There’s an adage about being “careful for what you wish for” that could apply nicely to our increasingly shrill scaremongering Federal Treasurer. He wants a global financial markets tsunami, and a slumping Chinese economy to save him and his government.

He should be very careful because there is something out there in the markets; it’s the same monster that reared up and froze financial markets in August and September, forcing banks, hedge funds and other investors to realise over $US100 billion in losses, and forced up market interest rates independent of what the central banks did.

The US Fed cut rates in September to attempt to save Wall Street’s bottom line, and helped force out those multi-billion dollar losses at UBS, Bank America, Citigroup and Merrill Lynch. But short term money market rates remain persistently high: ours have climbed to almost the level they were in late August on this week’s inflation news and interest rate speculation.

Our banks and mortgage providers have been edging up rates on financial products ever since and yet, King Canute-like, Mr Costello was railing against the banks for reacting to these funding pressures.

Does he really think that a “tsunami” will not mean these pressures will intensify if it happens? If his tsunami strikes and China slumps, interest rates will eventually fall, but that will be to stimulate a moribund economy. His hope is that monster is popping up all over the place, especially in the US:

  • The big US insurer, American International Group, saw its shares suffer the biggest fall in 30 months on reports around Wall Street that it was set to report huge losses on subprime mortgage bonds, insurance and associated financial derivatives. It’s third-quarter report is due in a fortnight.
  • Shares in MBIA, the world’s biggest bond insurer, fell around 20% after reporting its first ever quarterly loss on writedowns caused by mortgage-related securities.
  • America’s biggest mortgage insurer, MGIC Investment Corp saw its shares fall 12% as it slashed its dividend by 90%. Another mortgage insurer had a surprise quarterly loss because of the subprime crisis and writedowns.
  • The shares of America’s biggest US cable TV group Comcast Corp suffered the biggest loss since 2002 on confirmation that the housing crisis was costing it customers and profits. Its third quarter revenue rose but earnings fell 54% on the loss of subscribers.

Will Rupert Murdoch’s News Corp’s Fox cable group be far behind? His audience is in the subprime sector; just look at the way Fox Network News aims itself at blue collar America, subprime country, where the brunt of the housing slum is happening.

Writedowns spurred by the housing slump have seen profits at US financial companies in the S&P 500 fall by almost 25% in the third quarter so far, the worst performance among 10 industries. Merrill Lynch posted its biggest quarterly loss in its 93 year history on losses of $US8.4 billion and today a banking analyst at Goldman Sachs said Merrill might have to write down a further $US4.5 billion this quarter.

Bank of America’s profit dropped 32% after $US2 billion in trading losses and writedowns, and cut 3,000 jobs. But there’s more. Bank America is cutting 700 more jobs and the exiting wholesale banking. A 1.7% fall in durable goods orders followed a 5.3% drop in August. US Commerce Department figures however indicate that, excluding a 39% fall in defense equipment, orders actually nudged up 0.7% thanks to strong orders from exporters taking advantage of the sliding US dollar.

According to the Commerce Department, sales of new homes rose 4.8% last month after economists had predicted a 2.5% fall. Good news? Not really because August’s previously announced estimate was cut to an 11-year low and new-home sales remain 23% lower than a year ago. That saw one US forecaster lift its calculation of third-quarter growth to 3.3% from 3.1% and Morgan Stanley boosted its estimate to 3.5% from 3.1%.

No need for a rate cut from that reaction at next week’s Fed meeting. But the monster is lurking.

Peter Fray

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