Moral hazard can entice individuals insulated from risk to behave differently than they would if fully exposed to the risk.  Examples include tenured professors becoming indifferent lecturers, insured drivers being less vigilant about car theft, protected managers making poor decisions and unemployed workers being less inclined to look for a job while on government benefits. 

The subprime crisis is another example of moral hazard.  Many US financial institutions recklessly lent money to people with poor credit histories to buy overpriced houses.  They deliberately lowered their credit assessment standards knowing they could package dodgy loans into mortgaged backed securities and pass off the risk of default to unsuspecting investors.

Moral hazard is commonly associated with any type of safety net including deposit insurance.  At the height of the GFC, governments around the world guaranteed the deposits of citizens in banks and other financial institutions.  Most commentators believe this unprecedented intervention was necessary to protect the global financial system from meltdown (see earlier blog). 

As the crisis passes, the OECD is urging Australia to fulfil its promise to remove its deposit guarantee which, it argues, is a moral hazard.  Notwithstanding this, the OECD acknowledges that both depositors and banks now believe the Federal Government will always come to their rescue in times of trouble.

The belief that a bank is too big to fail represents a classic moral hazard.  If the public and the management of a financial institution believe it will receive a financial bailout to keep it going, management - in theory - may take more risks in pursuit of profits.  Yet, there’s no evidence that the deposit guarantee has actually encouraged Australia’s Approved Deposit-taking Institutions (ie, banks, building societies and credit unions) to behave recklessly.

We have a strong prudential regulatory system governing Approved Deposit-taking Institutions (ADIs) in Australia.  While there’s no doubt that moral hazard in financial services is real, our robust regulation and good practices prove that this risk can be mitigated. 

The GFC shows that governments will act to save banks which are too big to fail.  This gives our Big Four banks an implicit guarantee and an unfair advantage over smaller credit unions.  That’s why I believe the current retail deposit guarantee scheme (known as the Financial Claims Scheme) should be maintained after its proposed review date in October 2011. 

As someone who is a staunch believer in free markets and survival of the fittest, I can fully understand why the RBA opposes the extension of the deposit guarantee.  I too accept that governments should not be the first port of call in times of crisis.  However, some form of depositor safety net for all ADIs is essential to provide a more level playing field for Australian credit unions and building societies.

The deposit guarantee scheme provides protection for ordinary depositors, fosters competition in banking and doesn’t cost the taxpayer a cent.  In short, it’s a necessary evil if we are serious about the mutual sector being a viable alternative to the Big Four banks.

Regards
Paul J. Thomas

Podcast is available here   

Tourism is one of Ireland's most important industries and the Emerald Isle was the first stop on our European holiday.  Ireland has been severely hit by the GFC and the former “Celtic Tiger” is in recession.  As the first country in the world to guarantee bank deposits as a result of the GFC, Ireland is still trying to work through the aftershocks of its sovereign debt mess. 

I’m not sure whether the locals Bev and I met in Dublin suppress their economic sorrows with a pint of Guinness, but they sure are a friendly lot.  The Gaelic language, Celtic music and Irish riverdance certainly lifted our spirits and made for a pleasant stay in what was originally a Viking settlement.

Next stop on our vacation was Amsterdam, headquarters of the Netherlands-based Rabobank.  Rabobank is a co-operative bank which is owned by a federation of local credit unions.  The bank is rooted in the ideas of Friedrich Wilhelm Raiffeisen, the father of the global credit union movement.

In the Netherlands, the bank is known as the Coöperatieve Centrale Raiffeisen-Boerenleenbank B.A.  Rabobank has clung steadfastly to its status as a private co-operative and, impressively, maintained its Triple-A rating throughout the GFC.  It’s a very safe bank, just like the Dutch capital, which is a safe place to house the world’s largest collection of Vincent van Gogh’s paintings. 

Leaving the canals and windmills of Amsterdam, we then headed for the ancient cobblestone streets of Copenhagen.  The Danish royal capital is delightful and, contrary to what Shakespeare wrote, there is nothing rotten in the state of Denmark.  Indeed, Denmark ranks as the world’s least corrupt country and is also the birthplace of one of the world's most popular toys, Lego.

Copenhagen’s most famous son, Hans Christian Andersen, would be proud of how cosmopolitan his city has become.  However, he probably couldn’t afford to live there today.  Copenhagen is an expensive place and I suspect the local McDonalds is a popular eatery for tourists on a budget. 

Just across the bay from Copenhagen is Sweden but we didn’t stop at the capital, Stockholm.  Rather, we stayed in a city called Gothenburg.  Bev’s cousin, Anne, lives there with her Swedish husband, Lars.  I told Lars I would mention him in this blog in return for the complimentary accommodation they gave us.

Anne and Lars were delightful hosts (now we’re even, Lars, as I’ve made you “globally” famous!) and I’m looking forward to my next “free” holiday in Sweden.  But please don’t be upset, Lars, ‘cause I’ve already exceeded my blog word count limit, so I can’t tell my readers about your wonderful home town. 

From Gothenburg we flew to Munich, the capital of the state of Bavaria and home of the Bavarian Motor Works (BMW).  Each morning, we had a hearty Bavarian breakfast before setting off to see the sites.  We were too early for Oktoberfest, which this year celebrates its 200th anniversary, but we did get to see the Oktoberfest 1810-2010 exhibition. 

Well, that’s it folks.  Hope my postcard has not made you too jealous.  Now please stop frothing at the mouth and go back to work! 

Regards
Paul J. Thomas

Podcast is available here   

Peter Gilmore

p.s. By the way, I can’t wait for the time machines!

Podcast is available here   

I find Rum Doodle provides hilarious yet sobering irony during the annual climbing season on Everest. This year there was one climbing day when a queue of ninety-two climbers waited patiently in line for their individual moments of triumph on Everest’s summit. Reports then followed that a thirteen-year-old American boy had become the youngest ever Everest summiteer. Cynics have since concluded that Everest can’t be all that hard if it can be climbed by someone so young. With Sherpa guides increasingly having to pull and push paying clients to the summit, the exploits on Everest seem ever more absurdly Rum Doodle-like with each passing year. As a consequence Everest is waning as the symbolic pinnacle of mankind’s aspirations.

Not to be outdone, teenage girls have been busy solo-sailing around the world. To me this looks much more impressive than climbing Everest, but I can’t help but wonder how young is too young and what tragedies might result from this rush to be the youngest ever? Will we now see these youngsters displace mankind’s Everest summiteers on the lucrative corporate motivational speaking circuit, seeking to inspire us to enthusiastically tackle our personal “summits” and “capsizes”?

I’d suggest such hype is not really relevant to us mere mortals fully occupied by life’s more mundane challenges: balancing work and family, traffic jams and deadlines, Tim Tams and rice crackers …

May you successfully climb your own Rum Doodle, and above all, let sanity prevail with this youngest-ever nonsense!

Regards

Peter Gilmore

Podcast is available here   

Clearly this originates from pre-Federation times and has been seen in many forms. Most people would be aware of famous examples such as the insular approach to railway gauge standards that started in the mid 1800’s and took over 100 years to effectively resolve!

Fortunately there seems to be some progress in resolving more contemporary issues by adopting a national approach - some may remember  previous ‘initiatives’ such as the suitably named BAD tax & FID applied differently by all state governments before the advent of a national GST.  The recent implementation of a National Credit Code is another example.

However, given the enormity of the task of achieving consensus amongst the various levels of government across common issues facing all Australians there does not appear to be a realistic quick fix for this problem.  Certainly there are strong opinions within the community that we are significantly over-governed and something needs to be done. But what?

Should we replace State Governments completely with area administrators applying common standards across the country? Should we eliminate Local Councils – certainly anyone who has had the joy of lodging applications for anything with a council would seriously consider this option (yes, I am speaking from current experience!).

Personal issues aside, speaking as a business manager trying to achieve the best outcome for customers (members in our case), can government at all levels continue to ignore the commercial benefits of dealing with common standards, agencies or legislation. In the business world, inefficient managers are assessed on performance and if necessary, replaced. Operating structures are constantly reviewed to reflect the changing dynamics of markets. So why do we cling to a structure within government that originates from the days when you had to change trains six times to cross the country?

Wouldn’t it be interesting during an election campaign (federal, state, local – anything would be a start) if at least one side admitted that maybe the best option would be to simply call it off and put someone else in charge? I won’t be holding my breath for that one!

Regards
Gary English

Podcast is available here   

Unfortunately, history does not necessarily support this view.  Despite famous precedents such as the Dutch Tulip Mania of the early 1600’s, the South Sea Bubble of the 1700’s or more recently the Tech Wreck of 2000, has it been proven that by simply applying some arbitrary rules to a market, irrational thoughts and actions can really be contained?  And further, the question remains as to why if everyone knows the market will eventually ‘find a way’, should the more realistic approach be to simply limit the damage that will inevitably occur.

Some may argue Australia’s relatively (compared to some) benign passage through the GFC would suggest that our tendency to learn from previous experiences is a little stronger than many of our current trade partners. Certainly there was no shortage of agencies in Australia quite willing to assume credit for ‘protecting us’ from the market meltdown. In reality it is difficult to quantify the true value these ‘protectors’ actually provided and as such, is there a danger that when the next wave hits we may place undue reliance on defences that did not really contribute much this time around?

So maybe the message is that it’s OK to expect some financial protection for your investments but don’t get complacent. If you want to enter the bubble that’s your choice – just understand the downside. In my experience, dealing with an organisation aligned to your cultural values or goals is a good option and at the end of the day the best choices are usually simple.

Regards
Gary English

Podcast is available here   

My first recommendation may upset some readers so brace yourself … never borrow to finance your holiday!  Paying interest on discretionary expenditure is “bad debt”, which is why you should save enough to pay cash for your getaway.  After the suntan has faded and your escape is a distant memory, you’ll have nothing to show but an unpaid loan.

Given the joys of long distance air travel from the antipodes, you often arrive at your northern hemisphere destination in the wee hours of the morning or very late at night when banks and money exchanges may be closed.  So, always bring a small amount of local currency for cabs, a snack or tipping the hotel porter. 

Personally, I’m not a fan of carrying lots of foreign currency so I have bought a small amount of Euros to take with me.  No doubt, I’ll need to top-up our cash holdings while away and I’ll try to avoid doing this at hotels or airport exchanges due to the high transaction charges. 

But don’t get too stressed at currency exchange rates as they vary from day-to-day and place-to-place.  ATMs are a convenient way to obtain local currency at a reasonable exchange rate.  Keep in mind that your withdrawal may be subject to a fee, so check with your financial institution before leaving home. 

My personal preference is to pay for goods and services using my Visa debit card and I take two cards with me (linked to different accounts with different institutions) in case one is lost or stolen.  Bev does the same with her Mastercard and we both keep a copy of the respective card issuer’s 24 hour global customer assist number.  Plus, I also store the emergency contact numbers in my phone. 

Visa and Mastercard generally offer the most favourable exchange rates as these global giants have access to better rates than individuals.  But take care as your Australian card issuing institution might hit you with a currency conversion fee on the value of each transaction you make while overseas (mine doesn’t, but I’d expect no less from Gateway!).

While I’m away, Gateway will be in the capable hands of my Chief Operating Officer, Gary English, who will be the acting CEO.  Gary will be ably assisted by my Chief Financial Officer, Peter Gilmore.  Gary and Peter will share the blog writing workload in my absence.  The blogs for the 2nd and 9th of August will be posted by Gary while Peter will post on the 16th and 23rd August.

I’ll be back on Monday, 30 August.  Bon voyage. 

Regards
Paul J. Thomas

Podcast is available here   

The respondent invariably shares a clever one-liner which sums up some words of wisdom he/she has received from another.  Readers are encouraged to learn from these nuggets of wisdom.  Some of the more pithy advice proffered by these luminaries include:

• Think big, start small;
• Hire slowly, fire quickly;
• Ethics first, profits second; and
• Talk’s cheap, results matter.

None of us needs to be told that “there’s no such thing as a free lunch” or that we should avoid being “penny wise and pound foolish”.  But true sage advice never goes astray.  My father repeatedly told me to “always pay cash, never credit” and to “always do the right thing”.

The adamant instruction I instilled in my children is “never lower your standards”.  My personal mantra is “never stop learning”.  My financial advice for anyone who cares to listen is to “always save a little” and “beware of paying interest on things that lose value”. 

When it comes to money matters, I also think it’s useful to understand the difference between wants and needs.  It’s understandable that we want a roof over our heads but do we Australians really need to build the biggest homes in the world? 

Perhaps we should “put our money where our mouth is” and build smaller, more environmentally friendly homes.  While “money makes the world go round” I’m a believer in the get-rich-slow philosophy.  If you want to feel rich, simply count the things you have that money can't buy.

To varying degrees, I suspect most of us fall into the trap of “not seeing the forest for the trees”.  That’s why I’m a fan of the KISS formula - keep it simple stupid!  Finally, allow me to reveal my most prized wealth-accumulation secret - “there’s no secret formula for making money”.  How’s that for priceless wisdom!

Regards
Paul J. Thomas

Podcast is available here   

Most people don't spend a lot of time thinking about how they make decisions but there is a science to making optimal choices and judgments.  It’s okay to base frivolous decisions on feelings and preferences (emotion) but important decisions should be informed by data and facts (logic).

The decisions we make about money are important and economics (rational choice theory) is anchored to the notion that individuals act rationally and consider all available information in the decision making process.  Yet, in reality, many of us behave irrationally as investors. 

Investor biases can distort our thinking and cause us to make bad judgments.  The field of behavioural finance has evolved to explain why people make financial decisions which are contrary to their own interests.  Here’s a sample of the self-destructive cognitive errors made by investors. 

Confirmation Bias - This is a type of selective thinking where an investor seeks information/opinions which align with his/her views about an investment and ignores anything which contradicts this belief.

Hindsight Bias - This causes investors to claim that a past event (eg, sub-prime crisis) was totally predictable, thereby implying their ability to time markets to always buy low and sell high resulting in an inflated view of their predictive skills leading to overconfidence.

Overconfidence Bias - Most investors have an overly optimistic assessment of their knowledge, particularly in bullish markets, believing that good market returns are directly attributable to their own personal skills while blaming external factors when returns decline.

Herding - Many investors simply follow the crowd and are led astray (as in the dot-com bubble) as they mould their thinking to the prevailing opinion and make the same investment choices as others on the basis that if it’s good for others it must be good for them (for more examples, click here).

It can be seen that people are not hard-wired to be good investors as their emotions can overtake their ability to reason rationally.  So the message is clear:  When investing, do not underestimate the impact of psychology.  Your personality does affect your investment decisions.  So tread carefully when investing and beware of human behavioural flaws. 

Regards
Paul J. Thomas

Podcast is available here   

I have long recognized the contagious power of laughter and have never accepted that being in “corporate mode” means you have to wear a serious face.  On the contrary, I actually encourage people to laugh, chuckle and joke.  Consistent with this, one of our corporate values at Gateway is to “have fun”.

While I’m not Gateway’s official court jester, I do my best each day to inject some infectious humour into the office.  My PA, Marisa, wears the brunt of my corny jokes and antics.  I play the comic as I know from personal experience that employees are much happier, less stressed and more productive in workplaces where humour is encouraged.

“Laughter above all is a social thing,” says Dr Robert R. Provine, a behavioural neuroscientist at the University of Maryland and author of Laughter: A Scientific Investigation.  Laughter is about relationships which is why “the requirement for laughter is another person,’’ writes Provine. 

Provine spent a decade studying laughter and is considered the world’s leading scientific expert on the science of “Ha-Ha-Ha”.  He views laughter as a “vocal signal” which “almost disappears” when there is no audience.  By studying “laugh episodes”, Provine discovered that people who are by themselves are 30 times less likely to laugh than if they were in a social situation.

I didn’t need to read Provine’s book to know that laughter is one of the best ways to warm up a relationship.  My wife tells everyone she married me because I made (and still make!) her laugh.  Laughter creates a positive emotional climate at home and in the workplace and there should be more of it. 

Regrettably, many bosses believe it’s unbecoming of a leader to be funny.  Now that’s a bad joke!  As Provine notes: “John F. Kennedy was unusual among U.S. presidents in having both a presence of command and an excellent sense of humour.”  Good one, Mr President! 

Stern-faced and tough-minded leaders don’t necessarily get the best out of people.  In my opinion, work does not need to be serious business.  Good humour and high productivity are not mutually exclusive.  Employers should see the lighter side of things and strive to make their organisation a great place to work. 

Creating a fun work environment improves staff satisfaction.  And happy employees provide better customer service - that’s certainly been our experience at Gateway.  So, have a nice day.  And don’t worry, be happy.

Regards
Paul J. Thomas

Podcast is available here   

Before getting too consumed with the processes that precede the publishing of our full year results, it’s appropriate to look back on the financial year that was. You don’t need me to tell you that the past 12 months have been anything but business-as-usual. Fiscal ‘10 started under the shadow of the GFC and ended with Australia being hailed as the miracle economy.

While Australia appears to be out of the woods, many other countries are still in the eye of a storm. An uncertain future faces much of Europe with Portugal, Ireland, Greece and Spain (the so called “PIGS”) struggling to revive their economies in the face of deflation and recession. The near term prospects for the world’s biggest economy, America, are encouraging albeit the recovery is slow.

It has certainly been a (financial) year of challenges but out of the chaos caused by too much debt and too much leverage came opportunities for Gateway. Just look at our list of achievements:

• In early December we announced a strategic alliance with Mark Bouris and his team at Yellow Brick Road;
• In late December we picked up two awards in the 2010 Best of the Best Money Magazine awards;
• In March, Frankfurt University identified the podcast of this blog as an example of world’s best practice in the application of web 2.0 technologies;
• In April, we received a 5 star rating from Cannex for our Everyday Savings account and a 4 star rating for our eMax saver;
• In May, Channel Nine’s A Current Affair cited our 1 year fixed rate home loan as the second best in Australia; and
• Earlier this month, we were a finalist in the Credit Union of the Year category at the 20th annual Australian Banking and Finance Awards.

Staring down the lens of fiscal 2011 we have even bigger goals and these are encapsulated in our just completed five-year strategic plan called Creating the Future. We have deliberately set the most ambitious and challenging agenda in our existence. As the dust settles on the GFC, we must and will forge a sustainable future for Gateway. Our Members expect and deserve this.

Regards

Paul J.Thomas

Podcast is available here   

As part of continuous improvement in staff engagement, some employers run brainstorming sessions to encourage blue sky thinking and uncover any elephants in the room.  Of course, there are times when issues need to be taken off-line as individuals don’t have the bandwidth to tackle things head on. However, this is not best-of-breed behaviour and undermines the employee value proposition. 

Moving forward, organisations need to clearly articulate their Vision and Mission so that everyone is in-the-loop and singing from the same song book.  This might require a paradigm shift driven by transformational leadership to ensure the team stays in front of the curve and hits the ground running.  Any quick wins through low hanging fruit will buy some time until the rubber hits the road and there is no longer a need to fly under the corporate radar.

If you think this gobbledygook makes the corporate world look silly then you’re not alone.  A recent poll of 450 people by Sydney author, James Adonis, identified a number of management phrases which get on people’s nerves.  Some of the most annoying mottos include walk the talk, think outside the square, let's give it 110 per cent, there's no “I” in team, together everyone achieves more, what gets measured gets done and work smarter, not harder.

In my experience, business words are like fashion – they come and go.  During the 1990s it was popular to talk about downsizing and rightsizing.  Today, everyone waxes lyrically about toxic assets and institutions being too big to fail.

While I accept that effective communicators don’t speak in pretentious imagery, every manager drops one of these gems occasionally.  I use the phrases “there’s no silver bullet” and “customer centric” so does that mean I’m also guilty of meaningless gibberish?

The call to make the workplace a jargon-free zone is understandable, but some jargon serves a purpose.  Defenders of jargon say it acts as necessary professional shorthand as it conveys complicated ideas succinctly.  As far as I can tell, every group on this earth has jargon.

So, that’s my “download” for this week.  Should you wish to “push back” and “raise a red flag” if my attitude to management catch phrases doesn’t “dovetail” with yours, feel free to leave a comment on my blog. 

Regards
Paul J. Thomas

Podcast is available here   

One of the latest offerings to hit the shelves is a scathing critique of Wall Street by financial journalist, Michael Lewis.  In The Big Short: Inside The Doomsday Machine Lewis puts a very human face on the sub-prime fiasco and exposes the financial shenanigans, stupidity and malfeasance which brought the free market to the precipice. 

Lewis’ analysis of the mortgage meltdown is done through the eyes of three hedge fund managers who picked the looming crisis in financial markets years before others.  Michael Burry (Scion Capital), Steve Eisman (FrontPoint Partners) and Charlie Ledley (Cornwall Capital) all saw the real estate market for the black hole it would become and made a killing by “shorting” mortgage-backed securities.  (As I explained in a previous blog, going “short” means betting that stocks or any other financial instrument will fall.)

All three were connected to another interesting character, Greg Lippmann, a bond salesman with Deutsche Bank.  Lippmann was one of the few bankers to realise that mortgage-backed collateralized debt obligations (CDOs) were garbage.  As the true life drama unfolds, our savvy cast of Wall Street characters refuse to be fooled by soaring house prices and bet money on the boom going bust using credit default swaps (CDSs) – the so called “big short”.

Short-sellers are usually cast as villains but in Lewis’ book, which reads like a novel, they are painted as financial swashbucklers who set out to prove that house prices don’t always go north.  In the process, Wall Street destroyed Main Street, sparking the worst financial crisis since the 1930s.  If there’s one group to blame, Lewis says, it’s the “people who designed synthetic CDOs at Goldman Sachs. 

