Timely update for moneylending rules

Timely update for moneylending rules

By Lim Wei Chean

EVEN as Parliament approved a new Moneylenders Act yesterday, MP Ellen Lee wondered if the timing was right, given the current credit crunch as it could prompt more people to seek loans.
But Senior Minister of State (Law and Home Affairs) Ho Peng Kee gave his assurance during the debate that regulations were being tightened.

The new law eased some existing restrictions on advertising, methods of loan disbursements and collection of payments, as well as interest rates.

It also expands powers of the Registry of Moneylenders, giving it the ability to refuse, revoke or suspend a licence.

Borrowers also get greater protection. New rules require moneylenders to make terms and conditions known upfront, have loan contracts and explain these to borrowers in a language they understand.

They must also ask borrowers about other loans they have - a requirement which ensures borrowers do not over-extend themselves by taking multiple loans.

Penalties against harassment by loansharks now also extend to cover not just those involved in the act of harassment, but to those who instigate them to act.

Associate Professor Ho said the changes to the Act, which was enacted over 50 years ago, aim to place the industry on a firm and modern setting and ensure that moneylenders conduct themselves in a fair and transparent manner.

MPs Ellen Lee (Sembawang GRC) and Fatimah Lateef (Marine Parade GRC) supported the changes but asked about the impact on the industry.

They also wanted to know how the authorities would ensure moneylenders did not take advantage of borrowers, and how illegal moneylending or loanshark activities would be dealt with.

On Ms Lee’s concern that people might let their guard down and borrow blindly because of the credit crunch, Prof Ho said that in such times, licensed moneylenders would also be more risk-averse and cautious in lending.

And while advertising rules have been relaxed, this did not mean an easing-up on the industry. Restrictions do apply.

Moneylenders cannot place advertisements or material which are false or misleading, or which induce people to borrow for ‘inappropriate purposes’.

On harassment , he said moves like extending caning to those who instigate such acts are aimed at tackling the ‘ loansharking scourge’.

Source : Straits Times - 19 Nov 2008

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Govt to keep an eye on rising credit card debts

Govt to keep an eye on rising credit card debts

Growth of credit card loans - up 19 per cent - has been ‘fairly significant”. — ST FILE PHOTO

FEARS that the growth in consumer loans was fuelling a credit bubble were dismissed by Finance Minister Tharman Shanmugaratnam yesterday, but he said the situation will be monitored.
Mr Tharman told Parliament that consumer loans rose 10 per cent in September compared with the same month last year, largely in line with economic growth and the property boom. Total consumer loans amounted to about $112 billion as at Sept 30.

But he said the ‘fairly significant growth’ of credit card loans - up 19 per cent in September over last year - ’should be watched carefully’.

Credit card debts increased in absolute amount by $840 million from September last year to this September, which may be in line with economic growth and greater card use, but the Government believes a closer watch is warranted.

‘The Monetary Authority of Singapore (MAS) is monitoring this, but as of now there is no serious cause for concern and we will stay in touch with the banks,’ said Mr Tharman.

MP Seah Kian Peng (Marine Parade GRC) had earlier asked whether the growth of personal debt over the past 12 months warranted a review of the eligibility criteria for personal credit lines.

Mr Tharman responded by saying that the rules laid down by the MAS were stricter than in most other countries.

Credit card applicants must have an annual income of $30,000 and the maximum credit limit is capped at twice the user’s monthly income. Other unsecured credit loans are capped at twice a borrower’s monthly income.

Mr Tharman said: ‘We would be concerned if financial institutions are lending without regard for credit standards and risk assessment, and borrowers are taking credit without considering if they can afford it.’

But he added that the MAS rules and criteria used by financial institutions meant sound lending standards were in place in Singapore. Most of the growth of consumer loans was due to mortgages - no surprise ‘given the buoyant property market in 2006 and 2007′, he said.

Other forms of secured credit like car loans increased ‘marginally’ while share financing had fallen, he said. The total amount outstanding on credit and charge cards rose over the past year, but this was consistent with growth in previous years, he added. The rise also reflected the increased use of credit and charge cards.

