Just In Case You Thought The Markets Had Bottomed

Further big falls overnight in the US. Asia has been falling the last couple of days. This from CNN:

Wall Street markets dipped sharply Wednesday weighed down by losses in Europe and Asia and recession fears.

The benchmark Dow Jones shed more than 3 percent in early trading before rallying a little, down 231 points at 8,463. The Nasdaq was also down almost 3 percent, more than 40 points, at 1,539.

In an effort to bolster economic confidence U.S. Treasury Secretary Henry Paulson said Wednesday he had seen signs of improvement in the economic situation.

"Both at home and around the world we have already seen signs of improvement. Our system is stronger and more stable than just a few weeks ago," Paulson said as he updated reporters on the progress of the U.S. government's financial rescue package.

But Paulson warned that the economy remained "fragile" and said further market turmoil could be expected as a consequence of the collapse of the U.S. housing market.

Broadening the reach of the Treasury's $700 billion bailout plan, Paulson said non-bank financial institutions that provide consumer credit, such as credit cards and auto loans, would also be eligible for government financing and warned that banks and non-banks could require further capital.

"Although the financial system has stabilized, both banks and non-banks may well need more capital given their troubled asset holdings, projections for continued high rates of foreclosures and stagnant U.S. and world economic conditions," Paulson said.

New Zealand Financial System Holding Up Well

Some reassuring words from the Reserve Bank


New Zealand's financial and payments systems have held up well in the face of extreme disorder within the international financial markets, Governor Alan Bollard said today, when releasing the Bank's November
2008 Financial Stability Report.

"While we are far from seeing the final impact of the financial and economic disruption, New Zealand's banks, and the Australian parents of the majors, are well-positioned to withstand the economic downturn," Dr Bollard said.

Dr Bollard said that New Zealand's banks have not experienced the significant financial losses affecting financial institutions in the United States and Europe.

"Also, they have sufficient capital buffers to withstand the higher loan losses that will inevitably result from the economic downturn.

"However, recent global market conditions have affected the cost and accessibility of offshore funding that our banks - and the country - rely on heavily."

Measures undertaken by central banks and governments around the world have contributed to some improvement in market conditions over recent weeks. New Zealand has also adopted a range of policy measures to help reduce financial and economic risks.

Deputy Governor Grant Spencer said the retail deposit guarantee scheme that the Government announced in October assures New Zealanders that
their deposits are safe. The wholesale guarantee scheme announced in
early November is aimed at facilitating the re-entry of financial institutions to offshore wholesale debt markets.

"These schemes are a temporary response to exceptional circumstances.
While some distortions are inevitable, the Government has tried to reduce these distortions through the use of risk-based pricing and other features. The Bank will also monitor and supervise the guaranteed institutions more intensively, and will accelerate implementation of the new non-bank prudential regime.

"Recently we issued a consultation document on proposed new standards for the banks' management of their funding and liquidity. When finalised, this policy will reinforce incentives on banks to diversify away from short-term wholesale funding and reduce their vulnerability to credit market disruptions."

Mr Spencer said banks have been constructing Residential Mortgage Backed Securities following the Reserve Bank's announcement in May that it will accept these securities in its domestic market operations. "A number of banks now have these securities in place. This will enable us to maintain liquidity in the banking system if the offshore funding channels continue to be disrupted."

Dr Bollard noted that a slowing in the economy had been reflected in an easing in credit growth, and savings appeared to be improving, particularly in the household sector. Together with the decline in the exchange rate, this is expected to improve New Zealand's external balance and reduce the need for foreign borrowing over time.

"However, global developments have proven extremely disruptive and it will likely be some time before financial market conditions normalise.
The Bank will continue to adopt measures as needed to maintain the stability of our financial system as far as possible in these difficult times."