In hindsight, packaging loans - made to credit unworthy borrowers - into bonds for sale to investors was a disaster waiting to happen.  So why was it allowed to occur?  Well, as Lewis describes it, Wall Street firms were able to hide the risk by complicating it and getting the rating agencies to give triple-A ratings to bonds that were far lower in quality. 

Now I’m conscious that the workings of bond traders are a mystery to most people.  The Times newspaper has prepared a helpful review of Lewis’ book which explains how Wall Street turned crappy sub-prime loans into exotic and toxic financial products.  If, after reading this review, you are still confused, you must, must, must READ THIS satirical explanation of how traders can manipulate the derivatives market.  Then you will understand what happened!

Regards
Paul J. Thomas

Podcast is available here   

We need to “shut down, switch off and reconnect” with real people according to John Freeman, author of Shrinking the world: The 4000-year story of how email came to rule our lives.  He proposes we try and separate ourselves from the inbox which for many has become an “electronic fidget”. 

The compulsion to check our inboxes is akin to poker machine addiction.  “Email is addictive in the same way that slot machines are addictive,” says Freeman.  The upshot, he warns, is that “we spend less time dealing face-to-face with other human beings and more time before a machine playing e-mail ping-pong” (italics mine). 

Citing a survey conducted in England, Freeman reveals that “77 percent of office workers and company owners agree that email downtime causes major stress at work”.  Some psychologists are pushing to have “Internet Addiction” classified as a clinical disorder. 

According to Freeman, 65 per cent of North Americans spend more time with their computer than their spouse.  “The computer and email were sold to us as tools of liberation, but they have actually inhibited our ability to conduct our lives mindfully,” he laments. 

He goes on to say that cafés used to be filled with people talking to one another or reading books or newspapers.  Nowadays, you will find people sitting alone before the glowing screen of their laptop, typing e-mails, working on documents and chatting with friends online. 

Freeman sees electronic messages as “completely devoid of sensuality,” noting that we misunderstand the tone of e-mails 50 per cent of the time.  This is not a surprise, says Freeman, as “there is no face on the other end to … indicate that what we are in the process of saying is rude, not comprehended or cruel”.

The growing absence of face-to-face communication has given rise to cyber crime.  Freeman identifies phishing, spam, cyber-bullying and ID theft as examples of miscreant activities.  He also identifies a new form of narcissism, egosurfing, in which “one searches the Internet for information about oneself”. 

Like Freeman, I believe that between the carrier pigeon and the inbox, communication lost its personality.  While I’m not suggesting we go back to smoke signals, there’s still a place for phone and face-to-face communication.  The tone and inflection of your voice and the smile on your face means it’s less likely the receiver will misinterpret your message.  Try it! 

Regards
Paul J. Thomas

Podcast is available here   

My savings goal 
(by Sue Wood)

What could be more special than a Plan for the Future!  (Retirement Plan conjures up images of Nanna and Pop, knee rugs and incontinence pads.)  I’m definitely a ‘glass-half-full’ girl but our ‘financial security glass’ is unfortunately very small!

Eventually, we hope to finish paid employment, take on volunteering, learn new skills and travel to places we postponed visiting “until the kids left home”.  Who wants a bleak existence on “The Pension”?  We want to take control of our future.  We have A PLAN!

Surviving life’s dramas have definitely left us stronger, wiser but much, much poorer.  The assets have been severely depleted and our combined income is under the average wage.  My employment in Aged Care is rewarding, emotionally and spiritually, but… face it!  The money stinks. I love my job but, as I was told as a teenager, you can’t live on love!

Educating ourselves about money management and becoming financially aware was essential.  (Ah, the motivating blogs of Paul Thomas!)  If only we had known before what we now know…….

Our first strategy is to take full advantage of the Government Co-Contribution scheme.  Annually we deposit $1,000 to my superannuation and the government very generously rewards me for my pitiful earnings by matching the amount.  Money for nothing is so sweet!

Next, we have become very good savers since the departure of our combined brood of seven offspring.  Both of us have always budgeted.  I can proudly boast that our budgeting skills have improved dramatically.  Thrift is now our middle name.  Practice does make perfect!

I’m a lifetime fan of Oprah Winfrey since she enlightened me with the concept of “pay yourself first”. It works!  Each week, my eMax “Nest Egg” is replenished first, followed by what remains to bills etcetera.  For the first time in years, I am building savings!  Hallelujah!

Lastly, reliable financial advice is essential.  We’ll need help negotiating the minefield of old age; not just surviving it, but comfortably, purposefully, actively living it. 

GCU has a philosophy of “People Helping People”. Our philosophy will be “Help Ourselves!”

I wish you all the best in reaching your savings goal!

Sue

The “flapping wing” can be just one driver whose careless actions cause a traffic jam for thousands of other motorists.  It can be a mutating virus in African monkeys which creates a thunderstorm for humanity in the form of AIDS.  Or it can be a decline in the number of pollinating honey bees resulting in a multi-billion dollar impact on the fruit and vegetable industries.

Nature has always been global and now the globalisation of trade and finance means the butterfly effect is everywhere at work.  In an interdependent world, a drought in Australia can cause a shortage of rice in Haiti, a financial debacle in Greece can threaten Swiss banks and toxic US sub-prime mortgages can unleash a global financial crisis. 

Small mistakes can also cause big problems in organizations.  One bad customer experience can result in a consumer avoiding your product for life.  One disgruntled team member can poison an entire culture.  In business, every action affects another as everything is connected. 

The corollary of the butterfly effect is that you can achieve big results through small actions.  Individual households recycling waste help create a better world.  A random act of kindness has a ripple effect on those around you.  One employee can spark a conversation that fuels a thought, which changes how an organization is run. 

The butterfly effect found mass appeal with the publication in 1988 of James Gleick's bestseller, Chaos: Making a New Science.  I have a copy at home but you can buy a 20th anniversary edition at most good bookstores. 

We live in a world which is focussed on big events.  Yet small, wing-flapping events in our personal and professional lives can create a true hurricane-sized change.  Big might be beautiful but small is mighty.  It’s the power of one and we can all make a difference. 

Regards
Paul J. Thomas

Podcast is available here   

Organizations like Coca-Cola, Mercedes-Benz, McDonalds, Nokia and Gillette spend literally millions of dollars annually on positioning and promoting their brand.  The discipline of brand management was started at Procter & Gamble and is now embraced by corporations around the world.

It’s said that, like people, brands have personalities which evoke feelings.  Volvo offers feelings of safety while Mustang offers feelings of excitement.  Brand-aroused feelings also apply in financial services.  Mention the Big Four Australian banks and feelings of “big and impersonal” come to the fore while credit unions are typically viewed as “small and friendly”. 

Credit unions and building societies are jointly referred to as mutuals and they have joined forces in a new marketing campaign to promote the mutual brand.  The TV campaign began last night and will be screened in all states and territories.  The fundamental aim of the campaign is to position mutuals as viable alternatives to the banks. 

This positioning statement conveys how mutuals differ from traditional financial institutions.  All profits go back to members in the form of better rates and improved services.  While the campaign will not have a Toyota sized marketing budget, the placement of commercials is designed to give us maximum exposure for a powerful and consistent message about the benefits of credit union and building society membership. 

Many Australians are unaware of the mutual banking option.  With interest rates on the rise, banks under fire and consumers frustrated by a lack of choice, credit unions and building societies see a chance to boost their market share.  We want to become the preferred choice of consumers.

Regards
Paul J. Thomas

Podcast is available here   

As the boss of a bank which was one of the least toxic of the major banking groups, Green can legitimately take the high moral ground.  He laments the massive breakdown in trust of the financial system and commented during the GFC that “banks have chased short-term profits by introducing complex products of no real use to humanity”. 

Green is a passionate Christian and has been described as the banker with God on his side.  He is critical of the banking industry’s “inflated” bonus culture but believes capitalism is “not intrinsically evil”.  He also argues that much of what investment banks do is “socially useless”. 

In the wake of the GFC, Green has written a book, Good Value: Reflections on Money, Morality and an Uncertain World.   While one journalist described it as a “200 page sermon”, I certainly didn’t find it didactic.  In fact, I’m disappointed the Rev. Green did not pen a more fire and brimstone warning about human excesses and mammon. 

Despite the book’s title, what Green has produced is essentially a brief history and defence of globalization.  He examines how the human impulse to explore and trade has shaped our world.  The resultant interconnectedness has created what Green calls a “global bazaar”.

Green draws on the work of philosopher and Jesuit priest, Pierre Teilhard de Chardin.  Green notes that Teilhard saw globalisation as “…something far deeper than economics, commerce and politics.  It is an evolution of the human spirit”.

In his book, Green proposes a “new capitalism” that brings good business and good ethics together.  He says moral and spiritual values should take precedence over immediate profit and that we have the opportunity to remake capitalism while also helping the less fortunate.

He sings the praises of microfinance in helping the poor break the cycle of poverty.  As I pointed out in a previous blog, Lend a Helping Hand, Gateway is also a disciple of microfinance.  Something else that Gateway has in common with Green is Servant Leadership.  Green claims to be a practitioner of this leadership style and so is yours truly. 

It seems to me that Stephen Green would be a good recruit for the not-for-profit credit union sector.  We’re also high on ethics and values.  I thought about offering Green a job at Gateway - but I don’t think I can afford his multi-million dollar salary!

Regards
Paul J. Thomas

Podcast is available here   

Given what Paul has told me, I find it hard to believe you are the most intelligent life form on this planet.  As a well-travelled alien explorer, I believe your behaviour is light years from how a civilised society should act. 

You inhabit an extraordinarily beautiful planet.  Yet you have artificially divided it into 194 sovereign nations and this is the root cause of many of your world’s problems.

You act selfishly as citizens of independent nation-states instead of behaving selflessly as one united global family.  By viewing the world through national-interest glasses, you fail to clearly see and deal with global issues.

Your planet’s Great Depression is an example of this parochial thinking.  After the 1929 stock market crash, nation-states sheltered their domestic industries from international competition and this led to a collapse in global demand.

Your recent global financial crisis again showed you live in a borderless world.  No country was immune from its effects even though some threatened to escape behind protectionist trade barriers – history repeating itself! 

Just as the great oceans you navigate and the air you breathe know no national boundaries, so it is in a global economy.  The challenge humanity faces is to better manage an interdependent world.

You must evolve beyond a world order built around the sovereign state system.  Rest assured, however, that successful global governance does not require a monolithic global government.

What is needed is a change in mindset to facilitate true global co-operation and consensus.  To paraphrase your great leader, John F. Kennedy, you should ask not what the world can do for you but what you can do for the world. 

Let me conclude with a general observation.  In the cosmic scheme of things, the earth is just a baby in size and age, yet you Homo sapiens act as if you are the centre of the universe.

If the 4.5 billion years of your planet’s existence was compressed into a single year, modern humans would make an appearance on earth at three seconds to midnight on 31 December. 

You haven’t even roamed the earth for as long as the dinosaurs – you still have much to learn.  So, be nice to each other and be kind to your environment.  I have enormous faith in your ability to become a great people and to live in peace and harmony.  Best wishes from Zork.

Regards

Paul J. Thomas

Podcast is available here   

Two years on, I think I can safely say both concerns were unfounded.  I took to blogging like a duck to water and have never missed a weekly posting (even though I still lose sleep worrying about the content of next week’s blog!).  Also, my readership continues to grow and I receive lots of positive “offline” feedback about the blog. 

As part of my initial crash course in blogging I was told that blogging should come from the heart.  I was encouraged to write about my passions as “passion ignites interest”.  Well, I’m passionate about people and human behaviour and that’s been the common theme of my 100 postings.  [Remember, economics is the study of human behaviour (Homo economicus) as it applies to money.]

It’s customary on scoring a century to celebrate and that’s why we’re giving you the chance to win a $1,000 prize.  Simply click here for details of this exciting competition.  I’d also like to be rewarded for all my hard work.  So I’d really appreciate some feedback on my blog.  Feel free to use the “Make a comment” button below.

To ensure my blogging skills remain up-to-date, I recently read an article on the dos and don’ts of corporate blogging.  The article said:

Great advice I thought - as I expanded my chest with pride - until I read the sobering conclusion;  “Most likely, this person is not your CEO”.  Huh?  What?  Ouch!  Must go now and stroke my bruised corporate ego.  I may or may not be back next week!  On second thoughts, I will be back and I intend to do something outside the box.

P.S. For Blog Compeition details and how to enter click here! 

Please do not submit your entries in the comments tab below.

Regards

Paul J. Thomas

Podcast is available here   

Whereas I rapidly “hunt” down items, Bev slowly “gathers” what we need.  Thus, we follow the traditional evolutionary roles developed in the African Savannah.  Our classic Caveman/Cavewoman behaviour mirrors the Hunter-Gatherer Theory of Markets and Shopping.

Outside the supermarket “jungle”, there is a basket of goods which genuinely interests me - the items which make up the Consumer Price Index (CPI).  The CPI measures the change in the cost of a fixed basket of goods and services bought by Australian households.

In essence, the CPI tracks changes in the cost of living and provides a robust measure of price inflation for the household sector.  Given this, the CPI is a widely-quoted and well-known economic indicator and for good reason.  Trends in the CPI are a major driver of the Reserve Bank’s interest rate decisions. 

The principal objective of monetary policy is to control inflation.  Australia’s inflation target is expressed in terms of the CPI.  The RBA has adopted a 2-3 per cent inflation target and does not like to see inflation run above this comfort zone. 

But the RBA is unhappy that it only receives CPI data from the Australian Bureau of Statistics (ABS) on a quarterly basis.  It wants the CPI published monthly and notes that Australia and New Zealand are the only developed countries not to do so.

“The Bank is strongly of the view that a monthly CPI constitutes best practice, and that more frequent data on prices would assist in the assessment of inflation trends in the economy,” the RBA said in its submission to the 16th Series Review of the CPI.

There’s no doubt that a monthly rather than a quarterly CPI publication schedule will help improve Australia's monetary policy framework.  Timely information is crucial to the conduct of monetary policy and monthly data will eliminate the current backward-looking bias of monetary policy.

Speaking of looking backward, I forgot to mention that I enjoy shopping for gadgets.  So, I must go now as I’m off to my local mega hardware store which has aisles and aisles of big-boy’s toys and other “hunting tools”.  Strange how Bev hates hardware shopping - go figure? 

Regards
Paul J. Thomas

Podcast is available here   

The word ‘bankrupt’ comes from the Italian, banca rotta, meaning ‘broken bench’.  In the sixteenth century money lenders in Florence conducted their business on benches in outdoor markets where they exchanged money and bills.  When a banker failed, his bench (aka “bank”) was broken by the people as a mark of infamy and he was called a bankrupt. 

While the practice of publicly humiliating debtors no longer occurs, the propensity of people to get in over their heads has not changed.  The mantra of many consumers nowadays is: “I want it, I want it now and I’ll borrow rather than save for the things I want”.  As I have previously opined, we have become a society of credit junkies.  For many, unsustainable expenditure is the drug of choice.

Of course, there are those who would point the finger for rising personal indebtedness at over-eager banks and other lenders.  But as I explained in my posting, Household debt out of control, this is too simplistic.  Despite advice to the contrary, many people deliberately pile on debt, typically wracked up on several credit cards.  These individuals often see bankruptcy as an easy and attractive option. 

In fairness, I know that some bankruptcies are caused by serious illness, divorce, a death in the family or redundancy.  These largely uncontrollable events – “life’s accidents” – should be viewed with compassion.  Beyond that, bankruptcy should be an absolute last resort as the results are long lasting and far reaching.  It can destroy an individual’s credit rating and make it difficult for the person concerned to borrow again for many years. 

Bankruptcy laws have evolved over thousands of years and now protect debtors as well as creditors.  But I believe the pendulum has swung too far.  Debtors are using bankruptcy as a modern day “get-out-of-jail-free” card.  For my money, it’s far too easy for Australians to declare bankruptcy. 

It seems to me that both borrowers and lenders have a role to play in addressing the rising incidence of bankruptcy.  Financial institutions need to do more to improve financial literacy skills and consumers need to become better money managers and live within their means. 

Regards

Paul J. Thomas

Podcast is available here   

There’s no proof that fancy toothbrushes work any better than a conventional flat toothbrush.  Yet trying to find a toothbrush without ergonomic grips, multi-layered bristles and angled head is near impossible. 

An article in a recent weekend edition of the Australian Financial Review, The Great Toothbrush Conspiracy, caused my jaw to drop.  The exposé opened with the question - Why does your toothbrush look like a sports shoe? - and went on to quote dental experts who opined that the bells-and-whistles variety of toothbrushes have done little to advance oral hygiene. 

It seems that razor blades have also gone the way of the humble toothbrush.  I was recently “forced” to buy a three-head razor as my trusted and reliable two-head razor has been withdrawn from sale after 20 years.  I’m still waiting for my much hyped “closer, smoother, shaving experience” from my new turbo designed razor. 

Personally, I was quite happy with my old fashioned toothbrush and loyal razor, but they were phased out under a marketing strategy called planned product obsolescence.  Not to worry, I still have lots of choices (but not my preferred choice!) as manufacturers over cater to our needs.

Whether it’s toothbrushes, razor blades, sports shoes, bottled water or diet products, I think consumers are having the wool pulled over their eyes.  We have become overwhelmed by choice to the point where day-to-day decisions - such as which shampoo to use - are causing unnecessary stress. 

I believe that simplicity should be favoured over complexity and the same holds true in financial services.  As a result of the GFC, many investors had a close shave as they bought financial products they did not truly understand.  Financial engineering gave us toxic subprime loans and other hard-to-get-your-mind-around products.

The financial services sector needs to be careful it does not fall into the trap of overcomplicating the product mix.  If the GFC has taught us anything, it’s the value of keeping things simple.  Of course, those addicted to making a fast buck are always going to be tempted with the latest financial innovation. 

My advice is to be wary of fancy packaging and stick to “twin-head” loan and investment products.  You’ll be happier and it will show when you flash your pearly whites.

Regards
Paul J. Thomas

Podcast is available here   

As I explained in a previous post, governments increased the money supply through electronic means, not by increasing the amount of banknotes in circulation.  The money supply of a country consists of tangible money (physical notes and coins) and intangible money (balances in bank accounts).

Physical currency accounts for a very small percentage of the money supply and it’s getting smaller.  The motorway I drive on each day is cashless, my salary is directly credited to my account and I pay bills electronically. 

Nowadays there is simply less need for cash (fiat money) and one day banknotes may even become obsolete like the old barter system (commodity money).  Today, money largely exists in electronic format (electronic money) as records in a data base of a financial institution.

Banks and other financial institutions are electronic rivers of money which flows in and out on a tide of transactions.  They are also the creators of the majority of new money.  Today, printing money means creating credit.

When a bank makes a loan to a customer and deposits the proceeds into a bank account, new credit money is created.  Thus, money borrowed from a financial institution increases the money supply.  But this new money also has a multiplier effect.

For example, Bill borrows $1,000 from his friendly credit union.  He uses the money to buy his wife a new ring.  The jeweller takes the $1,000 and uses it to pay for major repairs to her car.  The car dealer, in turn, uses the money to help pay the wages of his mechanics and so it goes on and on. 

It can be seen that the same $1,000 gets circulated throughout the economy.  The higher the velocity of money, the stronger the economy as the same fixed unit of money flows freely throughout the system. 

So, the next time someone tells you the printing presses are working overtime churning out more currency, tell them the value of notes and coins manufactured by governments pales into insignificance compared to the money created out of thin air by financial institutions. 

Regards
Paul J. Thomas

Podcast is available here   

I’ve spent many hours in airport terminals around the world and have felt relief at surviving officious security personnel, delight at finding my baggage in a river of luggage and frustration at the never-ending customs queues.  No wonder the end-to-end passenger experience is characterised by anxiety. 

Alain de Botton’s new book, A Week at the Airport: A Heathrow Diary finds food for thought among the fears and frustrations inherent in air travel.  De Botton is a philosopher and author and in August 2009 spent a week at Britain’s largest airport as writer-in-residence. 

In contrast to most other passengers, de Botton admits he loves airports.  In fact, he longs for his plane to be delayed “…so that I might be forced to spend a bit more time at the airport”.  Perhaps that’s why one reviewer rated de Botton’s airport diary “as perky as an air stewardess”. 

What struck me after reading A Week at the Airport is the similarity between the airline industry and the banking industry.  Both industries manage systemic risk on a daily basis, both have yet to perfect the total customer experience and both are engaged in price wars.

Airlines are slashing fares to fill seats and financial institutions are discounting loans to attract borrowers.  Low-cost carriers and no-frills mortgage providers now compete head-to-head with established giants.  Consumers appear to be paying less but are they really getting value for money?  While the headline cost of a flight or a loan can appear cheap, are the add-ons a killer?

In both industries, explicit fees and charges have become the norm as airlines and banks attempt to recoup costs and mitigate the squeeze on operating margins.  The airline industry has parking fees, trolley fees, credit card booking fees, excess baggage fees, rewards redemption fees, a fuel surcharge and an obesity fee.  And that’s before you even board the plane and then have to pay for headphones and a drink! 

So the message is clear:  When booking a flight or applying for a loan, look before you leap on board.  Planning ahead will help you avoid “fee turbulence” and ensure a smoother ride. 

