real question is whether or not any outside parties should be permitted to conduct scouting expeditions into schools without prior parental approval. Isn’t the purpose of attending school meant to be education? Schools are not supposed to be talent agencies are they? If Baz Lurhman turned up at a school looking for a child actor to cast in a Hollywood movie, would that be an appropriate use of the school? Would it be a legitimate part of the education process, or a distraction from it? Surely, if parents want their children considered for such opportunities there are more appropriate venues for that to occur.

What’s worse is that while Bill Henson might be welcomed with open arms because he is a recognized artist, some schools actually prevent parents from taking photographs at school activities such as sports days because of child safety fears. Now that’s truly irrational.