Tuesday, October 14, 2008

Global crisis with local implications

It has been a month since the filing for bankruptcy protection by a Wall Street giant and the government rescue of two more financial institutions. Yet the meltdown is still unfolding - rapidly. The whole world is still coming to grips with the devastating effects of the US financial crisis and its consequent impact on the global financial markets. The series of events that changed the global financial markets is presented in this timeline.

But the events in the last months has been brewing for sometime now. Just over a year ago, I saw an investigative TV report on the "US subprime mortgage crisis" by Paul Barry which was aired in Four Corners, an ABC current affairs program in Australia. In hindsight, the issues discussed by those interviewed where prophetic in light of the current financial situation which is now always the first story in the daily news cycle, particularly in the last 2 months. "When the US sneezes the rest of the world gets the cold." (Mortgage Meltdown, 17 September 2007).

One financial market analyst told the program then of the foreseeable effect of the mortgage meltdown: "I don’t think anybody anywhere in the world is going to be immune. It’s a question of degree rather than whether they’re affected." Monday's Four Corners, 13 September 2008 revisited the story as Australians take in the implications of the crisis a year on.

I am still struggling in understanding the intricacies of what precipitated the crisis. For somebody not well versed with economic nuances, it is mind-boggling that well-established financial institutions have 'lost the plot'. A.W. Bodine and C.J. Nagel provided an insightful analysis and commentary on the subprime crisis. In a nutshell, Bodine and Nagel highlighted that this financial mess is attributable to bankers and mavens choosing to forget that "high return and low risk do not go hand in hand".

In the past two weeks, the Australian Federal government has been consistent in giving its assurance that notwithstanding the implications of the global financial system meltdown, the Australian financial system is relatively robust. Take for example the banking sector. Just middle of this year the rankings of 3,000 banks in the world compiled from balance sheet information had the top 10 banks from, among others, the UK, Germany, France, US, Switzerland, Netherlands. However, in a report filed with Reuters last week, the top 5 soundest banking systems based on The World Economic Forum's Global Competitiveness Report are (1) Canada, (2) Sweden, (3) Luxembourg, (4) Australia and (5) Denmark. It is interesting to note that in addition to having sound balance sheets, the basis of the ranking now includes looking at how insolvent a country's banking system is and if a government bailout is possibly required.

It is comforting to know that Australia is setting concrete measures in dealing with the financial crisis. Just last week, coupled with the 1% interest rate cut by the Reserve Bank of Australia, the steepest interest cut since 1992, the Australian government will also guarantee all deposits of Australian banks, building societies and credit unions and Australian subsidiaries of foreign-owned banks for the next three years to bolster confidence in the banking system. More announcements made earlier today include the government's economic stimulus package to mitigate the impact of the world crisis on Australian households.

But it is a certainty that nobody is immune to what is happening. Millionaire Mommy Next Door gives us a list of things to do to survive the economic crisis and on a lighter note, Time's Lisa Takeuchi Cullen has these survival tips to share.

As for me, this downtime calls for more prudence and circumspection and that means setting aside my some of the things in my varied 'wishlists' for the time being.

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