ROBIN CHAN

Source : Straits Times - 19 Nov 2008

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Budget deficit: Triple the $800m estimated

Budget deficit: Triple the $800m estimated

Higher infrastructure costs, lower revenues among causes: Tharman

By Goh Chin Lian

THIS year’s Budget deficit is set to balloon to over $2.4 billion, triple the $800 million estimated by the Government in February.
Higher infrastructure costs, additional spending on measures to encourage more babies, and lower revenues collected were among the reasons Finance Minister Tharman Shanmugaratnam cited for the larger deficit.

He was replying to a question from Nominated MP Gautam Banerjee, who wanted to know whether estimates in the Budget presented to Parliament in February need to be revised in light of the global financial crisis.

The official forecast then: gross domestic product growth at 4 to 6 per cent, and inflation at 4 to 5 per cent.

These have since been revised to 3 per cent growth and above 6 per cent inflation.

Mr Tharman, however, gave the assurance that the larger-than-expected deficit would be no cause for worry.

‘We are not seeking to reduce this deficit, either by trimming government expenditures or raising additional revenues,’ he said, adding that such a deficit was appropriate ‘in the context of an economy that has entered a slowdown’.

The Government will be able to fund the deficit from the $6.45 billion Budget surplus in the last financial year ending March 31, ‘when we had unexpectedly higher revenues’, he said.

Economists interviewed by The Straits Times were unanimous that the deficit would not be a problem for Singapore.

Associate Professor Choy Keen Meng of Nanyang Technological University (NTU) noted that what was more important was keeping national budgets balanced over an entire business cycle, rather than in individual phases.

NTU economist Tan Khee Giap expected an even larger deficit next year as Singapore faces a slowdown in at least four major export markets: the United States, Europe, Japan and China.

As unemployment rises, he expected the Government to introduce measures to ease people’s pain.

Noting that the Government’s ability to finance the deficit this year and likely next year is a reminder not to take for granted the years of surplus, Dr Tan said:

‘After Singapore recovers in 2011, the Government must go back to its old prudent budgetary approach so as to prepare all of us for the next crisis or emergency.’

Source : Straits Times - 19 Nov 2008

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Petrol and diesel prices drop again

Petrol and diesel prices drop again

Latest cut is 14th since July; prices at their lowest in nearly 20 months

By Christopher Tan, Senior Correspondent

PRICE cuts at the pump have become a weekly affair.
Petrol stations, led by Caltex and Shell, yesterday slashed petrol and diesel rates by five and six cents a litre respectively, just a week after the last reduction.

The latest cut was the 14th consecutive drop since July, and has brought fuel prices to their lowest levels in nearly 20 months.

A litre of 92 octane petrol now costs $1.603 before discount, 95 octane is $1.636 and 98 octane is $1.71. The prices are nearly 30 per cent lower than July’s highs.

Shell V-Power and Caltex Platinum, so-called ultra-premium grades, are now $1.839 and $1.836 a litre respectively, before discount. A litre of diesel costs $1.373, also before discount.

Pump prices have been sliding on the back of sharp drops in crude oil prices. Oil is now hovering at merely a third of its record US$147 a barrel in July.

Demand for oil is down as the financial crisis has forced factories to curtail production, motorists to drive less or switch to smaller cars, and most significantly, it has crippled speculative trading in oil.

The fuel dipped below US$55 a barrel on Monday as news of Japan sliding into recession rattled business and consumer confidence further. But the raw material has since risen to US$58 a barrel.

Efforts by the Organisation of the Petroleum Exporting Countries (Opec) to cut output further are expected to prop up prices.

Oil industry consultant Ong Eng Tong however feels production cuts ‘are not so easy in practice to implement and police’.

But Mr Ng Weng Hoong, editor of energy news portal EnergyAsia.com, is sticking to his forecast that oil will hit US$200 a barrel by 2013, saying the current situation is a ’short-term weakness’.

