Hands up anyone if you know what the ‘charter’ of the Reserve Bank of Australia (RBA) is?
The RBA website gives us the answer:
The powers of the Bank … are exercised in such a manner as, in the opinion of the Reserve Bank Board, will best contribute to:
(a) the stability of the currency of Australia;
(b) the maintenance of full employment in Australia; and
(c) the economic prosperity and welfare of the people of Australia.
Well, they RBA has been trying its hand at the first. Not to very good effect though. Unemployment is close to record lows, but is that because of RBA policy or is it down to private enterprise?
Why not have a crack at the third, RBA? According to the minutes from the last RBA meeting released yesterday, the RBA board members are concerned that “the recent falls in house prices and on equity markets had led to a decline in household net worth of about 8 per cent since the start of the year”.
Despite what the RBA charter states, is it really the role of the central bank to prop up over-inflated house prices? And what does the RBA define wealth as?
If someone bought a house for $400,000 with a $350,000 mortgage has their wealth really increased if the house is now valued at $600,000?
Surely wealth is only confirmed when the increase in value has been monetised. Until then it is purely a valuation and not wealth at all.
Maybe the RBA should add to its charter that it will “contribute to making everyone feel good about themselves and the decisions they have made regardless of how imprudent they were.”
Assets Down, Debt Up
For many investors they have been hit twice. Once the ‘wealth’ in their house had increased by so much it seemed a shame to just leave it there doing nothing. ‘Dead money’ is what they called it.
Much better to withdraw some of that equity and buy another property, or buy shares with it. Of course, it wasn’t really wealth because it wasn’t their money. They were borrowing it from a bank based on a valuation by a bank. A bank whose business it is to lend money so it can make more money.
Now share markets have fallen by 50% and house prices in some areas have fallen by 20%. The not-so-astute investor is left with increased debt and decreased assets.
Yet the banks should come out winners because they now have a bigger loan book, And unlike in the US where many home loans are non-recourse, the banks are more likely than not to get most of their money back even if the borrowers default.
From ABC to CFK
How will the Australian government go? It has recently provided a $20 million cash injection to keep ABC Learning child care centres open.
So can we expect the government to stump up cash to keep open another company called CFK Childcare Centres open? It has gone into administration with 43 creches in New South Wales set to close.
Or is it just a case of selective hearing by the government? If it isn’t, that’s a problem too. Now they’ve started handing out the cash it’s going to be difficult for them to find a reason to stop.
Babcock & Brown Lite
Is there going to be anything left of B&B by Christmas? At the moment it looks like a hot air balloon that is rapidly losing height. Executives are standing at the edge of the basket throwing as much ballast over the sides as possible.
If B&B thought that this would help shore up the share price it isn’t working. But then it also looks as though it doesn’t have much choice. It’s a forced seller.
The market is just taking the view that, even though the asset sales may be helping to rid the company of some debt, the prices the company is likely to get for them will be below previous valuations.
This morning B&B released an update to its strategic review. In bold letters it states “Restructure of the business to focus solely on infrastructure investment.”
Er, excuse us for asking, but isn’t the main reason the company got into the current mess because of the infrastructure investments? Rather, the leveraged nature of the investments and constantly revaluing them higher to borrow more.
This morning B&B is trading at 28 cents. As we mentioned in an email to an old mate yesterday it could be the sort of thing that you throw a few hundred dollars at today and then forget about it for 5 years.
You never know, it could be a phoenix from the flames. But it could just as easily remain a stinking pile of rubbish. We shall wait and see.