Regards
Paul J. Thomas

Podcast is available here   

If technology has its way, strolling through bookstore aisles may become a thing of the past. With the advent of electronic books (e-books) the days of ink-and-paper books are supposedly numbered. While our ancestors read from clay tablets, the next generation will apparently view texts and novels on a battery powered device called an e-reader.

Welcome to the age of digital information where a hand-held e-reader can literally store hundreds of books. The first e-reader on the market, the Amazon Kindle, arrived in Australia late last year. Its makers claim it will revolutionise the way we read in the same way the iPod changed the way we listen to music.

Like all technological breakthroughs, e-readers come with pros and cons. On the upside, they are lightweight and portable and can fit snugly into a small bag. School kids will be able to carry one e-reader instead of a backpack full of text books. E-readers also provide privacy - no one knows what you’re reading as there’s no tell tale book cover.

But on the other side of the coin, I can’t imagine curling up on the lounge with an e-reader. Nor will I be able to get the author to autograph my e-book. Unlike hardcover books, e-readers may break if dropped and they need power which may not always be available. Also, the look, feel and smell of a new book provide an important tactile experience which e-readers can’t replicate.

While the debate rages between e-reading evangelists and hardcover traditionalists, the jury is still out for me. I’m sure gadget lovers will readily embrace the e-reader but I’m yet to be convinced it will overtake paper books. At the end of the day, books are symbols and many of us like to display great works on shelves in our homes and offices.

Despite predictions to the contrary, DVDs have not led to the demise of movie theatres, the Internet has not wiped out shopping malls, home banking has not eliminated branches and I can’t envision e-readers replacing paper books. Many people will continue to read cover-to-cover rather than “disc-to-disc”. Personally, I’d much rather turn the page of a book than fine-tune the pixels on an e-reader.

Regards

Paul J Thomas

Podcast is available here   

As the temperature drops, it’s a great time to curl up indoors with a good book.  I did just that recently with a copy of Dr Aric Sigman’s tome, The Spoilt Generation: Why restoring authority will make our children and society happier.

One of the most resonant moments in Dr Sigman’s book comes early in his introductory remarks.  He argues we have a duty to bring up socially viable children saying “…child-rearing is not merely a question of personal style.  We have an overriding responsibility not just to rear our children to our own satisfaction, but to the satisfaction of others as well”.

I have long believed there is a relationship between how we parent and how our kids turn out and it appears the good doctor does as well.  Ask any school teacher (I have!) and they’ll tell you that, with rare exception, kids are a product of their home environment. 

The crux of Dr Sigman’s thesis is that we need to return to old fashioned parenting.  In the same vein, I’m an advocate for a return to old fashioned habits of thrift (savings).  These habits should start at an early age so that children learn the value of money and understand that it doesn’t come from the Tooth Fairy. 

You can open a savings account and encourage your children to save a percentage of their pocket money.  Or you can get your kids to put money aside in a piggy bank.  Either way, you are teaching them the importance of saving for the things they want and to shun impulse buying – the bane of our adult society!

As an incentive, you can offer to pay your kids “interest” on their money when they reach a pre-agreed savings goal.  As to the amount of pocket money, there are no hard and fast rules.  Some parents give their children pocket money in return for doing household chores while other kids simply receive a weekly allowance.

Of course, the most important lesson we can teach our kids is that money is not everything - it still can’t buy happiness.  Perhaps that’s why the world is full of people who are materially rich but spiritually poor.

Regards
Paul J. Thomas

Podcast is available here   

Banks and other authorised deposit-taking institutions (ADIs) convert household savings into loans for other households wishing to finance the purchase of a home.  Demand for home finance, however, exceeds the supply of deposits as Australians borrow more than they save. 

To fund this imbalance, our banks and other lenders borrow money offshore to lend for domestic purposes.  This creates a reliance on global capital markets and a resultant exposure to credit market price changes as occurred during the GFC. 

Our household saving - the difference between household disposable income and household consumption - has declined over the last three decades.  In fiscal 2003 it became negative and remains so.  Due to easy access to consumer credit (eg, credit cards, home equity loans) households have seen less reason to save for emergencies.

Also, Australia is currently in her 19th year of uninterrupted economic expansion and households tend to save less in the good times and put more away when the outlook is less promising.  Which is why the saving ratio is viewed as a barometer of the overall state of the economy.

But higher saving ratios are not of unlimited benefit as they come at the cost of lower consumption ratios.  Too much saving translates directly into too little consumer demand.  This is what occurred during the GFC when many households stopped spending, creating a paradox of thrift. 

To an economist, saving is the decision to defer consumption and to store this deferred consumption in some form of asset.  Savings are one of the most heavily taxed forms of assets under the current tax system and this discourages savings.  Maybe the yet-to-be-released Henry Review will address this?

One of the concerns behind the introduction of compulsory superannuation in 1986 was the decline of the household saving rate in Australia.  Superannuation has forced us to save for retirement but has not changed the “voluntary” saving ratio. 

The end result is that we are generating insufficient savings to fund the investment needed to build our great nation.  We have become dependent on foreign savings making us a debtor nation.  A large part of our current account deficit comprises the interest on the money we borrow from abroad. 

Australian households need to move from conspicuous consumption to inconspicuous saving.  You can do your bit by tucking away some money each pay day for a rainy day.  Next week I’ll give you some tips on helping your kids develop good savings habits.

Regards
Paul J. Thomas

Podcast is available here   

Member owned financial co-operatives have improved the lives of millions of people and have the potential to serve millions more.  Australian credit unions are bringing credit union solutions to communities in need and Gateway is lending a hand.

We want to play our part in the global fight to end poverty and are doing this in partnership with the Credit Union Foundation of Australia (CUFA).  CUFA is the development agency for the Australian credit union movement and supports people in the Asia Pacific region establish credit unions.

One of CUFA’s aid programs is the restructuring of the microfinance system in Cambodia to give the working class access to high-quality financial services through local credit unions.  The term microfinance encompasses the delivery of financial services to poor families and entrepreneurs and includes small loans, usually less than $200, in the form of microcredit. 

Microfinance gives poor people access to credit to build their assets/incomes or establish a small, self-sustaining business.  For example, a peasant farmer may borrow $50 to buy chickens so he can sell eggs.  As the chickens multiply, he will have more eggs to sell.  Soon he can sell the chicks and each expansion pulls him further from the devastation of poverty. 

Another example is of a woman in a remote village in Uganda who borrowed $25 which she used to buy a cow.  The proceeds from the milk it produced enabled her to pay school fees for each of her children.

The Cambodian financial system was wiped out during the era of the Killing Fields.  Recent bank failures again ruined people’s trust in the financial sector and has limited the amount they are willing to deposit.  To counter this, local credit unions - supported by CUFA - are improving their image and strengthening their operations leading to increased savings levels by members. 

Nobel Peace Laureate, Muhammad Yunus, is the father of micro financing.  If you want to learn more about the wonders of microfinance, pick up a copy of Yunus’ book, Banker to the Poor - it’s well worth a read.

Regards
Paul J. Thomas

Podcast is available here   

Now before you beat me up for having the audacity to raise these questions, let’s look at this dispassionately.  I truly believe a civilised society should support those who are less fortunate.  We have a fundamental responsibility to provide a safety net for those who need assistance.  The government has a moral obligation to help the neediest members of society.

However, an increasing number of Australians rely on government assistance and some believe that passive welfare is cruel.  Over 42% of families receive more from the federal Government than they pay in income tax.  It’s also argued that welfare saps the will to save. 

Those who do not receive welfare are often criticised for being well off.  Yet the “well off” pay the taxes that are re-directed by the government to pay the benefits to those in need.  This paradox is satirically explained in a modernized version of Aesop’s classic tale of The Ant and The Grasshopper.

Personally, I have always subscribed to the Chinese proverb:  Give a man a fish and he will eat for a day; teach a man to fish and he will eat for a lifetime.  That’s why Gateway is supporting the self help efforts of the peasant farmers in Cambodia to break the cycle of poverty through micro-financing.  The Cambodians do not want to be dependent on foreign aid but seek self-sufficiency. 

Credit unions around the world help people get ahead and maintain their independence by encouraging old fashion habits of thrift.  Without savings people can easily fall into the trap of using payday lenders and this can trigger a debt spiral.  I believe that self-help is better than institutional help.  I’ll have more to say about micro-financing next week. 

Regards
Paul J. Thomas

Podcast is available here   

The water line in the glass does not change when the ice melts as it’s already displacing its own weight and the same holds true for floating polar ice packs.  As the floating ice melts it becomes its weight of water, which is exactly the same volume as it displaces.  Therefore, it’s impossible for melting Arctic ice packs to raise the sea level.

This rational explanation is not evident in some of the claims made about the consequences of anthropogenic global warming.  It is this inaccuracy that prompted Professor Bjørn Lomborg to write his bestselling book: Cool It: The Skeptical Environmentalists Guide To Global Warming. 

Lest there be any confusion, Lomborg categorically states that global warming is real and that we humans have undoubtedly contributed to rising temperatures.  This, he says, is “beyond debate”.  He challenges, however, whether the elaborate and expensive actions now being considered to stop global warming will be effective.

Lomborg argues that “extravagant CO2 cutting programs” will have little impact on the world’s temperature for hundreds of years.  He views Al Gore and many prominent scientists as alarmists.  Equally, Lomborg is viewed by many as a controversial figure whose claims are to be challenged.  The details of attack and counter-attack are complex and I will continue to listen to both sides of the argument.

To state the blindingly obvious, I’m not a scientist and therefore it’s impossible for me to know who is right and who is wrong.  The recent controversy surrounding the credibility of the UN’s Intergovernmental Panel on Climate Change (IPCC) adds to people’s uncertainty.  This means that as a private citizen and the CEO of Gateway I will keep an open mind and not take extreme positions.

Of course, the debate surrounding climate change does have beneficial effects.  Gore’s campaign has put global warming on the international agenda and is causing many individuals and organisations to change their ways. 

At the end of the day I respect everyone’s right to have a view on this and other important issues.  I’m with Bjørn Lomborg who believes we should do something about climate change and a lot more about other problems, such as hunger, which he regards as more important and urgent. 

Regards
Paul J. Thomas

Podcast is available here   

Every year mother earth welcomes over 80 million more babies and there is fierce debate about the pros and cons of this level of growth.  As a general rule, environmental groups want little growth while economists argue for rapid growth.  The population debate intersects with many others and is not a simple, one-dimensional issue.

In Australia, the former coalition government introduced a baby bonus to encourage parents to have THREE kids.  As Peter Costello put it: “one for mum, one for dad and one for the country”.  Australia is currently in the midst of a mini-baby boom.  The ABS estimates Australia's population is bolstered by one birth every one minute and 44 seconds. 

In contrast, the British based think-tank, Optimum Population Trust (OPT), is encouraging Britains to stop at TWO children.  The OPT has warned of the dire consequences of human proliferation.  On his appointment as a patron of the OPT, Sir David Attenborough said the growth in global population was “frightening”. 

Meanwhile in China, the government introduced its ONE child policy in 1979.  It is estimated that had China not introduced her policy limiting couples to one child, there would be 400 million more Chinese than there are today.  The unintended consequence of this policy, however, is that China’s population is getting too old, too fast. 

The real population explosion is occurring in third world countries.  Population grows fastest in poorest countries as high fertility rates are strongly correlated with poverty.  However, according to a recent report third world population growth does not contribute significantly to rising greenhouse gas emissions as poor countries have low emissions. 

Paul Ehrlich’s predictions of mass starvation did not come true in his 1968 book, The Population Bomb.  Nonetheless, modern day doomsayers are warning it’s a case of populate and perish.  Overpopulation is cited as the root cause of climate change and is said to be testing the limits of social, economic and environmental sustainability. 

Clearly, population growth is a big topic and I can only provide a brief treatment of it here.  The issues are complex and have multiple variables.  For those readers interested in learning more, you might find this article of benefit.

Regards
Paul J. Thomas
Podcast is available here   

Beverley and I travelled to New Zealand and spent a week in Queenstown.  As always, I took a few good books away with me.  One of the most interesting was Australia’s Population Challenge.  The book is an anthology of the presentations made at the National Population Summit in Melbourne in 2002.  For some time, I have wanted to post a blog on THE POPULATION DEBATE and will do so next week.

The population debate is closely linked to THE CLIMATE DEBATE and I will post a blog about climate change on Monday week.  As with the population debate, the climate debate is replete with mixed messages and contradictions overlaid by vested interests and claims of disingenuous statements.  A good book on the subject is Poles Apart: Beyond the Shouting, Who’s Right About Climate Change? 

Along with climate change and population, another contentious issue in public policy is welfare.  There is concern that an increasing number of people are seeking a hand-out rather than a hand-up creating a welfare state.  On Monday, 1 February I will publish a blog titled THE WELFARE DEBATE.  Meanwhile a useful paper to read is Money for nothing? Australia in the global middle class welfare debate. 

It is my hope that my debate trilogy will inform and not offend.  Population, climate and welfare are important issues for all Australians and genuine discourse invariably produces the best policies.  Indeed, the openness and extent of civil participation in public debate is central to the quality of democratic governance.

While we don’t have to agree with each other, we must respect everyone’s right to freedom of expression.  This is our most cherished right in Australia and I hope that in raising these urgent questions I can facilitate reasoned discussion about issues which are of critical importance to all of us. 

Regards
Paul J. Thomas

Podcast is available here   

While brokers sat watching their stocks by night,
Investors moved faster than Rudolf in flight.
They didn’t dilly or dally or pause as they sold,
Shares tumbled far, unless they were gold.

Caused by market traders who some now despise,
The global crisis took most by surprise.
But like all sordid tales of excess and greed,
We love blaming others, it fulfils a need.

We’ve all learnt lessons, experience is the teacher,
Let’s hope we’re now wiser than a Sunday school preacher. 
But don’t be surprised if it all happens again,
The next generation’s exuberance will be hard to contain.

Now Rudd, now Swan, now Turnbull and Hockey,
You’ve squabbled all year, fighting harder than Rocky.
When St Nick asks if you’ve been naughty or nice,
Tell him politicians aren’t made of sugar and spice.

Bailouts and bankruptcies, the future looks bad,
But Santa is coming, so don’t be too sad.
With tinsel and presents under the tree,
Please enjoy Christmas, even if it’s not debt free.

As I sign off for Christmas I thank each and every member,
It’s been a pleasure to serve you, right through to December.
May the joy of the season fill your home on Christmas Day,
As we smile and gently whisper “Merry Christmas” from Gateway.

FOOTNOTE:  It’s been a tough year for many and we look forward to better times in 2010.  On behalf of the Gateway team, I extend to you the compliments of the season.  My first blog posting for 2010 will be on Monday 18 January. 

Regards
Paul J. Thomas

Podcast is available here   

By challenging his students’ beliefs through questioning, Socrates enabled them to think through issues by themselves. The influence of this approach is evident today throughout society. Significantly, it is used to develop scientific theories in which hypothesis is the first stage.

To solve a problem using the Socratic method, one need only pose a series of questions and the answer, so they say, will filter out. Socrates applied his problem solving method to the examination of key moral concepts such as good and justice.

The global financial crisis and the subsequent economic downturn raised a range of important and fundamental questions. In the Socratic tradition of nurturing debate, a number of my blog postings over the past year deliberately challenged readers to think critically about the social and economic implications of the global financial crisis.

I hope my Socratic questions about globalism, capitalism, socialism, ethics, greed and human behaviour have helped us emerge from the financial crisis with a better understanding and defence of our beliefs. In the process, I trust I have added to the richness of the economic debate.

George Bernard Shaw wrote: You see things and you say, “Why?” But I dream things that never were and I say, “Why not?” My (utopian) dream is for a wisdom-based global economy characterised by humanity thinking and acting as one global community. To achieve this dream, world leaders must facilitate and actively support more Socratic dialogue on global threats and opportunities.

The future of sovereign nations has already become the focus of debate (see blog - A glimpse at the future). This is because the growing interdependence of a global economy is increasingly undermining the independence of nation-states in setting social and economic policies.

The time to act is now. The age of ignorance must come to an end. The key Socratic question is: Can humanity change its ways? I believe we can. As we enter the period of peace and goodwill to all, my Christmas wish, in this my penultimate blog for 2009, is for this rhetoric to be turned into an agenda for action.

Regards
Paul J. Thomas

Podcast is available here   

We are surrounded by time.  Some say we are slaves of time.  Time is all we have, yet we are starved for time.  Many of us have insufficient time to think or smell the roses.  We try to balance work time and family time.  We have up-time and downtime.  Then there’s lunch time, dinner time and holiday time.

Some of us waste time.  Others just let it pass by.  The clever cherish every moment.  And everyone has a view on time.  Economists tell us that time is money.  Spiritualists claim that time heals.  Business gurus encourage us to manage time.  Scientists dream of time travel. 

The world economy has just been through some turbulent times.  But the good times will return.  Just as night follows day, booms follow busts.  So it’s time to cheer up.  But is it also time to re-examine our priorities?  When prosperous times return, will we quickly forget what got us into this mess in the first place? 

We know that those who do not learn from the past are destined to repeat it.  This current crisis, like past crises, was caused by the human tendency to excess and hubris.  These human foibles drive the self-interest which is evident throughout the human herd. 

As I pointed out in a previous blog, economics is a social science.  It is the study of human nature as it applies to money.  But when it comes to money, we often act irrationally and that’s why humans are the X factor in economic theory.

So, can we change our ways?  Will we see more responsible behaviour and less unrestrained greed in future?  Will humanity take the opportunity to transform and operate at a different paradigm?  Only time will tell. 

Regards
Paul J. Thomas

Podcast is available here   

Most organisations have a tendency to over engineer things instead of following the KISS formula – keep it simple, stupid!  In a world of overwhelming choice and technical complexity, it’s incumbent on business to make life easy.  Variety isn’t always the spice of life which is why consumers have become confused by the array of product options.

I believe that businesses should eliminate complexity and avoid management fads.  Yet many organisations fall into the trap of eagerly embracing the latest management thinking.  But management fads move quickly from being obligatory to obsolete.

The propensity for organisations to jump onto the latest “miracle” breakthrough technique gave rise to the 1990s book: Fad Surfing in the Boardroom.  I have not read the book but understand that its primary purpose is to help companies “…catch the right wave - instead of getting drowned by the ebb and flow of contradictory managerial fads”.

Organisations which are seduced by the various management fads that sweep the business world invariably discover that no management technique is a silver bullet.  In my experience, the essence of good management - respect staff, delight customers, control costs, improve processes - is unglamorous common sense.

Common sense is what we know while common practice is what we do and there’s often a gap between the two.  The best way to fight complexity is to adopt the common sense mantra of simplicity.  At Gateway, we offer simple and transparent products.  If we can’t explain a product in 30 seconds then it’s too complex. 

Research shows that consumers buy less when faced with too many options (the paradox of choice).  A simple product line has been integral to Apple’s success and the same holds true for credit unions.  You don’t have to be the biggest to be the best. 

Regards
Paul J. Thomas

Podcast is available here   

Fifty years ago you could have taken a similar stroll through most universities in the world and it would have resulted in an identical outcome.  Management is a relatively new “science” and a very inexact one.  It only became a recognised body of knowledge in the mid 20th century. 

In the shadow of the global financial crisis (GFC) some critics believe the fledging science of management has been discredited.  Others have re-labelled the much vaunted management degree, the Master of Business Administration, as the “Master of Disaster”.  Many are now asking whether business schools are to blame for the crisis.

There’s no doubt in my mind that business schools need to do some soul searching.  It’s also clear to me that management educators need to shake up their curriculums.  But to lay the blame for the GFC at the feet of academics and their “Masters of the Universe” graduands is too simplistic. 

MBA schools need to retool and Harvard University has already started this process.  Earlier this year Harvard facilitated an on-line debate titled: How to Fix Business Schools.  Thousands of people worldwide posted blogs on this issue.  One suggestion was for the adoption of a Hippocratic Oath of Business which defines management obligations towards society in order to avoid “financial malpractice”. 

Having survived near global financial calamity we must do all we can to ensure that history does not repeat itself and universities have a key role to play here.  Which is why I support the recent initiative by the United Nations in establishing the Principles for Responsible Management Education.  These principles call for universal values to be incorporated into curricula and research. 

Universities which embrace the UN Principles in their teaching should turn out students who do not suffer ethical lapses but always make principled decisions.  Educators may have been part of the problem, but they can also be an important part of the solution.

Regards
Paul J. Thomas

Podcast is available here   

The main determinants of the demand for housing are demographic/economic factors such as income level, employment rate, consumer confidence, population growth, net migration and household formation.  Housing supply, on the other hand, is the stock of houses available for sale and includes both new homes and existing dwellings. 

The supply and demand equation for housing see-saws and there is invariably a gap between the two.  Sometimes it’s a seller’s market (demand exceeds supply) while at other times it’s a buyer’s market (supply exceeds demand).  Over and above this, house prices go in cycles creating booms and busts.

There is much debate about who is to blame for housing booms.  Some cite monetary policy (rates too low), others point the finger at government ineptness (inadequate land supply) while others still vent at real estate agents (talk market up).  Not to be forgotten as a contributing factor is the “irrational exuberance” of borrowers. 

In Australia, we don’t have enough houses to cater for our immigration fuelled population growth.  Over the past five years migration has been very high with over 300,000 people arriving each year.  Yet Australia builds no more dwellings today than it did 40 years ago.  Estimates put the annual shortfall in housing supply at around 30,000 dwellings.  And that’s one of the reasons why Australian house prices are on the way up.