Fran Reviews APEC

Fran O'Sullivan has a good overview of the challenges facing John Key at this year's APEC meeting in Peru. We agree with Fran's points about the importance of this meeting for Key at this difficult time for the global financial system. The Vancouver Leaders' Meeting played a similarly important role at the start of the Asian financial crisis in 1997. We hope that Key does ensure that Treasury and maybe some business advisers are in Lima to learn as much as possible from counterparts in the US, Canada, Japan, Korea, China etc. Because of the importance of the GATT/WTO to our economic existence (if it wasn't for the WTO's rules we would be a much poorer country) we have a key interest in being at the centre of any process to reform the Bretton Woods system, of which the GATT/WTO is an important pillar. We can not rely on Kevin Rudd or any other Australian to represent our interests on this issue. Peru offers a chance to remind important players of the contribution New Zealand can and should play in this space. John Key and Tim Groser are better placed than most Leaders/Trade Ministers to play a leadership role on this topic given their backgrounds.

Rudd Pumps $6.2 Billion Of Australian Taxpayer Funds Into Auto Industry

We congratulate the Australian taxpayers for their generosity. The auto industry would not have been our preferred charity, now would we have allocated such a large sum, but what the hell. Rudd wants to be loved. If France can subsidise its industries why can't Australia??

What is a bit of a shame is that so little of this package is actually being spent to "green" the industry. Reading the spin you would have thought that every cent was going into the greening.

This also removes one of the comparative advantages that Australia had remaining after the global financial crisis began. Pretty much all OECD Governments had been forced to spend billions bailing out banks. Australia and New Zealand put up some guarantees, but no money - indeed the guarantee schemes might actually generate revenue. Now Australia has gone and blown $6.2 billion to keep the auto industry going.

This from The Australian

THE federal government's $6.2 billion automotive industry package will support jobs at a time of a global financial crisis and into the future, Prime Minister Kevin Rudd says.
The nation needed a green-car industry that would create high-paid, high-skilled green jobs for the future, he said launching the government's new car industry plan in Melbourne today. The plan sets aside $500 million - double the amount recommended by the Bracks review - for a green car innovation fund. It also confirms a reduction in the automotive tariff to 5 per cent will go ahead as planned in 2010. “In the time of global financial crisis the government today has taken further decisive action to support Australian industry, to support Australian jobs, because we believe this industry has a future,” Mr Rudd said. “We take decisive action to build an international, competitive green economy for the future. “Australia needs a green car industry that manufacturers the fuel efficient, low-emissions vehicles of the future and creates the well paid, high skilled green jobs of the future.” The choice was not between having a growing economy in the short-term and a green economy in the medium to long-term. “We can work effectively to develop both, and that's what a large part of today's package is all about. The automotive industry was part of Australia's future, Mr Rudd said. Building a low-emissions economy was the next step in the government's response to the global financial crisis. “By implementing a green investment strategy today we can transform our industry and create green jobs for tomorrow,” he said. “It's a future in which we should have absolute confidence - fuel-efficient technologies, low-emissions technologies, better designed and safer vehicles.” Australia could be world leader in green car technology, Mr Rudd said. The automotive industry faced a whole new set of market, economic and environmental changes and challenges. “The domestic market for cars has become more fragmented. Australian car makers do battle in a very crowded field, with 60 other car brands, Mr Rudd said. “Consumer preferences have shifted away from sedans, to both smaller vehicles on the one hand and four-wheel drives on the other.” Higher petrol prices had driven consumer demands for more fuel-efficient vehicles, he said. Mr Rudd said the automotive industry had a key role to play in climate change and faced a complicated set of industry challenges. “Some might say it's not worth trying to have a car industry, that is not my view, it is not the view of the Australian government and it never will be the view of any government which I lead,” he said. “I don't believe that car making is yesterday's business or something better left to the Germans and the Japanese. “But I also don't believe that industry policy is about 'saving' the automotive industry, it's about helping to transform the industry to meet the challenges of the future. “It's not about passive assistance, it's about active support for innovation and change.”

Bank Of England Slash By 150 Points

Wow, things must be looking grim for The UK economy. This from CNN

Well Done Senator Obama

You ran a great campaign.

You have given your nation and many in the world hope.

They want change. We hope you can deliver on their expectations.

