Saturday, September 20, 2008

Central banks are just doing their job

I’ve been reading a lot of comments on blogs complaining about US and other government action in wake of the current crisis of confidence gripping financial markets. Most of the complaints are directed at the US Federal Reserve and based around the idea that western economies are basically free markets and that governments have no place interfering in failing businesses.

The first thing I would say about this is that most western countries are not pure free-market economies but mixed economies where markets operate within a regulatory framework set by authorities and governments themselves perform some economic functions rather than leaving them to the private sector.

This is particularly so when it comes to banks. Banks are different because of the role they play in commerce. We all use Banks and expect them to be safe places for our savings and many individuals and businesses depend on them for loans. Banks borrow money for short periods that they then lend to you and me for long periods. Some of these short term funds they use include deposits that can be withdrawn at will. If too many people were to demand their money back from a bank at the same time, the bank wouldn't be able to pay them and would fail.

The other thing that banks do on a regular basis is settle transactions between accounts held by different banks. This happens every night, night after night (except weekends). Sometimes, banks find themselves short of liquid funds (cash) and they borrow from banks that have more liquidity than they need. In return for this, the lending bank charges the borrowing bank a rate of interest which happens to be the cash rate. This is partly how the cash rate affects retail lending products like your mortgage - its the rate we all currently wait on feverishly every month in the hope that it has fallen. In Australia this is set by the Reserve Bank.

In Australia, Open Market Operations are conducted by the RBA to ensure sufficient liquidity exists between retail banks. This happens on a daily basis as the RBA ‘intervenes’ to keep the price of funds at its targeted cash rate. If the RBA didn’t act in this way the price of funds exchanged between banks in overnight settlements would become erratic. A shortage of funds would ‘bid up’ the price and monetary policy would be ineffective (and your mortgage might become more expensive). In the opposite situation, a surplus of funds would drive the price down (when there is an excess of funds in the market the RBA becomes a buyer to keep the cash rate from falling).

This is what central banks do all over the world. However, given the present conditions retail banks are particularly reluctant to lend to each other both in the US and elsewhere. So the world’s central banks have stepped in and are lending to any bank that finds itself short of funds to complete its daily settlements. They are doing this to maintain stability in the price of funds (the interest rate) and to restore confidence in the banking sector generally. What we are presently seeing is an extreme version of what central banks do every day: manipulating the balance of demand and supply - keeping cash rates in accordance with their present policy settings. At some time in the future, when the market calms, the central banks will re-enter the market and withdraw the resulting surplus of liquidity.

Whether you think we live in free market economy or some other version of it, the banking system depends on public confidence for its stability. It's the responsibility of governments and their agencies to ensure the system remains stable.

Thursday, September 11, 2008

A scam story

Being involved in finance for many years has meant that, unfortunately, we have come across customers who have fallen victim to investment scams.

On one occassion a customer had substantial equity in their home in Sydney. It was just before the recent property boom and they were looking to make a further investment in real estate. They obtained a loan facility so they could be in a position of strength to make an offer on a house when appropriate.

The loan facility was established and they set about looking for suitable properties. During their search they came across a company offering investments in 'offshore vehicles' that were producing very high returns - 15 to 20 per cent. Our clients visted their very impressive offices and checked out their web site and everything looked good. Despite our protests to get further opinion our customers invested their entire borrowings with this company.

For a while everything looked good. The promised dividends arrived every month and our clients couldn't believe their luck. But after about four months the payments stopped and the company dissappeared.

Unfortuneatly these people found themselves victim of a classic Ponzi scheme. This is where some one makes a claim that they can invest your money and provide returns, substantially higher than that offered by other standard investment products. Once you invest, you are rewarded for your 'shrewd' decision by the dividend payments that come in each month as promised. Everything looks good and you are making money! What this can do is make you an advocate - a sales person for the investment - and you tell your freinds and they become involved too, investing their savings or loans.

At some point the money invested reaches an amount that satisfies the scammer and they leave town. You become aware of this development when your monthly dividend payment doesn't arrive but by then its too late. The flashy offices are deserted, the website is down and the phones don't work. Suddenly you realise that what you thought of as exceptional dividend payments were in reality, only some of your initial investment being returned to you.

This is only one of a dozen stories of people we have come across who have been defrauded. They are all very competent, decent, honest people. The trouble is, the people who perpetrate these frauds are ruthless, professional con artists.

Don't give your hard earned money to anyone for any reason with out consulting some one esle about your intentions. Please, please be guided by the advice of professionals. If something seems to good to be true - it usually is.

Wednesday, September 10, 2008

Avoiding Scams

In all the ways we manage and use money, it is important to protect ourselves from loss or detriment. This is where we need skills to manage the various risks that occur throughout our lives.

A popular belief that makes people vulnerable to scams is the idea that there are secret short cuts to wealth that are only known by certain financial “gurus”. The offers these types of people make often vary but tend to involve unusually high rates of return on investment. Believing that all businesses must be legitimate and that wealth or other benefits can be obtained through special tricks can place you at risk.

Before you invest money with anybody you should do these things first:

  1. Ask for the names of organisations that they are members of. People dealing with money and investments usually belong to well known government and industry bodies who could testify to their membership and conduct.
  2. Ask for written testimonials or verbal references from customers.
  3. Check government regulators like ASIC and state Offices of fair Trading.
  4. Seek the advice of a professional you know and trust like your accountant, solicitor or financial planner.

The Australian Securities and Investments Commission allows you to search a company and establish when it was formed, check disqualified persons, and provides alerts on recently uncovered scams and other useful consumer information through its affiliate site FIDO at .

State government Fair Trading offices also provide information on bogus investment schemes. Check the Queensland Office of Fair Trading at . You can also look at other statement websites in similar departments for alerts on recent scams as well as other useful information on consumer protection.

Monday, September 1, 2008

First home-owner hope

A recent Housing Industry Association survey showed that a record 50 per cent of Generation Y Australian’s (people born between 1975 and 1990) are living at home with their parents. The figure for Queensland is slightly lower, at 44 per cent and from this week, it might just get a little bit better.

Three reasons:

  1. From today, the Queensland state government has abolished stamp duty on homes with a purchase price up to $500,000. First-home buyers will be exempt from stamp and mortgage duty on homes up to $500,000, a saving of around $10,000. Prior to today, the purchase price threshold for exemption from these taxes was $350,000.
  2. Tomorrow, a mortgage will cost just that little bit less with the Reserve Bank (RBA) widely tipped to cut interest rates. A cut tomorrow by at least a quarter of one per cent will be the first easing since December 2001 and will help make life a little easier for potential first home owners. The prospect of banks not passing on the RBA cut to retail customers now seems unlikely with recent announcements by NAB, ANZ and Suncorp. On top of this Wizard Home loans has stolen a march on its much bigger rivals. As of today Wizard, cut its standard variable lending rate by 25 basis points in advance of tomorrow’s RBA announcment.
  3. The housing market is stagnant (despite what some real estate agents might optimistically say) and house prices are falling. So although prices are still very high (Australia currently ranks as having some of the least affordable property in the english speaking world), it’s a buyers market.

While home affordability is still very tough, these three developments should put some welcome purchasing power in the hands of the first home buyer (and maybe free up a spare bedroom for some Boomer Generation mum and dads)