Australian house prices are the most expensive in the world.  Relative to our incomes, we Aussies have to fork out more than any other nationality to buy a home - 6.6 times the average annual salary.  When compared to the United States, using medium household income as a measure, Australian property is more than twice as expensive as property in the US. 

The problem of home affordability in Australia is a function of strong demand and limited supply .  Standard affordability measures reflect the interaction of two factors: the mortgage interest rate and the ratio of housing prices to household incomes.

Australian borrowers now require 33 per cent of their family income to cover mortgage repayments.  For we baby boomers, home ownership was the great Australian dream.  For our kids (Gen Y), gaining a foothold in the property market may prove to be a nightmare.  A serious social problem indeed and one that is likely to get worse with Australia’s population predicted to reach 35 million by 2050.

Regards
Paul J. Thomas

Podcast is available here   

When I was a kid you respected your parents whereas today the law allows you to divorce them.  You paid attention at school lest you were disciplined while today teachers fear lawsuits from students.  If you caused trouble in the street, a big burly copper gave you a clip behind the ear and, unlike today, it wasn’t considered assault. 

Yep, we’ve made lots of social progress over recent decades (he says tongue firmly planted in cheek) and the same holds true in business.  When I started my banking career over thirty years ago you drew up a simple loan contract which everyone understood.  Nowadays the Consumer Credit Code requires you to issue forty pages of loan documentation which few read and fewer still understand. 

The global financial crisis (GFC) has fuelled calls for greater regulation of banking and finance.  Yet no sector of the business world is more heavily regulated than financial services.  My fear is that the populist framing of the problems arising from the GFC will lead to the wrong policy responses.

My concern echoes the sentiments expressed by Jane Albrechtsen, columnist for The Australian newspaper in her article, Don’t overlook the greed on Main St.  Albrechtsen concludes her piece with this sobering advice:  “So don’t buy imported arguments that our system is broken and needs overhaul.  And don’t be duped by the concomitant hysteria that capitalism has failed Australians.  In Australia at least, a tweak here and there will do fine.”

As I stated in a recent blog (Corporate Governance) the GFC was not caused by a shortage of regulation.  It was brought about by having the wrong people wedded to the wrong philosophy.  Care should be taken, therefore, in introducing hastily drafted new laws which will do more harm than good.

Regards
Paul J. Thomas

Podcast is available here   

Skipping an oil change might save you fifty bucks today but a seized engine down the track will cost thousands of dollars.  Equally, driving ten suburbs to save a few cents on a supermarket item is hardly economical when the cost of petrol is included.

Every family has those little extras that add up quickly.  The trick is to find painless ways to cut expenses and save money.  For example, did you know the average Australian wastes $1,000 worth of food each year?  Or that bad habits with electrical appliances unnecessarily push up the cost of electricity bills?

Preparing a household budget is often a choice between needs (food, clothing, shelter) and wants (sports car, overseas holiday).  Wants and needs differ from person to person.  Whereas I spend just $5 for admission to the local swimming pool, my eldest daughter spends $$$s on gym membership.  In this area of our lives, she thinks I’m tight-fisted and I think she’s extravagant!

I can’t tell you whether a take-away cappuccino is an essential need or a luxury want, but what I do know is that at $3 per cup, you will spend $1,095 per year on coffee.  Only you can decide whether the $1,095 could have been put to better use such as deposited into a Christmas Club Account or paid off your mortgage. 

Regardless of your personal situation, everyone should have a budget planner to help organise money inflows and outflows.  If you haven’t got one, feel free to use Gateway’s on-line budget planner calculator.  And at no extra cost, I’ll throw in this helpful guide – 22 simple ways to make ends meet.  Happy budgeting.

Regards
Paul J. Thomas

Podcast is available here   

I recall learning about X and Y chromosomes during science lessons at school but must have missed the class about the marketers’ X-Y-Z alphabet soup.  Not to worry, I’ve undertaken a crash course in Gen Y and I’m now ready to join the speakers’ circuit. 

To warm up the audience, I think I’ll start with the obligatory joke.  Gen Y-ers are said to be impatient so maybe I’ll use the one about Gen Y thinking that two minute noodles take two minutes too long to cook!

Now if that flops, I’ll move straight into recovery mode and tell them (untruthfully) that I’m a big fan of Paris Hilton - the quintessential Gen Y-er.  Like Miss Hilton, Gen Y-ers love social networks such as facebook and myspace but have not embraced twitter.

Gen Y-ers are also huge users of SMS and have developed their own text message shorthand.  They luv 2 cre8 & xpress themselves coz it’s cool.  But they can spot street language impostors a mile (sorry, kilometre) away. 

So financial institutions need to take care in embracing hip SMS jargon in their advertising as they battle for the fussy youth dollar.  They must also create Gen Y friendly websites.  Gen Y is the most internet-savvy group, spending more time on-line than they do watching television. 

When it comes to banking products, Gen Y want value for money, open disclosure and honesty but they are not good money managers.  Apparently you get brownie points for admitting mistakes with this 15-30 year age group.  So let me apologise for being professionally associated with the greedy US schmucks who created the sub-prime debacle. 

There are a number of stereotypes about Gen Y which I believe are sweeping generalisations.  Certainly, the labels “slackers at work” and “impatient spoilt brats” do not apply to the talented and hardworking Gen Y-ers we have here at Gateway.

Let me end by nailing my colours to the mast and declaring that I like Gen Y-ers.  As a group, they are no worse than the generations which preceded them. If they are problem children, maybe it’s because of the way we Baby Boomers raised them.  But that’s a discussion for another day.

Regards
Paul J. Thomas

Podcast is available here   

Interest rate movements are the result of many complex factors, not the least being human behaviour - a common theme of my blog!  Rates are also subject to the law of supply and demand – another recurring theme of my blog!  By combining these two themes we can broadly say, ceteris paribus, that when demand for credit increases, rates rise.  Conversely, if demand for credit reduces, then rates fall.

There are many types of interest rates – short-term, long-term, private, government, etc.  The most well known is the short-term interbank rate which is set by the Reserve Bank – commonly referred to as the cash rate.  The cash rate is the rate charged on overnight loans between financial intermediaries.  It’s also the main driver of mortgage rates in Australia.

The official cash rate is used as a tool by the RBA to keep the economy ticking along at a steady pace.  The RBA moves the cash rate up to cool the economy and ease inflationary pressure.  It moves the cash rate down to stimulate economic activity and boost confidence. 

Since 1993 the key driver of interest rate changes has been inflation.  The RBA aims to keep inflation within a 2 to 3 percent target band.  Spending by households impacts aggregate demand, and therefore inflation, which is why the RBA tightens or eases monetary policy to dampen or encourage expenditure. 

Prior to making monetary policy decisions the RBA consults detailed information on retail sales, building approvals, consumer confidence, unemployment rates and the performance of the Aussie dollar.  It also keeps an eye on property prices as holding interest rates too low for too long can cause a housing bubble.

I suspect this is one of the reasons behind the RBA’s recent decision to lift the cash rate by 25 basis points.  It wants to stop a residential housing bubble before it starts.  Only time will tell if this pre-emptive monetary policy strike was necessary.

Regards
Paul J. Thomas

Podcast is available here   

The games officially opened yesterday and I was among the thousands of athletes who marched into the former Olympic stadium at Homebush Bay.  I have registered as a swimming competitor and will be competing at the Sydney Olympic Aquatic Centre this Friday. 

While I have been unable to confirm this, I believe that a number of crusty old bankers and Wall Street dynamos will be competing.  Perhaps they should rename the event, Masters of the Universe!

According to an unsubstantiated rumour (which I am starting), bankers and other financial services executives traumatised by the share market tumble will be doing their own tumble turns in the pool.  With the world awash with losses, these competitors will be hoping they don’t suffer a similar meltdown in the water.

As punishment, bankers are barred from participating in any breast-stroking events during the games and must stick to freestyle.  But their style cannot be as free as the one which caused the world to gulp as it swallowed massive losses caused by their steroid-induced risk taking. 

Financial services swimmers have also been warned that if they suffer a cramp they should immediately bailout as no one is going to throw them a life line.  Apparently, a dozen investment bankers at the bottom of the pool is called “a good start”. 

I suspect that if any local big-four bankers are lined up in my heat, they’ll be wearing the new high tech bodysuits (see my blog Unfair Competition).  The extra buoyancy from their polyurethane suits will give them an unfair advantage but, hey, I won’t cry foul.  I’ll just stick with my Speedo briefs which will be propelled only by bilateral breathing and a two-beat kick.

While the fall in commodity prices has devalued gold, silver and bronze, medal winners will still be able to hold their heads high.  Wall Street executives were awarded riches when they lost so why shouldn’t athletes celebrate when they actually win?

As I dive into the pool this Friday, I know I will be carrying the weight of all credit unions on my shoulders.  I will do my best to admirably represent the mutual sector.  But please don’t look for my name on the list of medal winners - it definitely won’t be there.  Aussie, Aussie, Aussie, Oi, Oi, Oi.

Regards
Paul J. Thomas

Podcast is available here   

It’s clear the economies of developed nations will bounce back at different rates.  But what is unclear is whether the various economic upswings will be “U”, “V” or “W” shaped.  These alphabetical economic theories were developed by economists to explain how an economy responds during and after a recession.

A “V” shape reflects a strong and quick recovery with the economy growing as dramatically as it slumped.  A “U” shaped recession involves a longer trough and is followed by a slower and more gradual uptrend.  Finally, in a double-dip “W” the economy relapses into negative territory after a temporary recovery.  (A more detailed explanation of these theories is contained in this article.)

There’s no doubt the Australian economy is bouncing back, but which alphabetical metaphor will best describe our recovery?  Will it be a powerful and bullish V shaped upswing, a more subdued U shape or even a “Wecovery” where growth will return for a few quarters and then peter out once more?  As always, opinions are divided.

Australia has experienced eight recessions since the Great Depression but each one is different.  Consumers adjust their behaviour from recession-to-recession.  Around 70 per cent of Australia’s GDP comes from consumer spending.  When economists talk about a recovery, they are referring to growth in GDP.  So, consumers are a central point of any analysis. 

If you’ve kept up with me so far then the $64 question is this:  Will Australian households spend us out of this recession (even though we’re not technically in a recession)?  There has been much talk of “green shoots” but my sense is that Australians have entered a new period of austerity. 

So, my humble opinion is that…pause for effect…the only way to truly know the shape of any recovery is when it’s finished.  Beyond that, I’ll stick my neck out and say I’d like to believe we’re in for a swift V recovery, but a slower U recovery can’t be ruled out. 

How’s that for an each-way bet!  “G”, I think I’m now qualified to join the society of economic forecasters. 

Regards
Paul J. Thomas

Podcast is available here   

You don’t need eight glasses of water a day.  A man’s you-know-what is not related to the size of his feet.  The sex of a baby cannot be determined by the shape of a mother’s belly.  Reading in the dark won’t ruin your eyes.  Twins don’t skip a generation.  Sugar doesn’t make kids hyper.  And milk doesn’t make you phlegmy. 

Just as some beliefs related to our health and wellbeing are fundamentally false, the same holds true for some sacred cows in banking and finance.  Investors today are better informed than their forebears but ignorance is still bliss.  So, let me correct some of the misconceptions among investors. 

• You don’t have plenty of time to save for retirement – so start planning now.
• Estate planning is not exclusively for the rich - everyone should have a will.
• There’s no magic formula for investing - you can’t eliminate risk. 

The global financial crisis has also exploded a number of long standing financial myths.  Around the world, economic dreams have turned to economic nightmares.  Here are some claims that have proven false. 

• Real estate is a safe haven.  FACT - it rises and falls like everything else.
• Borrowing to invest is a sensible strategy.  FACT – many investors have been hurt by margin loans.
• The more sophisticated the investment the better.  FACT – financial engineering gave us toxic, sub-prime loans. 
• Brokers and advisers are better able to pick stocks.  FACT – no one has a monopoly on wisdom. 

The good news is that free market capitalism is not dead and financial markets will not take a decade to recover.  However, investors are hurting with most taking a financial haircut (shave) over the past 18 months.  Legend has it that when you shave, your hair grows back faster and thicker.  The bad news is that’s also a myth.

Regards
Paul J. Thomas

Podcast is available here   

Let me firstly say that I find blogging extremely rewarding.  It’s a great way for me to communicate with Gateway members and to share my views with a broader Bloggersphere audience.

My biggest frustration is having only 350 words to get my message across, albeit I often exceed this self-imposed threshold.  I overcome the word count limitation by having lots of links in each blog post (except this one!). 

Behind the scenes, I’m always on the lookout for news stories that will have relevance to my readers.  My posts are a combination of economic commentary, thought leadership and helpful hints. 

When I started blogging I worried that I would run out of topics to write about.  Well, thanks to the global financial crisis that’s not been a problem - I’ve had a rich source of developing and unfolding events to comment upon. 

I’ve been spectacularly unsuccessful in facilitating two-way conversations.  I rarely receive comments even though my audience continues to build.  A former colleague told me it’s because my blogs are too logical to generate feedback.  Hmm?

So I haven’t had to worry about un-publishable reader comments but have occasionally wrestled with editorial content.  I’ve had one blog “on-the-shelf” for almost twelve months as I’ve ummed and arred whether it’s too controversial for me to publish a blog about welfare reform.

Gateway’s foray into blogging was driven by a desire to get more personal with its members (or potential ones) and to show a more human side to banking.  Of course, if it builds our reputation and creates awareness around what we do, then that’s a bonus. 

I hope this insight into blogging answers the inquiries I occasionally receive about the pros and cons of blogging.  Finally, if you’re thinking about becoming a corporate blogger, don’t let the experts fool you into believing it takes only 20 minutes to draft a blog - it doesn’t! 

Regards
Paul J. Thomas

Podcast is available here   

Unless your name is Nostradamus, anytime you make predictions you run the risk of looking foolish.  This hasn’t stopped Frenchman, Jacques Attali, offering a raft of brave and controversial predictions for the 21st century in his book, A Brief History of the Future.

While Attali’s book is a good read, I challenge its accuracy.  This modern day soothsayer is trying to predict a whopping 100 years into the future and I don’t think that’s possible. 

In 1966 TIME magazine published an essay, Looking Toward A.D. 2000, which utterly failed to predict what our world would be like at the start of the new millennium.  Just as there are no freeways in the sky today (another false prediction!) I struggle to believe there will be no governments in 2100 – but that’s Attali’s view.

He argues that “money will finally rid itself of everything that threatens it - including nation-states”.  Attali foresees a borderless world governed by ultra-liberal market forces.  Even as a proud capitalist, the idea of sovereign states giving way to a “super empire” co-ordinated by huge corporations frightens me.

The global financial crisis has shown that governments have an important role to play in markets.  The world would have suffered financial calamity had it not been for the speed and united interventions of policy makers.

Attali’s prospective look at the next 50 years includes the decline of the American Empire (he predicts by 2035).  But it’s his retrospective assessment of human history I find instructive. 

As someone with a keen interest in human history, I know it’s based on three interlocking stories: religion, war and commerce.  In the same vein, Attali argues that since the dawn of time “three powers have always coexisted: the religious…the military…and the mercantile”.

He goes on to say that each of these three dominant powers has controlled wealth.  “Turn by turn, the master becomes the slave, the soldier replaces the priest, the merchant replaces the soldier”.

In terms of political orders, humanity started with the ritual order, progressed to the imperial order and has moved to the mercantile order.  It is this mercantile order which Attali predicts will be replaced by a unified and stateless global market – a “super empire”.

Apparently, the super empire will be controlled by an elite class of selfish people called “hyper-nomads”.  It is the “nomadisation” process - caused by the decentralising power of the Internet and the mobility of high-tech nomadic workers – which will make nation-states irrelevant.

For my money, I hope I’m not around when the hyper-nomads rule the earth.  I’ll leave it to you to decide whether Attali’s views are science fact or science fiction.

Regards
Paul J. Thomas

Podcast is available here   

While students graduate with some understanding of Reading, wRriting and aRithmetic, they have virtually no understanding of the three Rs of investing – Risk, Return and Relativity.  Indeed, most students lack even rudimentary skills in personal financial management.  Yet they face a world where easy access to credit could see them accumulate unmanageable debt before they turn 21.

With personal financial decisions becoming increasingly complicated, students and young adults must be taught how to take control of their finances to improve their lives.  Schools should start with the basics by showing students how to prepare a budget, compare loan and deposit accounts and prevent identity theft.

Research shows that individuals who learn about money management invariably fare better than those who don’t.  Which is why there’s a correlation between financial literacy and socio-economic status.  (Note: I’d argue that poor financial literacy contributed to low-income and ill-informed borrowers taking out toxic sub-prime loans.)  So, it’s incumbent on all of us to stop poor money habits before they start. 

Financial institutions have a role to play here and credit unions are stepping up to the plate.  Financial education is one way that credit unions can fulfil their mission and help enrich the lives of their members and the broader community.

In conjunction with the Credit Union Foundation of Australia (CUFA), Gateway is helping its junior members (and even some older members!) to improve their money management skills via an on-line financial literacy tool.  CUFA developed the tool and it’s freely available on the Gateway website (click here to access).

Gateway is also working with CUFA in Cambodia as one of the sponsors of the Cambodian Children's Financial Literacy Program.  We are helping teach a new generation of Cambodians the importance of thrift and the wise use of credit in an attempt to break the vicious cycle of poverty. 

Regards
Paul J. Thomas

Podcast is available here   

Star Wars was first developed by George Lucas in the early post Vietnam War era and is a classic example of art imitating life.  America believed she would win the war against the Viet Cong because of her vastly superior technology and this created a false sense of invincibility.

The might of American technology – jet fighters, advanced weapons and sophisticated communications - was not able to defeat the cunning of the smaller Viet Cong.  The technologically inferior South Vietnamese forces used a far more effective weapon - guerrilla warfare.

Fast forward to today and despite electronic intercepts and billion dollar spy satellites, the US can’t find any trace of the cagey Osama bin Laden.  When it comes to warfare, history teaches us that technology alone is not the key to success and the same holds true in business.

Despite using advanced computer technology to identify and mitigate risk, the risk management systems in many financial institutions failed to pick up the brewing global financial crisis (GFC).  Banks around the world believed they were invincible and didn’t realise the enemy was within their organisations.

The real adversary in the GFC was not a hostile invader but a far greater internal threat – poor corporate governance.  Banks relied too heavily on mechanical models which did not generate red flags.  As I argued in a recent blog, many organisations did not have the right moral tone and this fostered a cavalier attitude to risk management. 

The GFC was not a natural disaster – it was created by greed and lax supervision.  In hindsight, the relentless pursuit of revenue growth in a world of easy credit should have rung alarm bells.  Also, the real possibility of a housing downturn should have been included in risk assessments. 

What is needed now is new thinking, not new technology.  We need to take a hard look at risk appetites and risk management practices.  Unless financial institutions implement better risk management controls and processes, one day we’ll all have front row seats watching another slow train wreck unfold.

Regards
Paul J. Thomas

Podcast is available here   

Take the world of business - it’s built on the notion of fast, faster, fastest.  We want instant sales, instant profits and instant growth.  We want it now and we’re not prepared to wait.  Investors and analysts demand quick returns and this drives corporations to manage to quarterly outcomes. 

The constant pressure to deliver instant results has created a business cancer - short-termism.  The effect of short-termism on capitalism is well documented.  It has led to misplaced priorities which are not in the best interests of shareholders or society at large.

The dangers of short-term thinking are also evident in the global financial crisis.  The manic pursuit of quick profits drove the speculative housing bubble in the US.  Both borrowers and lenders saw real estate as a get-rich-quick scheme.

In a world of sound-bite journalism, the media fuels short-term thinking by lauding or disparaging companies based on the achievement of current earnings targets.  Asset managers add to the problem by not providing better incentives to encourage long-term growth.  And short-term investors like hedge funds perpetuate the here-and-now mentality.

Short-termism has become endemic in society.  We want QUICK fix surgery to rectify imperfections.  We crave crash diets to lose weight FAST.  We consume energy drinks to heighten alertness NOW.  We expect politicians to respond to tracking polls TODAY. 

Well guess what?  Magic pills don’t make us lose weight and caffeine’s not a remedy for sleep deprivation.  There are no miracle cures - all good things take time.  It takes TIME to build personal wellness.  It takes TIME to build trust.  And it takes TIME to build wealth.  So be aware of the pitfalls of investing in a short-term world. 

Regards
Paul J. Thomas

Podcast is available here   

As a result of the global financial crisis, banks also have an unfair advantage.  The big four banks were given “polyurethane” assistance from the federal government in the form of access to cheaper wholesale funding and have left the competition in their wake.

The big four banks now stand alone on the winner’s dais while regional banks and non-bank lenders wallow.  There has been a brutal reshaping of the field with middle tier competitors like RAMS, St George, BankWest and Wizard swallowed up.

As I stated in a previous blog, I’m all for survival of the fittest but it has to be on a level playing field.  Just as I believe the best and most talented athlete should win - not the one with the latest swimsuit - the same holds true in business.

To be fair, the banks are formidable competitors and have put in world class performances to survive the credit crisis relatively unscathed.  Failure to acknowledge this would be bad sportsmanship.  However, they have been favoured by government policy and a growing chorus of spectators is now crying foul.

The call to ease the stranglehold of the big four is coming from a number of quarters.  Consumer group, Choice, opposed the takeover of BankWest by the Commonwealth Bank.  Competition Commissioner, Graeme Samuel, has expressed concern at the reduction in competition.  And the Reserve Bank believes the banks need to reduce their reliance on the government guarantee.