Please don't look inward. Keep the international trade flowing. Finalise and ratify the KORUS deal. Begin negotiations on Trans Pac. And lets get the WTO Round finished.

We are sure that whoever wins New Zealand's election will be keen to help you achieve the change and leadership the world needs at this time of crisis.

Swan Dive Or Belly Flop

We reported yesterday on the revised version of the think piece by Mark Weldon and David Skilling. We read this last night. Here are our views.

This is now a very significant document. It is an head on attack on some current elements of Government policy (eg the current R&D policy is described as "deeply flawed in design") and an endorsement of some of the ideas coming from John Key.

We agree fully on the need for an economic strategy. We have so called strategies right now but they are largely spin. It is great to see Weldon and Skilling try and and define essential components of that strategy.

Urgent Actions:

• We think that we should be cautious on fiscal stimulus. we think that tax cuts are a great way to get money flowing in the economy. We are less happy with expanded Government expenditure unless this can be linked to likely productivity growth - eg key infrastructure. We really need to focus on improving the quality of Government expenditure.
• We agree that RBNZ needs to keep cutting and like the goal of having our rates down to 2.5% to 3% above the Fed's rates.
• We agree with the recommendations on provisional tax- this is just common sense.
• Accelerated tax depreciation on capital investment is essential if we are to grow productivity.
• Still thinking about the proposed review of the imputation regime and suggestions re Deposit insurance.

Drive to increase local investment and performance

• We support debt financing of key infrastructure projects and agree with the note of caution. We like the idea of SOE bonds being offered to NZ investors and the idea of a 30-year NZ Government Treasury bond and long term infrastructure bonds.
• Reforms of the CCMAU process are fully in line with our own thinking.
• The idea of an ownership vehicle for the SOEs is also of some interest. We know the Singapore model well. It has made some mistakes though....
• We, like you, support the idea of having more coordination of the various NZ Government investment funds. We are comfortable with National's 40% vision in the short to medium term.

Improve growth environment for New Zealand business

• We support a compulsory savings scheme and agree that 2% is a good place to start.
• We are happy to see housing removed from the LAQC regime but would oppose a capital gains tax.
• Agree that we should try and develop an R&D scheme that works rather than one that creates more accountants jobs.
• Agree fully on the need to reduce corporate tax.

Win in the global economy

• We must get those well qualified and experienced Kiwis home.
• Very open to use tax incentives to attract firms to NZ. Also keen to go out and buy some with our investment funds - should they fit.
• Expanded investment offshore is critical. Integration with our FTA strategy is essential.

Public Private Sector Cohesion

In full agreement.

Summary

Thanks for doing this work. Lets hope that a new Government, whether it be Labour or National led picks up your ideas and runs with them.

Slowdown Threatening China's Stability?

A disturbing article in the Financial Times


Slowdown threatens stability, says China PM
By Geoff Dyer in Beijing and David Pilling in Hong Kong
Published: November 3 2008 18:55 Last updated: November 3 2008 18:55
Wen Jiabao, China’s prime minister, warned that high growth was needed to maintain social stability as fresh evidence emerged on Monday that China’s economy was slowing quickly.
In an article in a Communist party magazine, Mr Wen said 2008 was “the most difficult year in recent years” and maintaining high growth was the priority.
“We must be crystal-clear that without a certain pace of economic growth, there will be difficulties with employment, fiscal revenues and social development . . . and factors damaging social stability will grow,” he wrote in the magazine, Seeking Truth.
Slowdown fears in China were exacerbated by two surveys of the manufacturing sector which both showed a sharp decline. The China purchasing managers’ index compiled by the brokerage CLSA fell from 47.7 points to 45.2 points in October – the steepest monthly fall and the lowest point since the index was started in 2004. Meanwhile, a government-backed survey of manufacturers dropped 6.6 points to 44.6 in October, also a record fall.
The Chinese figures came as Manmohan Singh, India’s prime minister, said New Delhi was ready to boost public spending and cut interest rates to sustain economic growth. In Seoul, South Korea unveiled an $11bn stimulus package – the second package in less than three weeks.
The Chinese figures came after an official at the central bank indicated that government quotas on new bank lending had been abandoned.
Stephen Roach, chairman of Morgan Stanley Asia, said the flurry of recent announcements could indicate that Chinese authorities knew growth had already dipped below 8 per cent.

