Hot topics in today's finances
The big one
As someone who has railed against the Reserve Bank's interest rate policy since the beginning of this year on the basis that the stockmarket rout was a big elephant in the corner of the room that could not be ignored, the 1% cut this week was a beauty!
Good decisions
The positive Asian stock market response was a double beauty and the major banks' quick reaction to offer customers an 0.8% cut was a triple beauty!
(I know I am over-using exclamation marks but I am excited! There I go again!)
Don't get me wrong, the repair job has only just begun, but this big decision by our central bank was a smart one. Negativity and a collapse of confidence in banks worldwide have spooked investors and traders, so the central banks as well as the governments of the world have to step up to the plate.
Support the banks
The Irish Government shocked their British counterparts when it promised to stand behind the deposits and loans of the Irish banks. This resulted in a flood of money into these banks at the expense of their UK rivals.
It's a big call and I can't believe I am saying this but governments worldwide need to back solid banks and if they cop a loss here and there, then let the taxpayer pay!
You see the taxpayer will ultimately pay if this potential recession turns into a global depression. The big cut in interest rates by the Aussie central bank shows that the smart people at the Big Bank are worried about negative stock markets and choked up credit markets. It was time for the big boys with the money and the influence over interest rates to go on the attack and it has had a positive effect.
The fact that Asian stock markets responded to an Aussie rate cut shows that they expect other central banks to throw inflation fears to the wind and go for growth through lower interest rates.
In the USA
Unfortunately, the Yanks can't cut by as much as us as their equivalent cash rate of interest is at 2% but our American cousins certainly need another boost to support the $US700 billion rescue package.
This has not had the positive stock market impact as many hoped but the Americans got some big unemployment numbers - 157,000 jobs lost in one month! - and this increased the prospects of a longer and deeper US recession.
Eurovision
This came as UK and European banks started to fess up to very dodgy balance sheets. Thankfully they were rescued but it has vindicated bank suspicions that many were not telling the truth about how the sub-prime debacle had affected them.
All of this means that the European contribution to global economic growth looks set to fall as many of their economies seem on target for recession. Until recently the Eurozone's growth, as well as that of Asia, had helped US companies produce some better-than-expected earnings results.
Global growth slide
Now Asia is on its own in keeping the global growth show on the road. Thank the Lord for China and India, which both generate a lot of growth domestically. However, a weakened USA and Europe, as well as a dead duck Japanese economy all says global growth is sliding and that's why oil is in the $US80 something a barrel region right now. Other commodity prices are also slipping and that's why the Oz dollar has slumped to the 60 something US cents level.
On the horizon
So what next? We don't really know but as central banks have now cut interest rates significantly and the world's governments stand behind their banks then confidence should make a comeback. This will be reflected in the dropping of the cost of wholesale funds and it will also mean non-bank lenders will gradually access more funds.
These lower rates will help banks pass on the extra 0.2% that has been held back. This will bolster confidence of consumers and business owners creating the foundations for a stronger economy going forward.
Governments too slow
If the worldwide rate cuts and the US and the UK rescue packages impress American investors, and Wall Street buys it then we have the pre-conditions to expect a stockmarket comeback. However, the financial woes are worse than everyone expected and poor government reaction is now to blame.
Don't expect a massive turnaround, though there could be a spike of 10% or more as the scare-driven share price falls are reversed.
How low can they go?
This is the best case scenario but it's not a certainty to happen this way. Some very smart economists I know think the cash rate, which is now down to 6% could go as low as 4%. Another economist thinks, wait for it, 2%! This would put home loan rates to around 4%, but I really hope this guy is wrong, as it would mean that we and the rest of the world are in a very serious recession!
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