Even the former Competition Commissioner, Allan Fels, has weighed into the debate labelling the relationship between the Rudd Government and the banks as “crony capitalism”. 

The pressure is on from some circles to axe the bank guarantee in order to restore fair competition.  However, a more equitable solution may be to revise the anti-competitive pricing on the wholesale funding guarantee to provide a more level playing field for all lenders to access wholesale funds.

Close to one in five Australians belongs to a credit union or mutual building society.  Financial co-operatives are a silent giant in the economy and a force for good.  We’ve also come through the crisis in pretty good shape.  All we ask is for a fair go.  Australians deserve choice and mutuals are a viable alternative to the big banks.  We are the “People’s Bank”.

Regards
Paul J. Thomas

Podcast is available here   

Fallen stock prices, diminished home values and negative superannuation returns have wreaked havoc on retirement nest eggs.  This triple whammy has serious repercussions for the 6.5 million Australians who are over 50 and approaching retirement.

Many baby boomers will now have to stay in the workforce longer to shore up their finances.  Last year $680 billion was wiped off the value of Australian shares and this has impacted the retirement income goals of many Australians.

The Federal Government believes Australians need 65 per cent of their gross pre-retirement annual income to maintain an adequate standard of living when they quit work.  This target should be higher for those on less than average weekly earnings and lower for those on higher incomes. 

No retiree, of course, can accurately predict their lifespan or the future cost of living and so face the challenge of funding an unknown liability.  With increased life expectancy comes the need to manage what actuaries refer to as “longevity risk” – the risk of outliving your money.

Running out of money before you run out of life is a frightening and real prospect.  According to a Risk in Retirement Report, one in three Australian men retiring at age 65 will live to 90 with women living three years longer on average. 

You can guard against longevity risk by saving more than you think you will need in retirement.  Alternatively, you can convert part of your savings into a life-long income stream by purchasing an annuity.  If neither of these strategies appeals to you, there is always the option of accessing the equity in your home via a reverse mortgage. 

The choice is yours but the message is clear: Never rely on just one investment strategy - always have a plan B.  And do consult a financial planner.  Retirement planning is a specialised area and you deserve the best advice.

Regards
Paul J. Thomas

Podcast is available here   

In a recent magazine article Kaletsky argued that “Economic forecasters cannot predict the future for the same reason that weather forecasters cannot predict the weather - the world economy is too complex and too susceptible to random shocks for precise numerical forecasts to have any real meaning”.

Economists not only failed to spot the financial crisis, they cannot agree how to solve it, so the profession is under the spotlight.  In the words of one commentator: “An entire field of experts dedicated to studying the behavior of markets failed to anticipate what may prove to be the biggest economic collapse of our lifetime”.

There’s no doubt the past 18 months has been a humbling experience for economic forecasters.  Their “macro” models churned out predictions of “micro” accuracy.  People are now asking whether economists really know any more than the rest of us.  Just as (some) bankers needed a financial bailout, there is a growing chorus of people calling for economists to receive an intellectual bailout. 

In fairness, economics is not an exact science like mathematics - it’s a human science.  The central goal of science is to describe and predict.  But as we all know, it’s impossible to accurately predict human behaviour and therein lies the problem.  The economy is the product of human action and economists have been unable to build models which reliably describe the reason and logic of humans. 

As economists go back to the drawing board, perhaps economics should be reclassified as a branch of psychology.  Modern day economics has been variously labelled a flawed science, a dismal science and the science of ignorance. 

While there needs to be a major rethink of economic tools and techniques, it’s unreasonable to expect economists to be fortune tellers.  In the words of celebrated economist, John Kenneth Galbraith, “There are two kinds of economists - those who don't know the future and those who don't know they don't know.”

Regards
Paul J. Thomas

Podcast is available here   

ID thieves are not visible robbers who break into your home - they are invisible hackers who maliciously attack your data.  You need to make it difficult for cyberspace criminals to impersonate you as ID theft is just one mouse click away. 

There’s lots of useful advice on the precautions you can take to minimise identity theft.  The Federal Attorney-General’s Department has put together an ID preventative kit.  Also, ASIC has established a SCAMwatch site to assist consumers recognise and avoid internet scams.  There’s even a book on identity theft – Your Evil Twin.  Plus, you can subscribe to the government’s Stay Smart Online Alert Service. 

Gateway has and will continue to take all reasonable measures to protect the integrity of member data including firewalls, encryption, automatic time-outs, factor 2 icons, incorrect password access lock and last login time check.  On top of this, we need your help to beat the crooks. 

You should shred sensitive information rather than disposing of it in the garbage bin.  You should be conscious of shoulder surfers when using ATMs to protect yourself from peering eyes.  You should change your password often and use longer passwords that combine numbers, letters and punctuation.  You should ensure your anti-virus software is up-to-date and cleared for online transactions before logging onto any internet banking site.

These simple but essential steps, as well as other handy tips, are outlined in the fraud awareness section of our website.  While early detection and fast action are the keys to limiting damage, victims can take months to discover identity theft.  So, prevention is better than cure.  Don’t be a victim of mistaken identity - act now and help us to help you. 

Regards
Paul J. Thomas

Podcast is available here   

The credit crisis has shown that the West’s capitalist system is not perfect.  The $64 question is:  Can we learn anything from the East’s Islamic system of banking?  Over the past year I have read a few articles suggesting we can and that’s what I’d like to briefly explore this week.

While I’m no expert in Islamic banking I know the rules and conventions are different to Western finance.  Islamic law (Sharia) prohibits usury – the charging or paying of interest (Riba).  As lending and investment products cannot be interest based, they are offered on a profit-and-loss sharing basis (Mudharabah). 

Loans (Murabaha) involve the bank purchasing a commodity at market value and then selling it to the customer at a higher price with the difference being the bank’s profit.  Similarly, interest is not paid on deposit accounts (Mudaraba) but investors share in the profit of the bank. 

Loans must be used to finance tangible assets (car, home, equipment, etc.) and cannot be used to fund the purchase of intangible assets (like sub-prime collateralised debt obligations).  This requirement to back every transaction with real, physical assets has seen Islamic banks unhurt by sub-prime toxic assets.

Sharia law also prohibits investments in businesses that are unlawful in Islam (haram) such as alcohol, pork, gambling and pornography.  The concept of “principled investing” extends to short selling which is also haram.

The popularity of Islamic banking has spread to the West with London the headquarters for the new Islamic Bank of Britain.  Locally, the ANZ Bank will become involved in Shariah compliant Islamic banking in Pakistan as part of its bid for the Royal Bank of Scotland’s Asian network.  And the National Australia Bank recently announced plans to trial Muslim-friendly loans.

Islamic finance is an ethical and equitable mode of community banking and, in this regard, not dissimilar to credit unions.  Islamic banking is rooted in the principle of justice with financial transactions required to be fair and equitable to all parties. 

Want to learn more?  Then grab a copy of Brian Kettell’s book, Introduction to Islamic Banking and Finance. 

Regards
Paul J. Thomas

Podcast is available here   

When you buy an imported car from Japan, convert dollars to Euros while travelling through Europe or invest superannuation savings in US equities, you settle these transactions by supplying Australian dollars.  The demand for our currency, on the other hand, is driven by those who have foreign currency and want to buy Australian dollars such as in-bound tourists and foreigners purchasing our exports.

Currencies, like any commodity, are subject to the free market forces of supply and demand.  A currency will tend to become more valuable whenever demand for it is greater than the available supply.  It follows, therefore, that when a country imports goods, it decreases the value of its domestic currency while exports increase a currency’s value. 

The Aussie dollar is one of the most traded currencies in the world.  As our exports largely comprise raw materials (eg, gold, wool), the Aussie dollar is referred to as a commodity currency.  The direction of our currency depends on Australia’s conditions/prospects and includes demand factors such as economic outlook, political stability, interest rates and the level of inflation.

Australia enjoys significant foreign investment as overseas investors have confidence in our local economy.  An important consideration for investors is the level of real interest rates relative to those in other countries.  Australia currently has the highest interest rates in the developed world.

The perceived risk of investing here is low and this influences the volume of capital inflow.  A rise in our capital inflow increases the demand for Australian dollars leading to a currency appreciation, while a decrease results in depreciation.  However, when the dollar rises sharply it hurts our manufacturing and tourism sectors.

This is one of the reasons why the RBA sold almost $2 billion of Australian dollars in May.  This sell-side intervention reduced the strain on Australia’s exporters who were seeing the competitiveness of their goods plummet. 

Opinion is divided on the outlook for the Aussie dollar as currency markets are difficult to predict.  Haven’t got an opinion on currency movements but want to know more about foreign exchange trading?  Then log onto the website, babypips, for a beginner’s guide to forex trading. 

Regards
Paul J. Thomas

Podcast is available here   

The true watersheds in human history often go unnoticed initially.  Unlike the dropping of an atomic bomb or the landing of a man on the moon, major transformational changes occur subtly and their effects emerge slowly.  Such is the case with economic change. 

In 1889 John Hay, the (then) US Secretary of State, said “the Mediterranean is the ocean of the past, the Atlantic the ocean of the present and the Pacific the ocean of the future”.  In the early 1990s futurist, John Naisbitt, identified “The Rise of the (Asia) Pacific Rim” as one of 10 MegaTrends for the new millennium.  Both of these prophecies are now reality. 

The rise of the Asian Tigers, the emergence of China as an economic powerhouse, the restoration of Japan’s growth and the momentum of India will see Asia become the dominant economic region in the world.  The growing influence of Asia as a world economic power is undeniable as this article, Ringing in the Asian Century, shows. 

Most commentators agree that the 21st century will see Asian countries take over as market leaders.  While no one is suggesting the total demise of the West or that Asian nations will become absolute masters of the universe, a power shift is occurring. 

A detailed explanation of this shift can be found in the book - The New Asian Hemisphere: The Irresistible Shift of Global Power to the East.  For those wanting a brief synopsis of what is occurring, you might care to read the Australian Financial Review article, Power shifts: The poor rise up, rich bow down. 

It’s about time world leaders started embracing this new reality.  Perhaps the next G20 meeting should be held in Jakarta or Seoul and not Washington. 

Regards
Paul J. Thomas

Podcast is available here   

I recently read Ferguson’s tome and enjoyed it.  While the book has received mixed reviews (see Times Online critique) I believe it’s well worth a read.  Ferguson charts the rise of money over the past 5,000 years - from the clay tokens of ancient Mesopotamia to the bits and bytes of today’s electronic money. 

The core lesson which arises from the history of money and finance is that every bubble bursts.  As Ferguson notes, “Sooner or later the bearish sellers outnumber the bullish buyers.  Sooner or later greed turns to fear.”  The Ascent of Money shows the current financial dislocation is just another crisis among the many that have struck the financial world throughout its history. 

“Money,” according to Ferguson, “amplifies our tendency to overreact, to swing from exuberance when things are going well to deep depression when they go wrong.  Booms and busts are products, at root, of our emotional volatility”.

Ferguson argues that money has fuelled human progress and that the finance industry is the essential backdrop behind all history.  “The ascent of money has been essential to the ascent of man.”  Ferguson also believes that “The evolution of credit and debit was as important as any technological innovation in the rise of civilization”.

He goes on to say that behind each great historical phenomenon lies a financial secret.  For example, “It was Nathan Rothschild as much as the Duke of Wellington who defeated Napoleon at Waterloo”.  Ferguson reveals why English speaking people developed their obsession with buying and selling homes and explains how finance evolves through natural selection. 

He also documents how a new financial revolution is propelling China from poverty to wealth in the space of a single generation - an economic transformation unprecedented in human history.  I’ll have more to say about that in my blog next Monday.

Regards 

Paul J Thomas

Podcast is available here   

The disproportionate amount of time and money put into breast cancer research versus prostate cancer mirrors the disparity in media coverage and political sentiment towards borrowers and investors.  When interest rates rise, every man and his dog laments the plight of those with a mortgage.  Yet when rates fall, there is deafening silence regarding the resultant misery for self-funded retirees and savers.

Falling rates may be a godsend to home owners but they are not greeted with joy by those who rely on interest income.  Over the past year savers have experienced a cycle of “pay cuts” as the Reserve Bank has repeatedly slashed official interest rates.  But there has been little outpouring of pity for pensioners and savers reliant on cash to generate income. 

It is instructive to note that two-thirds of Australians don’t have a mortgage.  So, falling rates benefit only a small percentage of the population.  On the other side of the coin, there are more savers than borrowers.  So, rising rates are a boon for a greater percentage of the population. 

People on fixed incomes are not just feeling the pinch due to derisory interest rates but also because of inflation and taxation.  This triple whammy means innocent savers are now struggling to find accounts that, after the taxman and inflation, offer a real rate of return.  Slim pickings indeed and a bitter blow for savers who are understandably up in arms over their reduced spending power.

With concerns that the various stimulus packages will cause inflation to rise further, the outlook for savers is glum.  Right now, cash might not be king but the tide is turning as the yield curve steepens (see recent blog).  It would also be beneficial to see the tide change to a more balanced media reporting of the impact of rates decreases. 

Regards
Paul J. Thomas

Podcast is available here   

QE enables a country to create new sums of money out of thin air.  Central banks have the power to wave a magic QE wand and produce money electronically.  So there’s no need to crank up the printing presses and put crisp new bills into circulation. 

The conjuring-money-out-of-thin-air trick is quite easy.  The magician must be a central bank (eg, Bank of England) and it simply uses a computer to transfer funds to itself.  It doesn’t even have to say “abracadabra”!

If you look under the magician’s cape, you’ll see that QE is a monetary policy weapon.  In the war against recession, central banks have been cutting rates (ie, easing monetary policy) to revive ailing economies by making it cheaper for people to borrow. 

But having reduced official interest rates to close to zero, the US and the UK central banks have effectively run out of ammunition.  While they can’t make money cheaper, they can make it more plentiful.  So they’ve decided to directly inject more money into the economy via a non-traditional weapon – QE. 

QE involves a central bank buying up assets - government and corporate bonds - with money it electronically creates from new central bank reserves.  The financial institutions selling the assets have the “new” money deposited into their accounts which boosts the money supply.

The theory is that banks will use the additional funds to lend to customers thereby stimulating demand and improving the health of the economy.  There is debate among economists as to whether QE will work.  The pros and cons of the debate can be technical, so here’s an easy guide to quantitative easing. 

While there’s no guarantee that QE will work, many economists are optimistic it will do the trick.  As AMP Chief Economist, Shane Oliver, pointed out in a recent market update, Australia has no need to engage in QE.  So, for now, we’ll just sit on the sideline and watch the magic show. 

Regards
Paul J. Thomas

Podcast is available here   

Just as my wife is comfortable with medical lingo, I’m used to financial terminology.  However, it can be very confusing when you are an outsider to an industry that has its own lexicon.  It’s no surprise, therefore, that the average punter is struggling to understand the credit crisis – it has challenged the financial literacy of even astute investors!

Be honest, had you heard of quantitative easing twelve months ago?  How about short selling?  What about exotically named instruments like Collateralized Debt Obligations, Credit Default Swaps and Floating Rate Notes?  Do your eyes glaze over when you see terms like toxic assets and margin loans?  And what do you make of the comical names of Freddie Mac and Fannie Mae?

This doubletalk is hard to swallow and causes the best of us to experience a system meltdown.  We all deserve a fiscal stimulus to ease our household budget deficits caused by falling aggregate demand.  Little wonder consumer confidence has plummeted.

We also need to be shielded from the bears and bulls which roam the markets.  And what about all the “isms” we have to put up with?  These describe the various schools of economic thought and include socialism, capitalism, monetarism and protectionism. 

If you haven’t fallen into a trance yet you could turn to a friend to help you decipher this economic jargon.  But don’t ask Milton Friedman, John Maynard Keynes or Adam Smith.  Firstly, they’re all dead and secondly their modern day followers will give you differing explanations of the current crisis.

Well, I should wind up now and bailout before the AAA rating on my blue chip blog is downgraded and I’m unable to hedge against a dead cat bounce in readership which will yield a sub prime outcome.

Regards
Paul J. Thomas

Podcast is available here   

Governments typically finance budget deficits by borrowing money.  This is usually done by selling government bonds and that’s exactly what the Rudd Government is doing and intends to do more of over the next four years.  The budget papers forecast there will be $300 billion of commonwealth government securities on issue by mid-2013. 

The good news is that bond hungry investors should snap them up.  The flipside is that in selling its bonds the government will be competing with the private sector for investors creating what is referred to by economists as a crowding out effect. 

When the government offers its planned $60 billion of bonds next financial year, it will divert money from bonds being sold by private companies.  Some private borrowers will be “crowded out” of the financial markets as the government’s sovereign rated bonds attract an increasing share of the economy's total saving.

In order for the government to take investment funds away from the private sector, it must offer its bonds at an interest rate* that is attractive to investors. That’s why some economists argue that increased government borrowing pushes up market interest rates.

But not all economists agree with this supply and demand argument.  AMP economist, Shane Oliver, believes the increased supply of bonds will not boost bond yields.  My own view is that there will be a lift in long term rates and this trend has already started.

As the price of fixed rate mortgages is determined by what’s happening on the bond market (see my recent blog), it follows that lenders will raise their fixed rate mortgages accordingly.  This upward movement commenced in April when the big four banks announced increases in their fixed rate loans.

Fixed rate loans fell out of favour over the past year but the tide is turning.  Make sure you keep abreast of what’s happening so that you can make informed decisions on both sides of the ledger.

*NOTE: The mix of interest and capital gain/loss produces a bond’s yield.  Bond yields move inversely to price, so as bond prices rise yields fall and vice versa. 

Regards
Paul J. Thomas

Podcast is available here   

Hedge funds are not your common or garden variety investment vehicle and their operations are sometimes clouded in secrecy.  Operating in the shadow of investment markets, hedge funds are essentially unregulated and specialize in sophisticated trading strategies including short selling.

As I explained in a recent blog, short selling is a (bearish) bet that the price of a stock will go down.  It involves selling a security you currently don’t own in the hope that you can buy it back at a cheaper price and thereby make a profit. 

Betting on falling share prices is one way hedge funds generate profits – so they tend to do well when stocks perform poorly.  This has led to accusations of stock price manipulation by some hedge funds, particularly where they are suspected of “bear raids”.

In a typical bear raid, a trader “shorts” a target stock and then spreads bad news and/or false rumours about the target company to deliberately drive down the price.  The trader profits between the original share price and the lower price that the share has been dragged down to. 

While bear raids are illegal they are a fact of market life and this has led a raft of people, including the Archbishops of Canterbury and York, to label short sellers as a renegade class of investors.

In response to a public outcry over short selling, the practice was temporarily banned or restricted in 17 countries.  The ban in Australia has been extended twice and is due to be lifted later this week.  This will be welcomed by hedge funds who say they have been unfairly treated as scapegoats for allegedly triggering the credit crisis. 

It is clear following the recent G20 meeting that hedge funds will come under closer scrutiny.  Given the public’s heightened and understandable demand for greater transparency, closer regulatory control will be a good thing. 

STOP PRESS: The short selling ban was lifted this morning  (25/5/09).

Regards
Paul J. Thomas

Podcast is available here   

One of the idiosyncrasies of the human species which will come under the historian’s microscope is a phenomenon called the Paradox of Thrift.  First articulated by John Maynard Keynes, this paradox describes the dilemma we face when times are tight.

During a recession we are encouraged to spend to keep the economy going.  But our natural and understandable tendency is to save and this triggers a cause and effect spiral to decreased economic activity.  Here’s how the slippery slope unfolds.

The ride to recession begins when we all start saving our money and this reduces consumer spending.  This, in turn, causes aggregate demand to fall and this, in turn again, results in a decline in total income.  And when income falls, people have less to save.

So, as counter-intuitive as it sounds, individual savings makes us collectively poor!  This paradox of thrift represents a form of prisoner’s dilemma as saving might appear beneficial at an individual level but it’s actually detrimental to the population overall.  One person’s spending is another person’s income!

We humans never seem to get the balance right.  We spent too much in the good times and are spending too little in the bad times.  We’ve rediscovered thrift at the worst possible time.  Debt fuelled spending got us into this mess, but paying down that debt too quickly has made the situation worse. 

That’s why governments are encouraging people to borrow and spend again by lowering interest rates.  As I explained in a recent blog, the money supply is primarily driven by banks and other financial institutions extending credit.

But people have become debt averse and this has contributed to the dramatic contraction in the money supply.  So, the wheels on the bus go round and round as governments and central banks continue their efforts to resolve the paradox of thrift.

Regards
Paul J. Thomas

Podcast is available here   

Meanwhile, workers on Main Street are angry that the Titans of Wall Street walked away with bucket loads of money while the taxpayer foots the bill for corporate bailouts.  But does that make every CEO a villain?  I think not.  Care needs to be taken, therefore, not to turn this into a class war. 

In a recent blog posting I spoke of the ideological divisions which have been fuelled by the credit crisis.  Janet Albrechtsen, a blogger for The Australian newspaper, picks up this theme in her post, Right’s crazy class war on CEOs. 

Albrechtsen, quite rightly in my view, argues that setting remuneration is an operational matter for boards of directors.  Of course, there are many who would disagree with this position and one of those is The Age columnist, Shaun Carney.  In his article, Greed without end, Carney argues that “there is a lack of morality at the heart of executive salaries”. 

Executive remuneration is a classic debate for the ages.  It’s unlikely the antagonists will ever agree as compensation fairness is like beauty - it’s in the eye of the beholder.  For my money, the answer lies in the supply and demand equation for labour – top executives don’t come cheap.