Government Expecting Bad News On Thursday

A significant jump in unemployment looks likely when latest statistics are released on Thursday, two days before the election. Brian Fallow looks at expectations from the market in today's NZ Herald

The unemployment rate is expected to jump when September quarter jobs data are released on Thursday, as the recession pushes more firms over the line from the desire to hoard labour to the need to cut costs.
Market economists' forecasts cluster around an unemployment rate of 4.3 per cent, up from 3.9 per cent in the June quarter. It would be the highest rate since December 2003.
Westpac economist Dominick Stephens said the seven-year run of strong employment growth had ended.
"So far most affected workers have found alternative employment, quit the labour force or emigrated. The rise in unemployment has been slow but steady."

Chances For Climate Deal Vanish

CHANCES FOR CLIMATE DEAL VANISH AS CHINA AND INDIA PRESENT THEIR DEMANDS
--------------------------------------------------------------------


China raised the price of its co-operation in the world's climate change talks yesterday by calling for developed countries to spend 1 per cent of their domestic product helping poorer nations cut greenhouse gas emissions. The funding - amounting to more than $300bn based on Group of Seven countries - would be spent largely on the transfer of "green" technologies, such as renewable energy, to poorer countries.
--Geoff Dyer and Fiona Harvey, Financial Times, 29 October 2008


The new U.S. president will be under pressure from industry not to jeopardise US finances. Under China's proposals, the US would have to give more than $130bn and the European Union more than $160bn to technology transfer.
--Geoff Dyer and Fiona Harvey, Financial Times, 29 October 2008


Indian Prime Minister Manmohan Singh on Saturday complained that the western nations have not lived up to their commitments for technology transfer and additional financing since the Rio Conference in 1992. "We should call upon our European partners to do more in this regard. The developing world is committed to doing its share," Singh said.
--The Times of India, 25 October 2008

As a result of promoting environmental alarmism, Western governments find themselves trapped in a perilous, yet largely self-constructed catch. As long as climate change is elevated as the principal liability of industrial countries, as long as Western CO2 emissions are blamed for exacerbating natural disasters, death and destruction around the globe, green pressure groups and officials from the developing world will continue to insist that the West is liable to recompense its exorbitant carbon debt by way of wealth transfer and financial compensation. Unless the industrial nations are prepared to sacrifice a substantial fraction of their wealth and economic stability, it is extremely unlikely that a new climate treaty will be agreed upon in the foreseeable future. While rich countries will put the blame squarely at the door of their Asian competitors, much of the rest of the world is likely to point the finger at Western greediness and intransigence. In this way, the global warming scare is creating a lose-lose situation for the West which is causing lasting damage to its standing, influence and economic strength.
--Benny Peiser, Financial Post, 8 April 2008


The Italian government on Tuesday said it would stick to its opposition to an EU climate plan to cut carbon dioxide emissions by a fifth by 2020, saying it would be too harmful for industry. "This would be untenable for our production, particularly in light of the current global economic crisis," it said.
--Reuters, 28 October 2008


I fear that the Climate Change Bill will end in political tears, when the targets are missed stratospherically, when the lights go out in the UK, when our economic competitiveness is undermined, and when the climate fails to behave as predicted by our politicians. If and when these outcomes occur, the electorate should not be generous. They must hold the sheep to account as lambs to the slaughter.
--Philip Stott, Global Warming Politics, 28 October 2008


Investors in renewable energy stocks have seen their sector hit hard in recent weeks on concerns that tightening credit and a weak global economy could arrest growth of the high-flying industry despite its long-term promise. Solar stocks, considered the darlings of alternative energy for their meteoric rise in 2007, have retreated so much this year that most have given back the triple-digit gains they logged last year.
--Reuters, 29 October 2008


