The Government Policy and its Failings

The local newsreels are fairly quiet today. The Reserve Bank’s March minutes will be out. Central bankers like to explain their lack of action in great detail. Then again, all the focus is on any hints for the ‘forward guidance’, which supposedly tells pundits where interest rates might move when. That assumes the RBA can predict our economic future…enough said.

But there was plenty of action overseas. See if you can spot the thread linking these stories together:

American Navy Seals (the soldiers, not the animals) raided a former North Korean oil tanker that picked up oil in a rebel held port in Libya. Because the oil belongs to the new Libyan government, and the tanker was sailing close to Cypriot waters, the Americans decided to raid it. They’ll be handing it over to the Libyan government soon.

Funny how quickly the revolution in Libya becomes about oil, isn’t it?

The US, EU and Russia played a game of sanctions last night. First the EU and Americans put a travel ban and financial restrictions on 21 high profile Russians. The Americans added a few more names onto their list for good measure. And then, believe it or not, the Russians responded with the same measures on US government officials. In fact, they practically mirrored them.

The stock markets in Europe and the US seemed relieved that the sanctions were so minor. German Chancellor Angela Merkel had been threatening worse, which is important because Germany was supposed to be least enthusiastic about punishing the Russians. Clearly, someone else doesn’t want to rock the boat.

The exchange of financial blows is far from finished though. The Russians know how to hit the EU and US where it hurts – Ukraine. Instead of making life difficult for his enemies, Putin is going to use the oldest trick in the book. He’ll make life difficult for his enemies’ friend.

Apparently, the Ukrainians owe the Russians $3 billion in bonds. Part of the so called ‘Ts and Cs’ is a clause that dictates the $3 billion becomes ‘callable’ if Ukraine’s debt to GDP ratio exceeds 60%. That means Russia can demand payment at short notice.

In a beautiful twist of irony, the aid package coming from the IMF will raise the Ukraine’s debt to GDP above the crucial 60% mark. The US funds much of the IMF’s budget, so money will flow from US coffers to IMF coffers to Ukrainian coffers to Russian coffers. The Americans are paying the Russians for Ukraine!

That certainly puts the sanctions on 21 Russian officials’ travel habits into perspective, doesn’t it?

In China, the news of another default is spreading. Zhejiang Xingrun Real Estate Co. can’t meet its repayments. More than 15 banks are amongst the creditors, and the company owes about half a billion dollars in debt.

The news sent US listed Chinese real estate stocks and bonds tumbling. But the real concern is what the Chinese banks and government will do next. Will the banks keep lending to each other and developers? If they don’t, when will the government step in? We’re going to find out the hard way.

Two more stories to go before we reveal their connection.

Over the last few years, just about every financial market price was shown to be manipulated in one way or another. Stock prices, interest rates like LIBOR, foreign exchange markets, mortgage backed securities, and everything else under the sun. The big exception was the gold price. For some reason, nobody ever manipulated the gold price.

Unless they actually did, and the media simply isn’t onto it yet. The Financial Times speculated on this issue in February and then promptly removed its article without explanation. But now it’s back with an article on the lawsuits alleging gold price manipulation. The class action alleges a cabal of banks manipulate the gold price to the advantage of their own traders instead of balancing bullion demand and supply.

Good luck to the lawyers trying to prove it. They’ll need it. A past investigation by a US commodities trading regulator found nothing. The German investigation is ongoing. And an internal investigation by UBS resulted in what the bank calls ‘appropriate action with respect to certain personnel.’ We hope that wasn’t a reference to the recent spate of suicides in the banking industry…

Last but not least, an update on our favourite topic. For those of you who’ve been following the Loan Application Fraud story here in Australia, there have been some intriguing developments overseas.

A bit of background: Mortgage brokers and bankers in Australia seem to have a habit of manipulating Loan Application Forms to ensure their client’s loan gets approved. This turns sub-prime lenders into prime lenders in the eyes of the bank, without anyone knowing otherwise.

The borrowers can get their own back thanks to courts deciding victims of this practice can cancel their loans without losing their homes. The remaining question is, how common is this practice? How many Australian loans could be cancelled if the law were applied to them?

It turns out the very same problems plagued the lending industries in the US and UK. A new lawsuit in the US claims that the bank Wells Fargo provided staff with a written guide on how to manipulate mortgage documentation to ensure loans were approved. In other words, a guide on how to game its own lending standards. In the UK, one mortgage broker claimed he was taught how to manipulate loan documentation by banks.

In other words, the countries that saw the same loan documentation problems we have here in Australia have figured out that it was the banks themselves, not just a few greedy mortgage brokers, who brought down the banking system by making dodgy loans. This is precisely the accusation consumer activists on top of the LAF issue are making about Australian banks.

If the banks here are instigating this fraud, that suggests the practice is much more widespread than regulators presume.

Meanwhile, US regulators have been caught by a watchdog overstating their efforts to prosecute mortgage fraud. That’s another claim Australian consumer activists are making here.

All that’s missing now is a drop in house prices and all hell could break loose like it did in the UK and US banking industries. When the tide goes out, the skinny dippers are exposed.

Now, what about that thread which binds these stories together? Well, how many of those stories are about purely financial or economic matters? None directly. They’re all related to government policy and its failings. Governments are raiding ships, suddenly allowing defaults that they would have bailed out in the past, imposing sanctions, demanding debt payments, failing to prosecute market manipulation and turning a blind eye to systematic and systemic document fraud.

Your financial life and future is no longer a matter of company profits, consumer sentiment, debt levels, entrepreneurship or business. It’s ruled by politicians and central bankers in capital cities around the world.

That hasn’t been working very well though. Economic growth and wellbeing around the world is iffy at best. Government policy was supposed to impose stability and prosperity, not generate instability and mediocre economic performance. Each intervention seems to bring the world closer to a big crisis.

Does anyone think governments around the world are going to be cutting back on their misguided efforts? Whether its interfering in your personal or financial life, we doubt politicians will be making you more free any time soon.

The good news is our conference theme is more than justified in the midst of all these recent events. We can imagine the remarkable list of speakers furiously adding their take on what’s really been going on into their speeches.

The real challenge will be how to make money out of all this. Although some of us have a different take for the question you should be asking yourself.


Nick Hubble+
for Markets and Money

Join Markets and Money on Google+

Having gained degrees in Finance, Economics and Law from the prestigious Bond University, Nick completed an internship at probably the most famous investment bank in the world, where he discovered what the financial world was really like.

Leave a Reply

Your email address will not be published. Required fields are marked *

Markets & Money