When it comes to executive salaries, politicians are playing the populist card.  But populist rhetoric and populist solutions rarely work.  Governments have a tendency to over regulate and this invariably leads to unintended consequences. 

I’ll give the penultimate say on this emotive topic to BusinessWeek and its article CEO Pay: No Easy Answer.  And just for good measure, I’ll conclude with an opinion by Sydney Morning Herald columnist Ross Gittins, Dirty deeds…done by chiefs.

(Disclosure:  The author is a CEO and cannot possibly claim to be unbiased on the subject of executive salaries!) 

Regards
Paul J. Thomas

Podcast is available here   

But how, in a practical sense, do you assess an individual’s fitness and propriety to hold an executive position?  One criterion is education and training.  A university degree in some business discipline is always well regarded.  On top of this, you need some practical experience in the University of Hard Knocks.  And it’s really handy if you have a clean credit history and have never spent time in jail for fraud. 

Well guess what?  I suspect that every financial executive who wrote a sub-prime loan could tick all the boxes on the fit and proper test.  And therein lies the problem - it doesn’t measure greed and ambition!  The executives on Wall Street and the organisations for which they worked did not have the right moral tone.  Which is why the root cause of the credit crisis is not a failure of markets but a failure in corporate governance. 

Greed is innate in human nature and Western society, in particular, places a high value on the pursuit of wealth.  Should we be surprised, then, that a culture of greed pervaded financial markets?  The lust for success which drove the growth-for-growth sake mentality of the chiefs in the big corner offices created a moral crisis which, in turn, led to a financial one. 

I find it ironic that the best and brightest caused the sub-prime crisis as they were too clever by half!  Their hubris has made them sorry symbols of greed.  At the end of the day, banking is an industry built on trust and the challenge facing regulators and boards is to devise a way of identifying and weeding out megalomaniacs with delusions of global domination – good luck!

Regards

Paul J. Thomas

Podcast is available here   

Consider two swimmers who are ferocious competitors.  One starts taking drugs and the other follows.  The drug taking leads to an identical improvement in performance.  So, both lose as the end result is the same as when they were “clean” swimmers.

Let’s up the ante and talk about warfare.  Two superpowers are in an arms race.  One develops a more destructive weapon and the other increases its arsenal accordingly.  Yet if both countries co-operated they could avoid a military build up by signing an arms limitation agreement so everyone wins.

I could go on but I think you get the gist of the win-lose mentality (zero sum game) of humans.  The tendency of people to focus on narrow self-interests in lieu of the best outcome for all parties led to the development of game theory.

The best known example of game theory is the Prisoner’s Dilemma where two criminals are enticed by police to betray each other.  The prisoner’s dilemma – to confess or not to confess - underscores how our choices affect others and how the choices others make affect us.

The credit crisis is a modern day prisoner’s dilemma (or Tragedy of the Commons) where the “every-man-for-himself” attitude saw markets crash as everyone tried to get to the exit door first.  All the efficiencies of the free market flew out the window as institutions hid their bad loans causing credit markets to freeze as players did not trust each other.

We humans must learn to modify our self-defeating behaviour.  Which is why game theory should be a compulsory element of the core curriculum of educational institutions.

School children and management graduates alike should be taught the benefits of co-operation over conflict and this training should begin in the home.  After all, parents are the world’s first and foremost teachers.  We can all play a part in making our planet a better place. 

Regards

Paul J. Thomas

Podcast is available here   

People are angry and scared and venting their anxiety over an uncertain future.  Riots have rocked China and the IMF chief has issued a warning about on-going protests.  Global capitalism is increasingly seen as the enemy of the people and this is fuelling social discontent. 

Policymakers need to be careful that this unrest does not lead to war.  World stability hangs by a thread and tensions are running high.  Politicians are trying to avert a disaster but the class warfare between the rich and the poor shows no signs of abating.

Many ideological battle lines have been drawn in this social politics of rage.  Bailing out Wall Street is seen as a cop out by Main Street.  The new deal is viewed as a raw deal.  The left is challenging the right.  Poor workers are bitter at their rich bosses.  Democrats are facing off against republicans while labour versus the liberals. 

Waleed Aly, a lecturer in politics at Monash University, has written an instructive piece on the social and political consequences of the credit crisis.  In his article, “Beneath the financial crisis waits a nastier beast”, he makes a number of compelling observations about how people behave in times of great insecurity – worth a read.

With worldwide jobs losses predicted to be in the tens of millions, living standards for many on this planet will plummet.  Poverty will rise, social disturbances will continue and leading economist, Nouriel Roubini, is even warning of food riots in America.  (Note: Roubini is one of the few economists who actually predicted the credit crisis.)

This Saturday our nation will pause to commemorate the Anzac spirit.  Lest we forget that the Great Depression fuelled the rise of radical political movements in the run up to World War II.  Let’s hope that history does not repeat itself and that extremist groups are not successful in pursuing their political agendas on the back of the current social discontent. 

Regards

Paul J. Thomas

Podcast is available here   

The fixed/floating debate is not as old as Shakespeare, but the pros and cons are classic.  Fixed gives certainty against future rises while floating (variable) enables you to take advantage of falling rates.  With home loan interest rates at a 45 year low, borrowers are again toying with the idea of “locking in”.

Obviously, the best time to fix is before interest rates start rising, so you haven’t missed the boat - yet!  However, not even the “experts” can accurately predict the top and bottom of interest rate cycles.  A good indicator of the direction of fixed rates is the movement of the three year interbank swap rate.

Fixed home loan rates are determined by what's happening in the swap market because that's where the major lenders manage their fixed rate exposure.  In contrast, the level of official interest rates set by the RBA determines variable mortgage rates.  Thus, fixed and variable home loan rates march to the beat of different drums.

As with all financial decisions, no one size fits all.  So do your research before deciding on a fixed, variable or split rate loan option.  This time last year, one in four Australians fixed the interest rate on their home loan.  Since then, sales of fixed rate loans have plummeted as the RBA has aggressively cut the official cash rate.

The tide is again changing on the attractiveness of fixed rates.  At the end of the day, it’s your choice whether you fix the interest rate on your loan.  However, make sure you appreciate the risk associated with mortgage exit fees (or break costs).

Finally, don’t take Shakespeare’s advice, “neither a borrower nor a lender be”, literally.  Four hundred years later, it’s a bit outdated!

Regards

Paul J. Thomas

Podcast is available here   

The harsh reality is that humans do not obey the efficient, orderly principals espoused by free-market thinkers.  When it comes to money, we often act irrationally and that’s why humans are the X factor in economic theory. 

Homo economicus was not supposed to buy a house at a grossly inflated price and expect its value to keep rising.  But that’s exactly what happened in the US where consumers behaved like Homo sillyus.  Which is why Yale University economist, Robert Shiller, believes the ultimate cause of the global financial crisis is the psychology of the real estate bubble.

In the 2005 edition of his book, Irrational Exuberance, Shiller predicted the housing bubble burst.  Shiller recently released another book, The Subprime Solution: How Today’s Global Financial Crisis Happened, wherein he outlines how borrowers, bankers and brokers were united in the delusional belief that house prices never go south.

There are a number of reasons why economists missed the warning signs of the crisis but chief among them, in my view, is that neoclassical economic theory is unable to account for flawed human psychology.  Put simply, economists have unrealistic expectations of rational behaviour.

With regard to the US housing surge, consumer optimism led to “bubble blindness” and all logic flew out the window.  When the bubble burst, markets tanked, people panicked and emotions took over.  And as we have seen, fear drives extreme and unpredictable behaviour. 

Deep down, I suspect most economists acknowledge the limitations of economic theory in explaining and predicting social behaviour.  Throughout the ages, we humans have shown we’re not rational and effective in making choices.

The credit crisis has merely confirmed what evolution has created – an emotive hunter-gatherer who can’t buy happiness.  Maybe buying some Easter eggs this week will bring a smile to your face!

Regards
Paul J. Thomas

The euro’s success also awakened the long held idea of a universal currency.  The credit crisis has again sparked interest in uniting the whole world under a single currency.  Many respected economists believe a universal currency could hold the key to stability and growth. 

One advocate of a single currency is Nobel Prize winner, Robert Mundell.  Professor Mundell laid the theoretical groundwork for the euro and his website states that “the benefits from a world currency would be enormous”.

Another Nobel laureate who is also a proponent of a one world currency is economist, Joseph Stiglitz.  Stiglitz believes it’s time for another Bretton Woods meeting to restructure the global financial framework.  It was the 1944 Bretton Woods meeting that established fixed exchange rates based on a global gold standard.

If the whole world adopted “common cents” there would be a considerable increase in trade, productivity and financial integration.  But I think the chances of a one world currency becoming a reality are about as good as Australia eliminating state governments (see my blog: Have state governments passed their used by date?).

No government likes to see a diminishment of political sovereignty and no government could be forced to replace their own domestic currency.  The introduction of a global currency will not be an agenda item at this week’s G20 Summit in London, albeit the Chinese are pushing for a new international reserve currency.

A good summation of the driving and restraining forces to one currency are outlined in the article, “A Universal Currency”.  A further restraining force would be currency traders as currency trading represents the biggest financial market in the world. 

Regards

Paul J. Thomas

The budget should be balanced, the treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, and the assistance to foreign lands should be curtailed, lest Rome become bankrupt.  People must again learn to work, instead of living on public assistance.

Hmm...smart dude!  Problem is the Romans didn’t listen to Cicero.  Ironically, the Roman Empire eventually collapsed due to out-of-control government spending and over regulation of the economy – it abandoned free market capitalism and became a socialist state.  Some are now saying that America’s decline mirrors Rome’s last days.

Back to our current day crisis and there is a war of words going on.  Kevin Rudd has put a 7,700 word ideological spin on the global financial crisis and is arguing that greater government intervention can save capitalism.  In contrast, Russian Prime Minister, Vladimir Putin, has launched a stinging attack on the West’s handling of the credit crisis and warned of the dangers of “interference of the state”. 

Meanwhile, Barack Obama acknowledged in his inauguration address “that we are in the midst of a crisis is well understood”.  I believe that President Obama is a superb and captivating orator.  But can the greatest orator of our time solve the greatest financial crisis of our time?  I don’t know the answer to that but it’s going to be enjoyable hearing his rallying cries.

The President uses a number of well known speech writing techniques including anaphora, epiphora and tricolon.  You can learn more about these techniques by reading “Obama’s Secret for Stirring a Crowd” and “How to Inspire People Like Obama Does”.  Hail our modern day Cicero!

Regards

Paul J. Thomas

Fast forward to today and the words of philosopher, George Santayana, are potent: “Those who cannot remember the past are condemned to repeat it”.  To the shock and dismay of economists, nation states are again threatening to introduce import quotas in the hope of protecting domestic industry from foreign competition.

Yet protectionism will harm the citizens of the world by causing a trade war which will bring global commerce to a halt.  This assault on free trade represents a grave political risk - it will actually cost jobs at a time when politicians face intense pressure to save domestic jobs. 

In January, world leaders flocked to Davo, Switzerland for the World Economic Forum and pledged to reject protectionism.  This promise flies in the face of a series of increased duties, re-imposed subsidies and a “Buy America” campaign by President Obama.  Australian unions are also pushing for a ‘buy local’ campaign.  No wonder world trade ministers are worried. 

The director-general of the World Trade Organisation has warned now is not the time for trade protectionism.  British PM, Gordon Brown, has raised a similar concern about financial protectionism.  Appealing to nationalist interests is destructive and all eyes will soon turn to the G20 Summit in London as governments again discuss how to ease the pain of the crisis.  Perhaps the summit on April 2 should be billed as Bretton Woods Mark II as the rules which currently regulate the global economy need updating. 

Eight decades ago, trade barriers helped turned a cyclical downturn into a Great Depression.  History does not have to repeat itself.  We are all part of one global village, so let’s start behaving that way!

Regards

Paul J. Thomas

However, as your blogger has previously pointed out, business forecasting is fraught with danger - just look at the past 12 months.  The credit crisis took (virtually) everyone by surprise and was greeted with the now familiar cry of “we-didn’t-see-it-coming”! 

Predicting the future has always been a notoriously risky business.  Right now, the degree of uncertainty in the business world is immense.  The financial services sector is still reeling from a loud wake-up call that brutally reminded us that banking, at its core, is about managing risk.

As I dust off my crystal ball it’s clear to me that when the credit crisis smoke clears, the financial services landscape will be different.  Some familiar players will have disappeared, the middle ground will have thinned and market power will have swung back in favour of the big four banks. 

I think that will be a good playing field for credit unions.  I’m someone who is not scared of competition and welcomes David and Goliath battles.  As I explained in my blog, Competition - let the fittest survive, it’s consumers not governments who determine winners and losers.

The credit union business model has survived the market tumult of the past year.  Moreover, the financial probity displayed by credit unions is in stark contrast to the corporate largesse of traders and investment bankers. 

The immediate future will bring more regulation, tighter credit standards, debt aversion among consumers, higher write-downs and a reassessment of the role of rating agencies.  But there will be life after the credit crisis and Gateway intends to be a survivor. 

Regards

Paul J. Thomas

Selling something you don’t own is counter-intuitive to most people but it happens everyday on securities markets.  When you sell short you are betting the price of a stock will go down.  It’s the opposite of a long (normal) position, where you hope the value of a stock will go up.  People sell stocks short when they think a stock is overvalued – here’s an example.

When an investor goes short, he must borrow stock from a broker and then sell those shares on the open market to a second investor.  At some time the investor must buy back the stock to cover his position as he originally sold borrowed stock and must return it to the owner. 

Short selling is a perfectly legitimate means of hedging a portfolio.  Indeed, it’s seen by many as a valuable weapon in the day-to-day trading arsenal.  But as this article points out, short selling is also a risky business.

Last September ASIC banned short selling because it feared that short sellers were destabilising markets.  There is now debate about the merits of short selling - some see it as an unscrupulous way of making money.  For a good analysis of the various views on short selling, you might care to read:  Is the shorting ban helping? 

The Australian ban on (covered) short selling of financial securities expires this Friday, March 6.  Any bets on whether this will result in local banking stocks being hammered when trading resumes next week? 

Regards

Paul J. Thomas

Dipping one’s toe in the water before diving in head first is always good advice for any novice.  Yet many investors failed to follow the maxim: look before you leap.  Worse still, some of those who did rely on expert advice were ill-informed of the pitfalls associated with margin lending.

It’s now clear that the general populace was not ready for a product that was previously the domain of high-net-worth, sophisticated investors.  Leveraged trading is not for everyone as clients of Storm Financial Services have painfully discovered.  Even some bull market high flyers have been severely hurt by margin loans.

Australian investors are now showing understandable caution to margin loans, but used sensibly they remain a useful investment strategy.  The Federal Government recently foreshadowed the introduction of new regulatory measures for margin lending to protect investors. 

While gearing to invest can ramp up your returns, make sure you understand the risks.  The Sydney Morning Herald has put together an easy-to-follow guide to margin lending that provides a balanced explanation of the pros and cons.

Speculators forced to stump up money to meet a margin call have learnt a costly lesson - always leave an adequate margin of safety otherwise your nervous bank may call in your loan.  If you can’t raise enough cash to top up the security on your margin loan, your lender will simply sell your stock.

So, it pays to take a more conservative approach and borrow less than the maximum loan-to-value ratio (LVR).  A lower gearing level gives you a buffer if the value of your investment falls.  And never forget the golden rule – caveat emptor!

Regards

Paul J. Thomas

There was no such thing as easy credit when I started my banking career over 30 years ago.  As a young credit assessor I had the three C’s of credit – capacity, character and collateral - drilled into me.  As a responsible lender you did not deviate from these tried and tested standards.

Fast forward to today and we are reaping the rewards of what we have sown over the past decade.  Dubious and risky lending practices have created a Devil’s kitchen where institutions have gorged on a diet of toxic loans.  The global financial system is still trying to digest a poisonous broth of sub-prime mortgages and is now starting to swallow a rising number of personal bankruptcies caused by credit card debt.  No wonder the system is choking! 

For many years I watched with dismay as personal “wealth” was increasingly born of leverage.  It seemed as if virtually everyone wanted to “super size” their debt.  That’s why I have repeatedly said (see Household debt out of control) that borrowers are not blameless spectators to this financial crisis.  Many consumers who binged on debt are now suffering a self-inflicted hangover.

Now I know it’s easy to be wise in hindsight, but greater risk assessment should have been undertaken before sub-prime loans, 100 per cent loans and low doc loans were put on the financial menu.  Gateway has never offered such products.  Yet many credit providers have promoted this all-you-can-eat smorgasbord to their detriment.

Lenders need to go back to school and re-learn their trade and borrowers should modify their behaviour and live within their means.  A refresher course right now in Banking 101 is just what the doctor ordered.  Less spicy loans and a return to bread-and-butter lending standards will provide a boost to everyone’s fiscal health.

Regards

Paul J. Thomas

The metaphor, invisible hand, was coined by the father of modern economics, Adam Smith.  Smith asserted that economic behaviour is driven by self-interest and that purely selfish individuals are guided by an invisible hand to produce the greatest good for all.  The credit crisis, however, painfully shows that the pursuit of self-interest does not always lead to outcomes that benefit society overall.

Many consumers understandably feel they have been slapped by the invisible hand and that it, in turn, should be clobbered by the visible fist of government.  But it would be a mistake to substitute the invisible hand of capitalism for the dead hand of socialism.  Right now, the invisible hand needs a helping hand in the form of government assistance.  Which is why taxpayers around the world have become bankers, albeit this is not a sustainable or desirable position in the long term.

When the dust settles on this saga, governments must revert to being market spectators and not players.  On going, the private sector will undoubtedly be subjected to closer scrutiny from the public sector.  All markets have rules (the term “free market” is an oxymoron) and governments play an important role in setting industry standards.  Care must be taken, however, not to over regulate (see my blog Time to cull misguided regulation).

Finally, to lay the blame for the credit crisis exclusively at the feet of the free market is too simplistic.  Governments must also shoulder some responsibility, as outlined by a leading US economist in her blog, Capitalism is not dead. 

Regards

Paul J. Thomas

When it comes to the state of the housing market in Australia, there have been some alarming claims.  Perhaps the most prominent property sector naysayer is Steve Keen, an Associate Professor at the University of Western Sydney.  Keen has been arguing for some time that Australia’s debt fuelled housing bubble will burst and this will send house prices plummeting by up to 40 per cent over five years.  Hmm?

Well, I’m just a simple guy who continues to believe that markets – including the housing market – work on the basis of good old supply and demand.  And the demand for housing in Australia continues to outstrip supply.  Keen’s rebuttal to this is that demand is fuelled by people’s willingness to borrow for housing and as this wanes (because borrowers no longer expect property values to rise) so will house prices.  But there is a raft of experts who hold an alternative view.

Channel 7s business commentator, Michael Pascoe, pulled no punches in a recent blog title Steve Keen is Wrong.  Pascoe’s view is confirmed by a property value index report, released by RP Data-Rismark, which proves that the property market did not experience a major downturn in 2008.

A more probing analysis of what’s been happening in the housing market is provided by leading property expert, Christopher Joye, in his article The Great House Price Myth.  Joye does an excellent job of taking the emotion out of the debate and provides a rational and coherent assessment of what’s really going on.  Certainly worth a read.

STOP PRESS:  Latest data confirms only modest fall in home prices.

Regards

Paul J. Thomas

Some people believe that governments should print more money to solve the current financial crisis.  However, only a small percentage of the money supply (3.5 per cent in Australia) consists of physical notes and coins.  The “real” money supply can be expanded in a number of ways including electronically with a few mouse clicks as the Rudd Government did with its $10.4 billion stimulus package.  On top of this, the Reserve Bank has injected massive amounts of money (liquidity) into the financial system. 

When central banks create (rather than print) money, this is referred to as credit money.  Every time a financial institution makes a loan, new credit (money) is created.  While it’s true that consumers are presently reluctant to borrow and spend to help expand the money supply, the prevailing economic situation is not a money crisis, it’s a credit crisis.  Banks have been unwilling to lend to each other due to concerns that these loans may not be repaid.

Which is why governments and central banks are supplementing the borrowing and spending efforts of millions of people and propping up a range of business sectors, including banks.  The US leads the bailout package stakes and has now spent more in financial assistance than it cost Uncle Sam to fund its involvement in World War II. 

You’d have to cut down a forest of trees to print the currency necessary to pay for the greatest outlay of money in US history!  Or you could print $200 million notes like Zimbabwe which now suffers hyperinflation as the massive and rapid increase in the amount of her currency has not been supported by growth in the output of goods and services.  (Note: Zimbabwe recently released a $10 billion note).

Noted English economist, Tim Harford, believes the board game, Monopoly, is the perfect symbol of the financial crisis.  Pity we can’t print our way out of this mess with play money! 

Paul J. Thomas

I don’t want to get on my soapbox so early in the year, but my hope for 2009 is that we have more true profits and less false prophets.  Predicting the future is fraught with danger.  Sages often get it wrong as Financial Times writer, Philip Stephens, points out in his article, Put away the crystal ball.

As far as I can work out the only true prophet in the credit crisis saga is the economics professor, Nouriel Roubini, of New York University.  During a presentation to the IMF on 7 September 2006, Roubini predicted the credit crisis.  While he was previously dubbed “Dr Gloom” for his pessimistic views, he is now a sought after speaker.  He fears the worst is yet to come but his critics worry that his celebrity status may be a bad thing in such troubled times.