European carbon prices collapsed to their lowest levels for 18-months on Monday as the market was flooded with industrial sellers from across Europe.
--Point Carbon, 27 October 2008

Labour's Redundancy Assistance Package Not as Generous As It Seems

So says NZ Herald columnist John Armstrong

So the two major parties are instead playing the political equivalent of poker by constantly raising the stakes by coming up with bigger and better rescue plans for the economy and assistance packages for those who will lose their jobs.
Labour yesterday promised an income-tested job search allowance equivalent to the unemployment benefit for up to 13 weeks for someone whose partner is working and who has been in the workforce for at least five years.
The move was a pre-emptive strike ahead of National's release today of its "transitional assistance" package, which will provide similar time-limited grants for those laid off.
National's initiative was designed to outmanoeuvre Labour which had previously gone one better than National by indicating it would bring forward "job rich" infrastructure construction projects to soak up the expected increase in unemployed.
Closer scrutiny reveals that Labour's redundancy help package is far less generous than appears at first sight. But you get the picture. Neither party is prepared to surrender ground.

Cullen's Response To Financial Crisis?

Insulate more homes. That is what he told the Mood of the Boardroom meeting in Auckland this morning when taalking about bringing forward infrastructure spend. Where have we heard this before - oh yes, from Comrade Norman. The AXIS hydra is now using the same sound bites...

Fran O'Sullivan Calls For War Cabinet

Fran O'Sullivan today calls for the establishment of a grand coaltition between National and Labour to deal with the financial crisis and to establish an 8 person war cabinet to run things. She also talks about a group of high level advisors helping out from outside Parliament. We like the second idea, but we are not sure we actually need Labour forming part of the new Government. This is, of course, what happens in countries such as Germany.

Anyway here is Fran's idea

The collapse of the New Zealand dollar has burst the air of surrealism clouding the election campaign.
At issue now is not just who wins the election but whether they have the brains, know-how and sheer chutzpah to avoid a full-on currency crisis.
The NZ dollar is already worth 40 per cent less than its peak value in US currency just months ago. The "smart money" got out when the dollar was peaking around the US80c mark.
Now that AXA and other funds are freezing redemptions - while the Reserve Bank and Treasury try to come up with a Government guarantee scheme to keep financial pipelines open - the crisis has entered a new phase.
The upshot is there will be huge pressures on the next Government. Looking over the political candidates, my judgment is that neither main party has sufficient high-quality, financially-numerate MPs to form the "wartime style" Cabinet which will be necessary to steer New Zealand through a lengthy period of instability.
The logical answer is for National and Labour to form a grand coalition in the country's interest instead of flaying about trying to meet the unreal demands of minor parties.
There are stellar players in the senior ranks of both parties: Labour has Helen Clark (unparalleled experience at the international political level), Michael Cullen (he is managing the vital shift to a saving culture), Phil Goff (good foreign affairs and trade track record) and David Cunliffe (former investment banker).
National has John Key (former international markets manager), Bill English (former Finance Minister and Treasurer), Tim Groser (former WTO negotiator) and Chris Finlayson (legal brain).
If those eight people formed a high-level bipartisan attack team to drive a response to the international financial crisis - rather than tear each other apart while the economy worsens - they would quickly find they had more points of agreement than is obvious on the campaign trail.
If that is just too hard a task for the politicians to consider in the heat of an election campaign, the least they could do is start thinking about appointing an independent Council of Economic Advisers to champion NZ's real interests after a post-election Government is formed.
The Scottish Government did just that last year by appointing 11 people from the senior ranks of business and economics to a council which is claimed to sport "the most formidable intellectual firepower ever to have tackled Scottish economic underperformance".
This is a smart way of making sure the best brains are applied to major national issues - not just current officials and politicians.

Carnage Again In Some Markets

But Wall Street stayed flat. Expect a rocky day on today's market as the NZX opens again. Latest business confidence survey data won't help sentiment.

