Markets around the world were thrown into chaos when US politicians voted down a $US700 billion ($840 billion) proposal to rescue US banks and shore up the world`s largest economy.
Westpac senior economist Andrew Hanlan said while the failure of the proposal had been "a significant setback" , Congress was likely to pass a rescue plan in some form, because our economic future depends on it.
"Certainly we need to see that to avoid a very sharp deterioration in economic conditions," he told news.com.au.
Are our jobs safe?
Mr Hanlan said jobs growth was half of what it was a year ago, and the slowing Australian economy will push the unemployment rate higher.
"The big surprise has been that unemployment hasn`t really moved noticeably higher, but we think that`s unlikely to continue," he said.
He said jobs growth would slow "to around 1 per cent or so," from around 3 per cent where it was a year ago.
"That would mean unemployment could rise from its very low levels currently to maybe up to around 5 per cent," he said.
"The Aussie dollar is providing a cushion to the fact that commodity prices have been weakening, so we haven`t really seen as large a fall in petrol prices here as we`ve seen in the fall in global crude," he said.
Mr Hanlan expected oil to rebound if the bill is passed.
Not so super
SuperRatings` managing director Jeff Bresnahan said today`s slump has pushed the average Australian`s super losses to around "11 or 12 per cent" for the past 12 months.
"Having said that, what we`ve seen is a significant increase in earnings between 2003 and 2007, and we`re simply handing back a part of that increase through this market cycle," he said.
"The average Australian is still up around 40 per cent in the last five years on their superannuation balance," he said.
Mr Bresnahan said because around 55-60 per cent of Australians` super was generally sitting in the share market, there was going to be volatility from year to year.
Although everyone has an option to change their exposure to the share market within their super fund, "if people are taking a long-term strategy, moving to cash right now is going to crystallise the losses".
"If people move to cash, then how are they going to know when to move back into the market?"
He said there were "very few people" who would need to jump straight to cash right now - most affected are those in or around retirement.
Riding out the share market pain
Independent financial planner Bill Raffle of Bennelong Private Wealth said Investors with a long term strategy and plan won’t sell out when the market falls.
"The knee-jerk reaction when things go down is to move them into cash and when markets move up we can move them into equities,” he said.
“But that assumes you can time the market, and in my view it’s not possible to accurately time the market.”
"If you move into cash now, you might well miss a part of the recovery. That’s not to say things will get better or worse, I don’t know, I don’t have a crystal ball."
Selling now means you may crystallise losses, meaning you lose all potential to recover part of the loss, he said.
He said market volatility is the price people pay for earning returns higher than just saving their cash.
"You can’t have one without the other. We’re now experiencing the negative part of the cycle.”
"The essential thing is that if you ride with your emotions you will typically end up selling low and buying high."
“If you’ve got a long term approach I don’t think that necessarily changes whether you have a bull or bear market.”
Deputy chief executive of the Financial Planning Association, Deen Sanders, said investors are feeling uncertain but shouldn`t panic.
“People are uncertain about the impact the US and global situation will have on them," Mr Sanders.
"Consumers have already felt the early impacts in their superannuation returns and mortgages but these latest twists reinforce that they should be seeking advice rather than hitting the panic button."
“Everyone is nervous and a lot of people are confused by what it all means and our members are telling us their clients are calling but importantly they’re not panicking about the recent events," said Mr Saunders.
“It’s obvious that things are going to get more uncertain for consumers over the next few months and the clear message for everyone is that in these volatile and uncertain times people need good advice.”
Mr Sanders said markets are "volatile and the global climate is in new terriority" but Australia`s regulations and market compare favourably to international events.
Home loans
Federal Treasurer Wayne Swan warned today that the failure of the bailout bid was likely to put pressure on borrowing costs for banks. If banks` borrowing costs remain high they are unlikely to want to cut home loan rates even if the Reserve Bank lowers official interest rates when it meets next Tuesday.
The RBA cut rates last month - the first time official interest rates were lowered in seven years. The central bank is tipped to cut rates again next week, but so far banks have refused to say whether those cuts will flow through to home loans.
But all hope is not lost. Warren O’Rourke of Mortgage Choice said there was some speculation that the RBA might push through an aggressive 50 percentage point cut, in an effort to encourage banks to pass on some relief to borrowers.
Mr O`Rourke said if this happened, then banks might opt to pass on some of the official cut.
How safe are our banks?
Australian banks are much more heavily regulated than their US counterparts, and have also not indulged in such free-and-easy lending. This means they are in a much stronger position to weather a financial crisis.
“The mortgage scene in Australia is vastly different than what has existed in the US,”said Mortgage Choice’s Mr O’Rourke.
“From that point of view there’s no real reason for people to panic."
Prime Minister Kevin Rudd has also been talking up the stability of Australia’s banking systems.
"The Government has spoken this morning with the Australian regulators, the Australian Prudential Regulatory Authority, we are advised that the developments overnight in the United States do not affect the fundamental stability of the Australian banking system,” Mr Rudd said.
However, in the unlikely event an Australian bank does go under, there’s no guarantee you’ll get your money out. The Government has proposed legislation to guarantee bank deposits of up to $20,000.
`Pass rescue package or else`
Westpac`s Mr Hanlan said a bailout package was likely to be passed to ensure banks continued to operate.
"If the package fails to pass, then we`ll see this continuing lack of confidence pervading the markets, we`ll see a lack of willingness from banks to lend to each other," Mr Hanlan said.
"(It) will make it very difficult for the credit creation process which we normally take for just a give-in, that banks lend to each other, banks lend to households, banks lend to businesses, and that`s how the economy functions," he said.
"If that all seizes up, you`ll see an ongoing downward spiral in activity.
"It`s not going to come to that ... that sort of reality means that the package will be passed."
Bloodbath after bailout blocked AUSTRALIA`S market has been sucked into the vortex of global financial crisis after the Bush bailout plan for Wall St failed.
What I want to know is - if a bank goes under and you only have debt with them what happens? If you could have deposits with them and lose it all do you no longer owe them anything if all you have is debt?
Posted by: Toni of Brissy 8:58pm today
Oh well ! what did you expect , "The love of money is the root of most evil" . All those responsible for this should be held to account .
Posted by: JEFF RICHARDSON of ADALAIDE 8:57pm today
gee i wonder who america is going to blame.. how about the middle east??there is no one to blame but the us government, ever since bush came into power the american economy and its people have suffered.
Posted by: one to blame of adelaide 8:56pm today
Shane, Shane, Shane, (comment 105), your mortgage is an asset, your bank will sell that asset to another bank whom will probably put the interest rate up on it because of the lack of liquidity in the market.You better hope for higher OCR buddy to attract more cash into our financial system, thats what you had better be hoping for.
Posted by: medicineman 8:49pm today
Bob of Brisbane, i totally agree with you, why should they bail out the CEO of some bank or finance company by giving out $700 billion, that money should be used for better purposes. But this is up to the Americans, they feeling it alot worse than us.
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