Certainly, calling the bottom of a market fall is notoriously risky - not even behavioural economists can do that with accuracy.  But that does not mean economics has no application to daily life.  Tim Harford proves this in his best selling book, The Logic of Life: Uncovering the New Economics of Everything.  I read Harford’s tome over the holiday period - here’s a synopsis.

Finally, while on the subject of predictions, climate change experts have been warning of dire consequences for some time.  As Herald Sun writer, Andrew Bolt, explains in his blog, The 10 worst warming predictions, we have now reached the stage where we can check whether the experts past forecasts have become a reality. 

As for me, I predict another year of false predictions!

Paul J. Thomas

I’m busy blogging with mouse and worn keyboard,
I try to ensure each blog strikes an interesting chord.
One last message before the year comes to a close,
But keep it simple and don’t overdo the prose.

I reflect on a year that was filled with gloom,
And wonder why we humans focus on doom.
The year will go down as our annus horribilis,
Our wealth tumbled far and this did not thrill us.

The credit crisis was challenging, we all looked for an answer,
But for now our thoughts focus on Dancer and Prancer.
We’ll let the year pass, because another is coming,
Let’s hope a new dawn sees the economy humming.

Now Gary, now Loyce, now Peter and Paul,
You’ve worked hard all year, so dash away all.
Don’t dilly, don’t dally, move merrily as you now flee,
Go home to families and presents beneath the sparkling tree.

So as I sign off for Christmas I thank each and every member,
It’s been a pleasure to serve you all, right through to December.
May the joy of the season fill your home with festive glee,
As I smile and gently whisper “Merry Christmas” from me.

Footnote:  This is my final blog posting for 2008.  My first blog for 2009 will be posted on Monday, 19 January.  Thank you to all my loyal readers.  My Christmas wish is for peace and goodwill throughout the lands.  Have a great New Year. 

Paul J. Thomas

Car dealers will be nice (as distinct from naughty) as they need to turn over the stock on their showroom floors. Pressure on dealers to unload inventory is high and prospective tyre kickers should benefit from what one media report described as the "sale of the century as car prices crash".

Part of the reason for the vehicle fire sales relates to the credit crisis. Motor dealerships are typically highly leveraged businesses that use floorplan financing to pay for the cars on their lots. In Australia, GE Finance and GMAC (the finance arm of GM) have been big providers of floorplan funding and their recent decision to pull out of car dealer finance has sent shockwaves through the local car industry.

As financiers hit the brakes on funding, dealers are gearing up for hard times. Vehicle financing is integral to car sales and there is understandable concern that some car dealers may be in peril. Respected business commentator, Robert Gottliebsen, believes the “car industry (is) heading for a pile up” and his assessment is well worth a read.

For those who have some discretionary spending power now is the time to drive a hard bargain, with car sales the worst in 22 years. It’s a buyer’s market with incentives, discounts and extended warranties on offer. So turn heads this Christmas by driving the newest toy on the block. And if you need finance, Gateway can help.

Paul J. Thomas

The continuing credit crisis is like the smack-the-rodent game. As soon as a problem is smashed down another rears its ugly head. Bad news after bad news keeps popping up and governments around the world keep whacking them down with a fistful of dollars.

The ongoing saga with its unimaginable collapses and unintended consequences has led to some unhelpful media coverage. Is it time we thumped the sensational media reporting on its head?

It would be absurd to ascribe to the view that the media caused the credit crisis. However, it is not unreasonable to suggest that some newspapers have sensationalised the crisis. Worse still, we have witnessed gutter journalism with the inexcusable character assassination of a public official.

The credit crisis reporting reminds me of the doomsday predictions surrounding the Year 2000 Computer Bug (Y2K). Y2K captured the imagination of the popular press and lost all sense of proportion with catastrophic forecasts of jumbo jets falling from the sky and nuclear missiles self-launching.

 The world survived the Y2K bug and it will survive the credit crisis. Market falls are a natural part of the economic cycle and understandably attract media commentary, but comparisons with the Great Depression are exaggerated as economics writer, Ross Gittins, points out in this article.

I’m all for freedom of speech as long as it is balanced and responsible. Alarmist and emotive headlines incite panic and breed unnecessary fear. Surely, the media has a responsibility not to make a bad situation worse with a constant barrage of overwhelmingly downbeat stories?

What do you think?

Paul J. Thomas

The safety of deposits in Authorised Deposit-taking Institutions (ADIs) has, quite rightly, always been taken as a given and to promote this feature would have called into question the stability of the financial institution concerned.

Well, how the world has changed.  It started with the Irish Government guaranteeing deposits and then it was a case of one in, all in.  Now all depositors around the world expect an iron clad guarantee from their government to protect their hard earned savings. 

The Rudd Government’s decision to guarantee funds held with ADIs has undoubtedly engendered confidence among Australians.  Hopefully, it might even stop some of the unnecessary panic we have seen in recent months.

Some Australians have been literally hoarding their cash as there is a shortage of $100 notes in circulation.  Of those hoarders who have bunkered down, some have put their money under the proverbial mattress while others, displaying “rational panic” (excuse the oxymoron!), have at least put their cash in safes. 

While I believe the guarantee is subversive to sound economics, I also accept our government had no choice but to follow other governments.  So, yes, Gateway is subject to the government guarantee and, like everybody else, we are now promoting our strength and stability.  So sleep peacefully.

By the way, if you know someone who has stashed their money in a safety deposit box, politely suggest they put it back into circulation.  Spend it or invest it … but don’t hide it!

Paul J. Thomas

The fiscal stimulus package represents a modern day New Deal and is based on Keynesian economics.  The British Economist, John Maynard Keynes, believed that in a downturn, fiscal policy should be used to stimulate the economy.

As a result of the credit crisis governments around the world are moving to shore up confidence but this does not mean that, longer term, free markets are out and governments are back in business.  The health of our economy (and others) is declining and, in Australia’s case, I believe a pre Christmas injection of cash is just what the doctor ordered.

What the academic heavyweight of laissez-fair capitalism, Professor Milton Friedman, would make of this is probably not hard to guess.  Friedman was a staunch advocate of monetarism and argued that government action was at the root of inflation. 

In line with the underlying sentiment I espoused in my blog last week, I am of the school which believes that, right now, we need a Keynesian recession buster.  I believe the government’s economic stimulus package will help the economy stay alive in the short term and that a hit of Keynes will do us good. 

Lest there be any confusion, I am neither a Keynesian purist nor a monetarist purist.  One has to be pragmatic and Keynes is undergoing an understandable revival in the face of unprecedented market conditions.  In normal times (see my blog Let the Fittest Survive), I believe that governments should play a much smaller role in the economy and that we need to be cautious of over regulation. 

What do you think?

Paul J. Thomas

Our economy, like all economies, is based on consumer confidence.  The sub prime crisis has weakened consumer confidence and spending.  Markets have been running on emotion.  Economic fundamentals have been thrown out the window.  The threat of recession is causing many of us to experience a “psychological recession”.  We think things will get worse, so we adopt a gloom and doom mentality. 

The problem with this is that a capitalist economy runs on the simple notion of supply and demand.  When consumers get spooked they stop spending and when this occurs, companies produce less and eventually must downsize their workforce.  And so begins a vicious cycle in which everyone loses.  That’s why we need to re-learn an old lesson: united we stand, divided we fall. 

Yep, it’s distressing watching your superannuation nest egg decline in value.  And it’s no fun seeing your house price fall.  But the worst thing we can do right now is hoard our money.  I’m not suggesting we throw our money around recklessly and become materialistic spendthrifts (see my blog posting of 19 May 08).  But if we apply the brakes too hard, the economy will grind to a halt and we will officially be in a recession. 

Remember, the entire economy is built on trust and panic is not a sensible investment strategy.  It’s understandable that consumers are concerned but there will be light at the end of the tunnel.  Meantime, we just have to be careful not to cut our collective noses to spite our faces, otherwise the slowdown will take everyone to the cleaners. 

Paul J. Thomas

As an adult my frustration with inconsistencies between the states has not abated.  In a former life I worked for an organisation that spent over a decade lobbying government for uniform credit legislation throughout Australia.  I watched with anticipation John Howard’s efforts to secure uniform gun legislation following the Port Arthur Massacre (in which my wife’s friend was shot dead).  And I’ve listened to upwardly mobile Australian executives with children complain about differences in school curricula around the country.

Let’s be honest - the only reason we have three levels of government is due to the burden of history (or path dependency).  Australia started out as six independent colonies.  The joining of these colonies into a federation of six states to form the Commonwealth of Australia was a good idea in 1901.  Today, I humbly submit, the Federal/State structure of government is obsolete. 

I don’t think the founding fathers of our great nation envisaged the buck passing, endless bickering and unnecessary duplication that have come to characterise Federal/State relations.  My sense is that Australians are sick of politicians playing the blame game.  No system of democracy is perfect - but surely we can do better than what we currently have in place.

While I’m on my hobby horse, can I also suggest that the entire world is over governed?  The tiny rock that we call home – planet Earth – is divided into no less than 192 sovereign nations.  Try solving a global credit crisis with that many governments! 

Paul J. Thomas

The good news is there’s plenty of blame to go around when it comes to the credit crisis.  Responsibility for the mounting contagion does not reside with any particular group.  No one can claim a monopoly on greed and stupidity, so many in the populace and media are demonizing everyone and anyone. 

Chief among the villains are the fat cat CEOs who pocketed huge pay packets while presiding over lax lending.  Others blame US regulators for turning a blind eye to an unsustainable mortgage market.  Not to be forgotten are the financial wiz kids who invented the newfangled securities that turned toxic. 

But what about us?  Do we need to temper our righteous indignation in the knowledge that, as a society, we have become credit junkies?  In my blog posting of 19 May 2008 title Household debt out of control I argued we are living beyond our means.  For many, unsustainable expenditure has become the drug of choice. 

I think as a society we need to take a long hard look at ourselves.  Collectively, we need to take some ownership for the prevailing economic climate.  We need to understand that debt is not risk free.  We need to save more and encourage habits of thrift among our children. 

But most of all we need to stay calm.  Markets are driven by sentiment.  So, the most important virtue right now is not to panic.  Let’s all work together to rebuild trust and confidence and prove we are not morally bankrupt.

Paul J. Thomas

Over the past year, however, the lurid stories which typically grab the headlines have given way to the normally sedate world of business - thanks to the credit crisis.  Financial news has been pushed to the front pages with talk of market meltdowns, bank bailouts and plummeting confidence creating fear and panic in the streets. 

To be sure, the credit crisis is a severe and protracted issue and a financial tragedy for many.  Gateway, thankfully, is not in this category.  We have survived the turmoil relatively unscathed and in the catch-cry of the street newspaper seller you can “read all about it” in Gateway’s 2008 Annual Report. 

I should warn you that our annual report contains no shrill breaking news or fear mongering.  It is not a bleak and nail biting drama, nor is it full of adrenalin-pumping headlines.  Nonetheless it’s a pretty good read.  The annual report documents how we navigated the credit crisis and conveys the optimism we have for Gateway’s future.

I’m sorry we could not be more alarmist, but when you run an institution that has maintained prudent practices and resisted the temptation to lower standards then life, relatively speaking, is pretty boring.  On a serious note, I do hope you enjoy the report.

Finally, it would be remiss of me not to recognise the professional Gateway team and our Board of Directors for their efforts over the past 12 months.  I would also like to acknowledge our loyal members for their on going support. 

Paul J. Thomas

Life, however, inevitably takes unexpected twists and turns.  Some of the most significant things that happen to us are unplanned.  I’ve yet to meet a person who planned to fall ill, or get divorced, lose a job, or suffer a serious injury.  Unforeseen events can derail the best life plan and all can cause financial hardship.

Believe it or not, the main reason borrowers are unable to meet home loan repayments is not over commitment but unexpected “catastrophes” such as illness or injury.  This fact was confirmed in a report released in May by Mortgage Insurer, Genworth Financial, which showed that interest rates are not the biggest cause of mortgage stress.

Only 2 per cent of defaults are caused by being too deep in debt.  In contrast, a whopping 38 per cent of mortgage delinquencies are caused by injury and illness.  This is something that can be managed by having income protection insurance in place.  It makes sense to protect your income from the unexpected.

If you’ve experienced a change in your personal circumstances and are struggling to keep up your mortgage payments, don’t stick your head in the sand.  Contact your lender and negotiate an affordable repayment arrangement.  Don’t wait until you are on a slippery slide to foreclosure or bankruptcy.  All prudent lenders would rather put in place a payment plan than repossess a property. 

Paul J. Thomas

It’s understandable that investors are nervous.  We humans don’t like uncertainty and we become unsettled when markets wobble.  Fear is stalking Wall Street and the rest of the world is experiencing a historic shake up.  But stability will return - just as it has before.  Meantime, we need to keep a level head and not make irrational decisions. 

Let me tell you what I rationally know.  Cash is king in times of turmoil and this is good news for Australian savers.  While our retirement funds have fallen, interest rates on savings accounts are providing attractive returns (close to a seven year high prior to the recent RBA easing).  And our banks, building societies and credit unions - collectively know as Approved Deposit-taking Institutions (ADIs) are strong.

Australia’s ADIs continue to be safe havens for savers and investors.  Over recent weeks the Federal Government has been reassuring Australians about the robustness of our financial system.  Yesterday, the Rudd Government went one step further and announced it will guarantee all deposits held by banks, building societies and credit unions for a period of three years.  The move follows similar blanket guarantees offered in other countries amid the world financial crisis and is welcome news for investors. 

Gateway has been helping members with their savings and investment needs for over 50 years.  And we intend to continue doing that for many years to come thanks to our strong balance sheet and prudent management.  You can confidently deal with us. 

Paul J. Thomas

Just as American intelligence did not predict the terrorists’ attacks, American regulators did not see the sub-prime financial time bomb ticking away.  As with 9/11, national turmoil in the US has quickly escalated into international calamity. 

In America, the finger of blame is pointed squarely at the government, the press is having a field day and the attacks are coming from all quarters.  One headline proclaimed “The bigger credit crisis is with the government” while another labeled the ongoing saga as “A failure of US political leadership”.

Surviving any crisis requires strong leadership.  In times of uncertainty, people look for guidance and clear communication.  The Bush administration has failed to project any sense of authority over the dislocation in financial markets.  The credit crisis has turned into a credibility crisis.

Meanwhile, Australians can be proud that our banking system remains sound.  Our world class regulators and central bank are working with world financial authorities to prevent this happening again. 

Australia leads the world in many areas and we have a level of checks and balances in our financial system which is arguably second to none.  As the RBA Governor recently stated, we are “light years away from what is happening in other banking systems around the world”. 

The integrity of our financial system remains intact.  The government has, quite rightly, said that Australia will beat the turmoil.  Perhaps we antipodeans should be more concerned about global warming than market meltdowns? 

Paul J. Thomas

The dislocation in financial markets was caused by irrational lending practices - saddling borrowers with dodgy (subprime) loans they could not afford.  As the loans went sour, markets overreacted and then fear and panic set in.  Investor confidence plummeted and everyone rushed to the (stockmarket) exit door.

The human species was convinced it faced a financial Armageddon and this supposedly intelligent herd animal behaved like one of Pavlov’s dogs – the market rings the bell and hysteria starts.  The great panic was fuelled by apocalyptic reporting from the media which whipped us into a frenzy.

The white knuckle ride has been made even more exciting by market rumours.  Nothing like wagging tongues to propel gloom and doom!  But if we had acted more rationally, could we have avoided or mitigated the financial system death spiral?  As economics commentator Ross Gittins pointed out last week, humans are too smart by half. 

Conditions on financial and equity markets remain jittery.  When the dust eventually settles on this damaging saga, teachers of media and political studies will try to make sense of what happened.  Hopefully, economists will learn that markets are not populated by rational decision makers.

They might also learn that the really big events in world history, as outlined in the bestselling book, The Black Swan: The Impact of the Highly Improbable, are rare and unpredictable.  The author argues that economists live in a fantasy world where they believe the future can be controlled by sophisticated mathematical models. 

To those who still struggle to understand what has happened, you might care to read the article, Can’t Grasp Credit Crisis? Join the Club. 

Paul J. Thomas

The average Joe “knows” that economics deals with the production and consumption of goods and services.  However, economics is really about how we make decisions.  It’s a body of knowledge that explains how we make choices.  Given our limited resources and unlimited wants (referred to by economists as scarcity) how do we make trade offs between alternatives?

As consumers we make choices every day.  Should I buy that new car?  Or should I extend my house instead?  Maybe I should just take the family for a holiday?  Or how about I put the money aside for a rainy day? 

Our collective decisions contribute to the economic trends we read about in the media.  We help create the recessions and expansions that occur in the economy.  The latest economic statistics tell us that we are not a happy lot.  Australia now has the second lowest level of consumer confidence in the OECD but the RBA says the fall is not disastrous.

What is not debatable is that we have tightened our belts.  We are spending less on eating out.  We are buying fewer magazines.  We are purchasing fewer new cars.  And we are building fewer homes.  In America, changed consumer spending patterns has caused leading economist, David Rosenberg, to suggest that “frugality is now replacing frivolity”. 

With restaurant meals off the menu, big ticket expenditure on hold and petrol prices rising, people are understandably worried.  But history shows that things will get better.  Consumer sentiment will bounce back.  The good times will return.  It’s all part of the (financial) circle of life.

How do you think we can start a wave of optimism?

Paul J. Thomas

In many areas of life, two things can be similar yet quite different.  Just look at credit unions and banks.  Both are regulated financial institutions.  Both are prudentially managed.  Both provide savings and loans products.  But that’s where the similarities end.  Credit unions and banks have distinct differences with regard to purpose, ownership and governance. 

Credit unions are not-for-profit, member-owned, democratically controlled financial co-operatives.  Banks, on the other hand, are for-profit, shareholder owned and controlled entities.  Unlike banks, credit unions exist solely to serve their members, not to pay high dividends to an outside group of stockholders. 

Credit unions are better for you and your wallet.  According to Roy Morgan Research, credit unions have higher customer satisfaction levels than the major banks.  Credit unions are focussed on people and service - both members and staff.  In Gateway’s case, we have an 88% staff satisfaction rating and a 94% member satisfaction rating. 

Here is a brochure which outlines ten good reasons to join a credit union.  If you don’t have time to read, then listen to this 46 second YouTube video and discover why credit unions are really different.  If you have a few more seconds, then listen to this second 1:47 minute YouTube video for a fuller explanation of the credit union difference.  Or scan this short but informative article, “Banking on credit unions”. 

What do you like about YOUR credit union? 

Paul J. Thomas

In 1997, thirty-seven industrialised countries plus the EU committed to reduce their pollution through an international agreement - the Kyoto Protocol.  Last December, the Rudd Government ratified Kyoto – the much touted global solution to climate change.

More recently, the federal government released details of its Emissions Trading Scheme.  While not obvious from reading the scheme’s guiding principles, Australian consumers will not be immune from the impact of the brave new world of carbon trading.

In my blog posting of 7 July 2008 titled, Petrol prices a crude awakening, I spoke about the impact of supply and demand on petrol prices.  The same economic equation holds true for energy prices – electricity supply will become dearer to encourage households to reduce their demand of this emissions-intensive energy source.

So, are you prepared to throw away your power hungry plasma TV?  How about converting to solar heating?  What about buying a more energy efficient car?  Gateway is trying to reduce its environmental footprint and has introduced green business initiatives.

I suspect it’s going to be a stormy path to a cooler world with leading global economist, Professor Jeffrey Sachs, sounding alarm bells about Australia’s carbon trading scheme.  No doubt “human temperatures” will also rise as individuals let off steam while arguing their preferred solution to a hot topic.

To help you make sense of this debate, you might care to read: Cool It: The Sceptical Environmentalist’s Guide to Global Warming.  The author challenges the effectiveness of Kyoto and debunks the apocalyptic scenarios linked to climate change – a compelling read. 

Paul J. Thomas

Beverley and I had a wonderful holiday in Europe.  We travelled via Dubai where everything is big and brash.  What a contrast that made to our visit to Gallipoli which was a very serene and moving experience.  The Anzac Commemorative Site includes 10 large panels that tell the story of Gallipoli in 1915. 

The Gallipoli campaign is regarded as one of the most spectacular failures of World War I.  The allied naval assault was the product of poor military strategy and the offensive ended in disaster due to poor leadership.  Almost 9,000 young Australian soldiers lost their lives at Gallipoli and thousands of Australians gather at Anzac Cove each year for the commemorative service.

It always weighs heavily on my mind that the defeat at Gallipoli was not due to the courageous soldiers but to the incompetent battle commanders who developed a flawed plan of attack.  I take my leadership role here very seriously and will always do my best to steer Gateway to victory. 

It’s good to be back in the Land of Oz.  We truly are the lucky country.  I’m pleased that credit unions are an important part of the fabric of this nation.  Gateway will continue to do its bit to Advance Australia Fair.

In closing, my only regret is that I missed the Australian coverage of the Olympics while I was away.  I understand we did well.  Aussie, Aussie, Aussie, Oi Oi Oi.

Regards
Paul J. Thomas

Regards

Gary English

Occasionally I venture out to one of those giant warehouse stores (usually owned by a supermarket chain) that sell wine, spirits and other conversation starters. I may look for a wine from a small producer that has received a good review - many times it is either nowhere to be found or buried in an inconspicuous location amongst a myriad of competing brands. How can producers not willing or able to pay shelf premiums survive in a market like this?