This review of the internationaal markets from CNN....

Bloodletting that led to record breaking lows on shellshocked Asian markets eased Monday as Wall Street opened flat and Europe reined in earlier losses to contain the damage.

The main European markets enjoyed a mixed day with Paris' CAC 40 down 3.9 percent, Frankfurt's DAX 30 up 0.9 percent and London's FTSE 100 up 0.8 percent.

In early afternoon New York trading, the main U.S. indices were all within 1 percent of the open.
It was a contrast to Asia where a region-wide selling frenzy saw violent losses.

Hong Kong's major index closed down 12.7 percent, while Tokyo's bellwether Nikkei lost more than 6 percent, closing at its lowest level in 26 years. The index stumbled as the yen fluctuated near a record high against the dollar -- a condition that makes Japanese exports more expensive.

Markets Bomb

This summary from CNN.

Good To See Bipartisanship Working, But...

Finance Minister Michael Cullen says that the release of the details of the Australian wholesale deposit guarantee scheme today will assist in finalising the details of the proposed New Zealand wholesale guarantee scheme.

"Officials and I will be working together over the weekend to determine whether the proposals that we have been developing need any refinement in light of the Australian scheme. "Once we have finalised details of our proposals, officials will undertake further discussions with the banks and others in the financial sector before final decisions are taken.

"I will ensure that National Party Deputy Leader and Finance Spokesman, Hon Bill English, also receives a briefing. It is anticipated that announcements will be made next week-end if at all possible while the New Zealand markets are closed.

Dr Cullen will be making no further media comment at this time.

And it is good that the banks will be consulted. But why do we have to wait until next weekend to finalsie things and announce them - dumb question. Next weekend is the final weekend before the election. Guess who is going to run this? The PM we bet. This needs some scrutiny from the MSM...

What Has Happened to Peak Oil?

Remember all those Green arguments a few months back about us not needing to build anymore roads as we could not afford to run vehicles on them any more?

This is an interesting perspective from Dominick T. Armentano that a reader just sent through. The source is here.

When LewRockwell.com published my article, “The Coming Collapse of Oil Prices” back in May, crude oil was selling for roughly $135 per barrel. Almost every oil pundit was then predicting that prices would soar even higher. I strongly suggested, however, that prices would likely fall sharply, probably into the $80 dollar range. Well, since then the price of crude oil has declined sharply and (absent some new Mid-east war) they are likely headed even lower in the weeks and months ahead.

My thesis about the near-term direction of oil prices was that declining world demand (due to near recessions in several national economies) and generous profits associated with oil production would inevitably lead to sharply falling prices. The long 150-year history of oil prices is that short-run increases in price are (almost) ALWAYS followed by just as dramatic reductions in price. This scenario has played out in the late 19th century, during and after World War 1, World War 2, and most dramatically after the price hikes of late 1970’s and early 1990’s. Oil prices first increase sharply, then the tumble.

The only apparent exception to this almost Iron Law of Oil Prices is the period 1933–1941, when real oil prices (adjusted for inflation) increased sharply and stayed uncharacteristically stable for years. Yet the proximate cause of that period of sustained high prices was government regulation, not the free market. During the Great Depression, several oil producing states (led by Texas) placed quotas on oil production (pro-rationing) and the federal government cooperated by initiating tariffs and quotas on imported foreign oil. In short, government regulation subverted normal market forces and politically savvy producers benefited artificially at the expense of consumers. Thus, this episode became the exception that proves the rule.

Current oil market pundits, of course, were convinced that this time around the oil barrel, things would be very different. We were told repeatedly that the world was “running out” of oil; that oil production had “peaked” and future supplies must fall; that we were hopelessly “addicted” to oil (our President and both presidential candidates asserted this); that higher prices would not curb consumption substantially; and that the oil industry was not “competitive” anyway and would simply not allow prices and profits to fall...ever. All of this, of course, was (and is) dangerous nonsense, belied over and over again by economic theory and the facts of history. Yet these notions have now become “conventional wisdom” and policy makers employ them in order to subsidize and regulate energy markets regardless of common sense or cost.

