Keeping Banks Afloat: Government Gives Markets a Helping Hand

10-30-08, 9:33 am

Original source: The Guardian (Australia)

It is impossible to keep count of the billions of dollars of taxpayers’ money being handed out by governments and central banks to salvage the largest financial institutions and shore up a crisis-ridden capitalist system. Markets continue to tumble — hopes that each drop will be the last are quickly dashed by another fall. One can only wonder how long governments and central banks can remain solvent. The whopping October 10 crash was soon followed by more drops — by Monday this week the Australian Stock Exchange ASX200 Index had reached a four-year low of 3729.4 — a massive 45 percent below a record high of 6828.7 on November 1, 2007.

The global financial crisis is rapidly spreading into the broader economic, social and political spheres, with no end in sight. Governments continue to give the failing markets a no-strings-attached helping hand.

The Eurozone countries at a meeting on October 12 committed a total of 1.7 trillion euros (1,700 billion) to a rescue plan. This follows on from the US government’s $US700 billion and the hundreds of billions before that. No one is discussing where this money is coming from: how much is being printed, how much was from stored surpluses and how much from future cuts to welfare, education, health, etc, is not publicized. In the end, it is coming from the hard earnings and suffering of the ordinary working people of those countries.

Australia is no different; the budget surpluses were created from understaffing of hospitals, underfunding of schools, lack of public housing and subsistence pensions and welfare benefits. Expect further cuts in government spending in social welfare and other essential public services; the government as no intention of slashing military spending or corporate welfare.

Those who placed their faith in China and a booming mining industry providing Australia with immunity from the global crisis are having second thoughts. The shares of Rio Tinto and BHP were among those experiencing falls on the stock market as investors watched commodity prices fall and a slowing down in production by the world’s largest steel producers in China. China is not immune to international economic developments. As the US, Europe and other markets slide into recession, orders for products from China will contract, and with them demand for Australian minerals and other resources.

It might be hard to believe looking at the price of petrol in Australia, but oil prices fell to their lowest for a year — to $US81 a barrel earlier this month after peaking at $US147 a barrel in July. Petrol should be back down under a dollar a liter, not the $1.45 to $1.65 a liter as found in different parts of Australia. The oil companies are making a killing at the petrol bowser.

As the global financial crisis deepens and penetrates further into other sectors of the economy, governments, central banks and the financial conglomerates continue to thrash out their next moves.

The focus has shifted from rescuing the large investment houses and insurance companies to dealing with the credit squeeze and ensuring liquidity of the financial sector and now the solvency of the big retail and commercial banks.


The next stage of the developing economic crisis is recession. Already companies have started laying off workers, investment plans are being re-examined or put on hold, including in Australia’s mining industry. The Australian government’s $10.4 billion in handouts to pensioners, seniors, carers, parents and first time new homebuyers is an attempt to pump prime the economy — sustain consumption and give the housing industry an injection.

Some lessons have been learnt from past economic crises — don’t keep cutting consumption as that reduces demand and accelerates the downward spiral of business crashes, higher unemployment and even less spending. If workers don’t have the money to spend, the capitalists cannot sell their products to make profits.

In the US and the European Union (EU) thousands of workers have been sacked and economies have begun contracting. Every day companies downgrade profit expectations or report losses, and announce more sackings. The major car companies, the backbone of the US manufacturing industry, are amongst the latest to announce more sackings.

Blank check

In line with its counterparts in Britain and Europe, the Australian government announced measures to prevent a loss of confidence in the banking system. It originally indicated that bank, credit union and building society deposits would be protected up to a limit of $20,000. This limit was later removed, and by the end of last week Treasurer Wayne Swan had announced a cap of $1 million — which will mainly affect businesses.

Protection for amounts above that cap would be available at a price through a form of insurance. The government has also extended its guarantee to cover savings in local branches of foreign banks.

The government’s measures to protect the banks have had repercussions in other areas of the financial sector. Thirteen of Australia’s top 20 cash management trusts have frozen withdrawals of assets to halt the flood of withdrawals as investors began moving their funds to government guaranteed bank accounts.

Many of these investors are self-funded retirees and pensioners. The funds include AXA, Perpetual and Australian Unity. They hold an estimated $22 billion of funds belonging to 180,000 Australians. The funds are pressuring the government for similar guarantees.

The government’s immediate response was to tell those affected to contact Centrelink which will be reviewing the value of pensioners’ assets (some have lost up to 20 or 30 percent) and adjusting pensions accordingly. Thousands more people will become eligible for a pension following the crash in the value of their investments.

Super takes a bashing

While the government has virtually signed a blank cheque to save banks from insolvency, it has done nothing for to assist workers and retirees with the heavy losses that are being experienced in superannuation funds. Private funds continue to charge exorbitant fees — around 1-2 percent on the amount of assets remaining — regardless of performance!

Industry funds appear to have performed better — or should I say not as badly as their private counterparts. Super funds are losing an estimated $1 billion a day of workers’ retirement savings as the global financial crisis deepens, according to a report in The Weekend Australian (October 25-26, 2008).

The losses vary according to the types of investment and their location. Shares, currencies, hedge funds, private equity, property and the more highly speculative derivatives have suffered considerable losses and continue to bleed. Much will depend on the individual worker’s choice of investment areas or the fund’s default allocation where choice was not exercised.

Time to put people first

The US, the British, the EU and the Australian governments have no intention of changing policy direction. They have yet to come up with a single policy that gives priority to the interests of the people; instead their actions are designed to protect the big end of town, those who created the mess in the first place. The billions of dollars being thrown at the financial sector could have been directed to assisting people, to rebuilding the public sector and taking control of the financial sector.

Immediate reforms are needed that put people first, before private profits. These include a publicly owned and controlled bank, which is run in the interests of the community. The pooling of superannuation savings into a national public fund, owned by the members and funds, could be used to build infrastructure, provide public housing and other socially desirable investments.

This would secure workers’ retirement incomes and at the same time create real jobs in the real economy. The age pension should be increased and the means and assets tests rolled back. Other welfare benefits also need to be raised in line with the pension.

Millions of Australians have been hurt and suffered considerable financial losses already in this economic crisis. It is crazy that their retirement savings are being gambled away on highly speculative markets or that they should on retirement be faced with a large lump sum and have to make financial decisions on how best to invest it to ensure an adequate income for life.

Retirement should be an opportunity to enjoy leisure time and feel secure with a guaranteed regular income, not having to worry about what the markets are doing.