They can’t really differentiate on price - how many of us would actually buy a 'cheap' brand of wine that we weren't familiar with?

They can’t afford expensive advertising campaigns or an army of sales reps storming around the country?

Often the key to success for these businesses is identifying a cost effective distribution model able to reach and create value for a niche group of customers. Mail order and e-commerce are common methods.  If they do it well, their customers become advocates of the brand and a low cost sales force is created. 

But sometimes success has its price. Businesses grow and often find it difficult to maintain the personalised touch that created their success – customers know this!

• When you come across a niche provider that creates value, do you tell others or keep it a secret?
  
• Are you torn between the benefits of preserving the experience and the risk that if too many others join in, things will never be the same?

Our members often tell us that we need to change – but not too much!

Regards

Gary English

But is this good service or merely consistent delivery of an expectation?

In recent times, many of these business models have become less effective i.e. if you want beetroot on your hamburger, then maybe we should let you have it because if we don’t, you’ll go next door to get it! Who is setting the expectations now?

A challenge for any business (including Gateway) is to understand and where possible exceed the needs, aspirations and expectations of their customers. Many services providers champion their service offering and ‘commitment to quality’. The intent may be genuine but in my experience, there is often a shortfall in delivery. Certainly my recent experiences with a variety of tradesmen have been inconsistent at best and as a result my expectations have shifted. Simply turning up to an appointment on time is now exceeding my expectations but could hardly be considered great service.

This reinforces the notion that a customer’s reaction to a service experience is not always relative to the quality of service provided. Sooner or later the customer will react - those who don’t adapt will not survive.

When was the last time you received truly great service?

Regards

Gary English

Financial markets around the world are presently in a state of flux - the common theory as to the root cause of the problem is inappropriate lending practices creating a spate of mortgage defaults.  In the current climate, it is unlikely that my nephew’s original proposal would be entertained by many, if any, lenders. Unfortunately, in the not too distant past the chances of such a transaction proceeding would have been significantly greater. In the case of the latter, whilst the emotions driving the request may have been satisfied and a lender may have made a short term gain, the potential for subsequent problems would have remained high.

In the lending business we are constantly balancing elements of risk and return. Often, the driving emotional influences of a transaction may cloud financial logic and the ‘middle ground’ needed is not explored. Behaviours driven by periods of conservatism (bear market) or optimism (bull market) inevitably end and memories can be selective, particularly at the start of a new cycle. Many institutions are now thinking about the shape of the lending landscape once the dust settles on the credit crisis.

Will the ‘bulls’ return with little recollection or regard for recent history and a drive to recover lost ground?

Will the ‘bears’ ensure a more measured approach utilising lessons learned to seek long term stability? 

Who will you listen to?

Regards

Gary English

Well from next Monday there will be a slightly different routine.  The CEO blog will be updated weekly but not by me - I’m off on annual leave at the end of this week.  My Head of Sales and Operations, Gary English, will be acting CEO in my absence.  Gary’s mug shot will be on the website in lieu of mine but please don’t be frightened; he’s actually a great guy!

Gary will have the pleasure over the next month of coming up with an interesting blog topic each week using less than 300 words (good luck!).  Now to help and encourage Gary, please feel free to comment on his blogs - it’s lonely when no one talks to you.  I’ve discovered that blogs are like talk back radio - you can have lots of readers (listeners) but only a few post comments (phone in).

While I don’t see myself as a “shock jock”, I have tried to make my blogs somewhat provocative.  Am I hitting the mark?  Would you like me to cover different and/or broader topics?  But please don’t get me started on how our education system is churning out graduates who can’t spell or compose a letter.  And certainly don’t mention the absurdity of having three levels of government in a country of only 21 million people! 

Okay, I’ll calm down now.  You’ll hear from me again on Monday, September 1.  Phew - I must need a holiday.  Bon Voyage!

Paul J. Thomas

Try buying a simple ham sandwich.  Would you like that on white, brown, wholemeal, wholegrain, rye or focaccia?  Would you prefer leg ham, pressed ham, smoked ham or shaved ham?  How about coffee?  Do you prefer skim, full cream, soy or low fat milk?

Now I’m not advocating we go back to the bad old days of Henry Ford.  Ford famously wrote in his autobiography: “Any customer can have a car painted any colour that he wants so long as it is black”.  What I am suggesting is that we heed the sobering observation of Edward de Bono in his book Simplicity.  De Bono notes that 95 per cent of people do not use 90 per cent of the features on their video-recorders - because they are too complicated.

I believe that simplicity is also required in retail banking.  Financial service customers are confused by the explosion of products and services.  At Gateway, we have no desire to offer a full suite of products with umpteen variations.  Convenience with simplicity is our mantra and we believe this will ultimately separate the winners from the losers.  So, we’ll continue to follow the KISS formula – keep it simple stupid!

By the way, does anyone know the difference between reduced fat and low fat?

Paul J. Thomas

A life of leisure might sound appealing but what about purpose and meaning?  Happiness in retirement is about being active and for some this purposeful activity will take the form of work.  The authors of Avoid Retirement and Stay Alive believe that the longer you work the longer you live.  Research shows that almost 20 per cent of baby boomers plan never to retire.

While success in retirement is about much more than the money, it does not mean you can ignore the question: How much do I need to retire?  The answer to this will be influenced by your choice of retirement age.   I’m 51 years of age and started my retirement planning six years ago. 

Like 50 per cent of full time workers in their 50s, I plan never to retire.  When the corporate world tells me my time is up, I’ll finish writing the book I’ve been (slowly) working on, possibly do a PhD and then maybe lecture.  My dad is in his mid 70s and still works, albeit part time, just to keep himself active. 

I have absolutely no intention of sitting in a rocking chair on the porch.  I don’t want to be part of a granny state but an active state of mind.  What do you want to do?

Paul J. Thomas

Now I know this is going to sound counter-intuitive, but the best protection against rising petrol prices is for the government not to lower the price.  The law of supply and demand states that as the price of a good rises, less will be purchased.  Thus, lower fuel prices will only increase demand leading to higher prices.  That’s why a leading researcher has noted that the solution to higher petrol prices is to keep the price high. 

With bowser prices above $1.60 a litre, motorists understandably feel they are being pumped dry.  Drivers are forking out over $100 to fill the family car and day trips/weekends away are being cancelled.  The petrol pump is the new one armed bandit and more price hikes are on the way.  Not surprisingly, the cost of petrol ranked as the top concern of Australians surveyed for the March 2008 Sensis Consumer Report.

Kevin Rudd was right when he said there’s “no silver bullet to bring down the price of petrol”.  So what’s the solution to the oil shock?  The environmental website, Low Impact, argues we have to reduce our reliance on petrol.  This means changing our behaviour and our love affair with the car.  You might even choose to walk more and this will have the added benefit of reducing the western world’s obesity problem. 

How do you think we can reduce our dependence on petrol?

Paul J. Thomas

I’ve never been convinced that being first to market provides a company with a sustainable competitive advantage and that’s why I’m positioning Gateway to be a fast follower.  As noted in the best selling book, Good to Great, De Havilland pioneered the commercial jetliner but was overtaken by Boeing.  IBM was initially a laggard in computers behind Remington Rand.  Lotus 1-2-3 lost out to Excel.  GE was not the first to market with the AC electrical system, Westinghouse was.  In a true embodiment of Aesop’s Fable of The Hare and Tortoise, these market followers prove that slow and steady wins the race.

Today marks the end of the financial year and Gateway’s greatest achievement during fiscal ‘08 has been to move closer to being a fast follower.  Frankly, over the past decade we have been a laggard in product development and have spent the past three years playing catch up.  We now have a more comprehensive line up of savings and loan products and when we introduce our Visa Debit card early next year we will close the gap in our product range (for the time being!).

Thank you for your patience as we brought these new products on stream.  We’re committed to keeping up with developments which occur in the retail banking space.  Are there other products we should be considering?

Happy New (financial) Year! 

Paul J. Thomas

Change is being stifled by the four pillars policy which does not allow mergers between Australia’s big four banks.  This policy is based on fear of reduced competition but as this article shows the policy has not led to a better deal for consumers. 

Now it may seem strange that a small credit union is calling for greater freedom for bigger competitors.  However, at the end of the day, it’s consumers and not governments who really determine business survival.  And consumers don’t necessarily want big, tough, macho organisations dominating the corporate jungle.

Darwin never spoke about survival of the biggest (remember the dinosaurs?) nor did he mention survival of the toughest.  Darwin’s theory was based on change and adaptability and that’s where credit unions come to the fore.  Remember also that giants may form but this does not stop more nimble species evolving and proliferating. 

To be sure, I don’t believe in unrestrained competition where one wins at any cost.  Governments have a role to play in defining the rules of competition so that it’s not survival of the most ruthless or the most deceptive.  Beyond that, it’s up to each market participant to avoid extinction. 

So, I’m happy to do battle with the big four or big three or big two.  And guess what, I’m prepared to bet it won’t lead to a financial ice age.  At Gateway, we’re not hibernating…so let the games begin! 

Paul J. Thomas

Over one million Australian households now spend more than 30 percent of their gross income on either mortgage or rent - the measure of housing stress.  In many of these homes mum and dad both work, the kids are in day care and the fabric of family life is being stretched to breaking point. 

I agree with the Reserve Bank that Australians generally do not benefit from increases in housing prices.  So, how do we ensure that first home buyers do not become extinct?  ANZ economist, Saul Eslake, believes interest payments made by first home buyers should be tax deductible as long as they pay capital gains later.  Meriton boss, Harry Triguboff, argues that young people should be allowed to delay compulsory superannuation contributions to save a deposit.

For my money these ideas are too simplistic.  Life has taught me that all complex questions have several layers of possible answers as this article by two academic urbanists points out.  Rather than stabbing at solution, a co-ordinated approach by all levels of government is required.  While the Rudd government’s recently announced First Home Saver Account is not a panacea, it’s a step in the right direction.

Gateway does not want to see young people squeezed out of the property market and will be offering a low tax, First Home Saver Account later in the year.  What else should we be doing?

Paul J. Thomas

My bald uncle is now referred to as “follically deprived”.  The drug addict down the road is “chemically dependent”.  The blind man on the bus is “visually impaired”.  The woman in the wheel chair is “physically challenged”.  Slow students are “developmentally delayed”, bed wetters are “nocturnally compromised” and the list goes on.

The corporate world is not immune to euphemisms.  Most people now know that “sub prime lending” is a fancy term for high-interest loans to people who would otherwise be considered too risky for a conventional loan due to their poor credit history.  Avoiding potentially offensive terminology has contributed to the worst global financial crisis since the great depression.

Hopefully, the hapless sub prime borrowers and the opportunistic lenders have learnt a hard lesson - all that glitters is not gold.  My heart goes out to the thousands of people who have lost their homes.  I have little sympathy for the investment banks that packaged and bought the mortgaged backed securities (bonds).

Attempts to mask the truth or hide unpleasantries bring into sharp focus the pitfalls of political correctness.  With regard to the sub prime crisis, dressing up questionable lending practices doesn’t make them respectable.  That’s why Gateway has never offered loans to borrowers who clearly cannot demonstrate a capacity to repay.  Surely, honesty is still the best policy?

Paul J. Thomas

It often takes the voice of innocence to reveal the naked truth, but in this dog-eat-dog world, who can claim to be unblemished?  At the risk of sounding like another spin doctor, I’d like to explain why mortgage rates have risen by more than the RBA rises.  In doing so, I hope to be the voice of reason on an emotive topic. 

Every business needs raw materials to produce a finished product.  A baker needs flour to produce bread, a carpenter needs wood to make furniture and a financial institution needs money to fund loans.  When the cost of flour and wood rises, the end price to the consumer needs to increase too, otherwise profit margins fall, leading to business instability over the longer term.

The same basic economics holds true for financial institutions.  The continuing turmoil in financial markets has driven up the cost of funds (the price paid for deposits) by more than the RBA increases.  This has resulted in a fall in the margin (spread) between the rates lenders charge borrowers and the rates they pay investors.

I don’t believe financial institutions are gorging themselves on fat margins but merely trying to recoup some extra costs.  But how far should financial institutions go in shielding families from the rising cost of funding?  Should they absorb more of the increased funding costs?  Is Gateway doing enough to ensure the economic well-being of its members?

Paul J. Thomas

In the era of the 30 second TV grab, our political leaders are quick to jump onto the bandwagon of consumer sentiment and pander to voters and the popular press.  However, in their bid to act decisively, governments often behave impulsively and fail to address or solve the underlying issue.  The end result is unnecessary regulation on business, the cost of which is invariably passed onto the consumer. 

The Rudd government wants to relieve the burden of red tape on business.  To this end, the Council of Australian Governments (COAG) has developed a regulatory reform agenda which is designed to reduce the regulatory burden on business.  Currently, business must comply with an extensive array of corporate regulation with the total cost of federal, state, territory and local government regulation estimated to be $40 billion per year.

The financial services sector picks up its fair share of this cost and you, as consumers, pay.  Gateway believes that Product Disclosure Statements should be more simple and concise.  Also, we believe that the current system of uniform state based consumer credit legislation should be taken away from the states and into federal jurisdiction (under ASIC’s watchful eye).

Can you think of anything else that needs to be streamlined to make your banking easier?

Paul J. Thomas

According to a recent survey three-quarters of Australians believe that financial institutions are to blame for the debt crisis as lenders are too willing to advance credit to those who can’t afford it.  There’s no doubt that deregulation and increased competition have given consumers greater access to household credit.  But can everyone claim to be a victim of predatory lending? 

What is not in dispute is that household debt is burgeoning.  Australian families are straining under a record $1,085 billion of debt - an average of $137,000 for every household.  The average family owes $160 for every $100 of disposable income, compared with $125 three years ago.  Not surprisingly many Australians, according to an independent study, are worried about their ability to pay their debts. 

Does this heavier debt burden reflect rising affluence?  Or do we just crave for bigger and more expensive homes and household items like plasma TVs?  Is there a contradiction in the fact that our homes are getting bigger while our families are getting smaller?

Gateway is concerned about the growing debt burden on families and has prudent lending practices to guard against over commitment.  Ironically, our cautious approach does raise the ire of individuals whose loan applications we decline.  But when it comes to extending credit we believe it’s best to be safe rather than sorry.  Do you agree with our conservative lending approach?

Paul J. Thomas

Each day the press reveals another casualty of the protracted downturn with the narrative leaving readers in no doubt about the severity of the situation.  One article poetically labelled the credit crisis as “the perfect storm”, another used the metaphor “tsunami” to describe Australia’s vulnerability while another still declared it the most severe crisis “since (the) great depression”. 

While Gateway is not directly exposed to the subprime meltdown, the price (interest rate) we pay for term deposits has risen sharply.  The global credit crisis has forced the major banks to fund more of their operations from the retail market and this pond is being “over fished”.  The end result is our continuing difficulty in reeling in new depositors.

To overcome this we recently released a limited offer term deposit to attract new money at a slightly higher rate than our standard rate.  Some long term members cried foul that we were paying more to new investors.  So, the $64,000 question is: Did we do the wrong thing?

I reasoned that other financial institutions have differential pricing, so why not Gateway?  Our honourable aim was to merely raise additional deposits to fund our on-going loan demand.  In no way was our intent to disadvantage existing members.  I suspect that whether the glass is half-full or half-empty in the matter of special offers depends on your perspective.  What do you think?

Paul J. Thomas

Sure, there have been disreputable lending practices since antiquity.  But credit unions have always been the good guys of finance in line with their people helping people philosophy.  At the heart of this philosophy is the concept of human development expressed through people working together to achieve a better life for themselves and their children. 

Gateway wants to play its part in the global fight to end poverty by helping build vibrant credit unions in developing nations and will do this in partnership with the Credit Union Foundation of Australia (CUFA).  CUFA runs a number of aid programs and one that has caught our attention is the restructuring of the microfinance system in Cambodia to give the working class access to financial services through local credit unions. 

In September we will be sending one of our employees, James Tanios, to Cambodia for 12 days to educate the local villagers about the importance of savings.  James will also assist in the training of local credit union leaders.  A full overview of James’ trip is available here. 

Gateway is paying for James’ travel and accommodation.  But he is required to personally raise $3,000 prior to his departure.  You can support James with his fundraising efforts by completing this authorisation form.

Do you think Gateway should be involved in such charitable pursuits?  Should we do more of this outreach work?  Is supporting developing nations part of our Corporate Social Responsibility?

Paul J. Thomas

In the same way, organisations should undergo periodic health checks to make sure they are not getting out-of-shape.  Like humans, organisations often ignore the symptoms of illness and by the time they act, it’s too late and the business is in decline.

The real judge of an organisation’s health is the customer.  That’s why we regularly ask a cross-section of members what they think of us.  A recurring theme from these surveys is that we are difficult to access.  Gateway does not have branches nor do we have plastic cards.  Most members never set foot in our Sydney office and transact with us on-line or over the phone.

Nonetheless, it’s clear that a growing number of members would like ATM and EFTPOS access to their funds.  That’s why the Gateway board resolved last month to add a Visa debit card to our product line up.  We are still working out the product construct and hope to be in a position to start offering Visa debit in the first quarter of 2009. 

There would be a cost attached to the Visa card but our no fees policy on other services would still apply.  I’m keen to find out your attitude to this product initiative and would welcome any feedback.

Paul J. Thomas

Given this, I’ve been deliberately slow to embrace a management technique that was released a few years ago called triple bottom line reporting.  I’m now convinced that triple bottom line is not simply the latest in a long line of management fads but rather the tip of an iceberg.  Beneath the calls for triple bottom line reporting is the larger idea of sustainability i.e., strategies for sustainable growth.

Triple bottom line holds organisations accountable for their impact on the communities in which they operate and the broader environment and that’s why it’s sometimes referred to as triple P - people, planet, profit.  I’m committed to making Gateway a leading socially responsible organisation. 

Credit unions have always known there’s more to business than profits alone and that’s why the triple bottom line is a natural fit for Gateway.  Our recent eTree initiative is one example of this.  As a first step, we are currently putting together a list of potential green initiatives and other positive contributions Gateway can make to society and the environment.

I would welcome your feedback on how Gateway can reduce its ecological footprint.

Paul J. Thomas

I take my leadership role here very seriously and am a true believer in the credit union people helping people philosophy.  I love the fact that everyday the credit union helps people achieve their dreams.  There is no greater reward than seeing the smile on a Member’s face when we have financed a new home or the gratitude we receive from a struggling family to whom we have provided relief through debt consolidation.

When I started at Gateway I promised myself that my legacy would be a reinvented credit union with new products and old fashioned service.  As cream on the cake, I also quietly wished that Gateway would be recognised as the best credit union in Australia.  Well, that wish is closer to becoming a reality with our nomination in the best credit union category as part of the 2008 Australian Banking & Finance Awards.

Thanks to the outstanding efforts of the Gateway staff and the wonderful support of our Members, Gateway Credit Union has been short listed as a banking awards finalist.  The winning credit union will be determined by popular vote and you can vote for Gateway today.  We can’t win without your help. 

Of course, our greatest reward is your continuing custom.  So, I’m interested to know how we can serve you better and would appreciate your thoughts. 

Paul J. Thomas

Even though predicting the future is perilous, it’s a necessary evil in business.  So, what does the future hold for Gateway Credit Union?  Well most of the innovations in retail banking in the past three decades have been driven by technology.  But it’s the technology gurus who most often have to eat their words after gazing into the future. 

What the technocrats fail to recognise is that the social consequences of technology are always hard to predict - just look at the phenomenal success of the internet.  Australians have embraced internet banking like ducks to water.  Online banking has become the norm for customers and a key distribution channel for financial institutions.

I constantly read that customers know even less about the future than business executives.  But I’m not convinced that’s the case.  So, what other changes do you think technology will usher in for retail banking over the next decade?  Or better still, how would you like to be doing your personal banking?

Paul J. Thomas

Whenever the Reserve Bank tightens monetary policy to dampen demand (restrain expenditure) interest rates rise.  Such rises do not discriminate between rich and poor households which is why monetary policy is referred to as a blunt instrument.  Those households with no debt escape relatively unscathed while the 38% of those with mortgages bear the brunt. 

With 12 interest rate hikes since May 2002, households are understandably livid at the repeated body blows to the family budget.  But should they be venting their anger at banks and other financial institutions?  Mortgage interest rates will always be a political hot potato as they affect the living standards of ordinary Australians.

As every man and his dog plays the interest rate blame game, it’s worth remembering there are always two sides to every story.  No prudent lender wants to see their borrowers in financial distress.  Nor do they enjoy putting up rates.  Given the choice, I’d much rather notify members of a rate fall than deliver the bitter pill of another rate increase. 

So, is monetary policy the only instrument we can use to curb spending?  Is there a better way?  I’m not the only one raising these questions.  Check out this blog.

Paul J. Thomas

I’ve had a crash course in blogging and think I understand the rules of the game.  It’s been drilled into me that CEO blogs are not for corporate spin but for honest opinions.  My aim is to write my blogs in a conversational style to facilitate open, two–way communication. 

The danger that all leaders face is receiving only filtered feedback.  With the best of intentions, sometimes the bad news does not get to the CEO.  Of course, the real boss in any organisation is the customer and I’m keen to hear from our Members and potential Members. 

So, please use this new communication medium to tell me what you think.  I have broad shoulders, so you can be frank.  If we’ve made a mistake or fallen short in our service delivery, I’ll unreservedly apologise.  However, I’ll draw the line at feedback which is unnecessarily rude or profane.

I look forward to hearing from you.

Paul J. Thomas