I experienced some of this nonsense first-hand shortly after my op/ed appeared. I’ve written hundreds of op/eds over the years but few sparked more of an email assault than that one. Letters came from here in the U.S. and abroad, from businessmen, teachers, financial analysts, and even from local legislators, instructing me that I was either an idiot, a shill for the oil industry, or likely both. I was told on the best authority that oil prices were going straight to $200 per barrel, and then even higher, and that any talk of lower prices was, well, idiotic. Yet when I challenged one alleged oil expert to a Julian Simon-style wager that oil prices would be lower (in real terms) ten years from now, he never replied. My guess is that he is currently risking his clients’ money, not his own, on the near-term prospect of $250 oil. Good luck.

Could currently falling oil prices increase again? Of course. And one of the new reasons, ironically, might be that the “alternative energy” crowd now requires higher and stable oil prices in order to make energy alternatives economically viable. So I’ll be interested to see whether Nancy Pelosi and Harry Reid (or even Sen. Obama and John McCain) might be willing to support a government “floor” on crude oil prices in order to promote the development of solar and wind energy. Stay tuned.

Interest Rates

Great to see the banks have been so quick to pass on the benefits of the drop in the OCR.

OCR: Down to 6.5%

The Reserve Bank has, as expected announced a cut of 100 points.

Here is the statement


NEWS RELEASE
Date 23 October 2008
Time Embargoed until: 9:00am

OCR reduced to 6.5 percent

The Reserve Bank today reduced the Official Cash Rate (OCR) from 7.5 percent to 6.5 percent.

Reserve Bank Governor Alan Bollard commented that "ongoing financial market turmoil and a deteriorating outlook for global growth have played a large role in shaping today's decision.

"Economic activity in New Zealand will be further constrained, relative to the outlook presented in our September Monetary Policy Statement, by these international developments. New Zealand can expect to face lower demand for exports and credit is likely to be less readily available. In this environment consumers and businesses are likely to be more cautious and curtail spending.

"The reduction in domestic spending will be partly offset by the depreciation of the New Zealand dollar over the past few months, falling oil prices and the recent loosening of fiscal policy.

"With weaker short-term growth and sharply lower oil prices we now expect that annual CPI inflation will return to the target band of 1 to
3 percent around the middle of 2009. However, we still have concerns that domestically generated inflation (particularly in labour costs, local body rates, electricity prices and construction costs) is remaining stubbornly high.

"Consistent with the Policy Targets Agreement, the Bank's focus will remain on medium-term inflation. Should the outlook for inflation evolve as projected we would expect to lower the OCR further. However, the timing and extent of OCR reductions over the coming months will depend on evidence of actual reductions in domestic cost pressures as well as how the global financial developments play out."

Media Missing Point

The Press today reports that 130,000 homeowners are now in a negative equity situation.

This is a major crisis, but is this portrayed as such? No. What does one of the home owners say?

However, McKay said he was in the property market for the long haul and expected prices to bounce back eventually.
"I don't think in the long term it's probably going to affect the price of the property too much," he said.

But what about the short term Mr McKay? Are you on a fixed or floating mortgage? What happens when the fixed rate mortgage comes up for review? Do you expect the bank to roll this over in full even though the property securing the mortgage is worth less than the mortgage? No way.

The bank is going to want a new valuation and it is going to only be prepared to lend you a proportion of that value.

Mr McKay's house was purchased for $293,000.

Lets say it is now worth 10% less. It is now worth $263,700

And let us say that the bank is only prepared to lend 90% of that - $237,300.

What happens to the $55,700 difference?

The house belongs to the bank. Do you think that the bank is going to gift it to Mr McKay? No way.

If Mr McKay wants to stay in the bank's house he and his co-owners are going to have to pay the bank $55,700. Do Mr McKay and fellow owners have $55,700 sitting around? We hope so.

There is a major crisis coming the way of 130,000 homeowners. Why is the media not explaining it?