Source : Straits Times - 19 Nov 2008

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Guidelines today on options before wielding the axe

Guidelines today on options before wielding the axe

MOM list will include flexible work plans and shorter work week

By Jermyn Chow

EMPLOYERS in Singapore must be socially responsible as the economic downturn bites harder, and resort to retrenchment only after all other options have been exhausted.
There are many other alternatives available before the dreaded axe is wielded, Acting Manpower Minister Gan Kim Yong said yesterday.

To this end, the Ministry of Manpower (MOM) will release a set of guidelines today that will list cost-cutting options available to companies that have excess staff in a time of slowing business.

The guidelines - which are not mandatory - include having flexible work arrangements, a shorter work week and sending employees for upgrading, Mr Gan said.

Though they have been in the works for some time, the move to publish the guidelines comes just days after labour chief Lim Swee Say took DBS Bank to task for failing to consult its staff union and for not exploring other cost-cutting measures before laying off 900 workers.

Speaking on the sidelines of a workplace safety and health event held at The Regent Hotel, Mr Gan said MOM wants to send a ‘very important message’ to employers that they ‘need to take a socially responsible approach’.

He said: ‘We want to help these companies and guide them through the process, so that they look at the whole challenge holistically, and so that they also understand that there are many other options available other than retrenchment.’

He added that in some cases, a company may have to lay off workers to survive, but if this happens, the ministry will work with unions and employers to give the affected people the opportunity to upgrade themselves and find new jobs as soon as possible.

‘We are not just waiting for workers to come to us…but will go down to the companies, design packages and programmes that are suitable for the companies to help their workers.’

Though the electronics and manufacturing sectors have been hit hard, others, like the services industry and the education and childcare sectors, are still hiring.

Mr Gan added: ‘The key is how we can help the retrenched workers transit to these new industries.’

He also gave this assurance to companies which approach the Government, unions or Singapore National Employers Federation for help: ‘We would be very happy to guide them and hold their hand through this process.’

When asked, Mr Gan said the ministry did not have a projection of how many workers would be retrenched during the current downturn, but said that whether it tops the record of 30,000 - in 1998, at the peak of the Asian financial crisis - depends on companies taking ‘responsible actions’.

On who will be hardest hit, he said that the impact will be felt most keenly at middle-management levels and in PMET (professional, managerial, executive and technical) occupations.

This, he explained, is partly a factor of success: The quality of jobs here over the last few years has improved, and many Singaporeans are now in PMET or middle-level management jobs today.

The Good
THIRTY-THREE heads of Singapore’s top construction firms, property developers and construction-related associations have pledged to cut the injuries in their worksites to zero.
To do this, they must establish safety management plans, disclose the number of workplace accidents and injuries on their websites or in publications, and spread the safety message from top management down to the last man on the line, among other measures.

No date was given on when worksites should be injury-free, though a target will be set in 2011, when they review how much they have achieved.

They signed the pledge at the inaugural Construction CEO Summit yesterday, witnessed by Acting Manpower Minister Gan Kim Yong and Workplace Safety and Health (WSH) Council deputy chairman Heng Chiang Gnee.

‘By signing the charter, these CEOs acknowledge that the management’s priorities go beyond traditional business concerns to include safety performance,’ said Mr Gan.

He said that while the Government continues to enforce workplace safety and health regulations, employers and companies had to take ownership.

The pledge comes as a growing number of workers die on the job.

Fifty-two people perished in workplaces in the first nine months of this year, up from 42 during the same period last year.

Construction sites and shipyards accounted for more than half of the deaths.

Construction company Bovis Lend Lease chairman John Spanswick lauded the move, saying that the journey to an injury-free workplace always starts with the man at the top.

‘CEOs need to behave differently before they can expect to make a positive change in their workplaces…they must intervene and take charge,’ said Mr Spanswick, who is also Britain’s health and safety commissioner.

A new set of guidelines on removing risks at every stage of the construction process - modelled after a similar law in Britain - was also unveiled at yesterday’s summit at The Regent Hotel.

But the Design for Safety advisory is not mandatory for companies.

Mr Gan said the 41-page dossier will help contractors ‘eliminate risks at the source’ by ‘factoring in risks and safety considerations at the planning stage’.

For instance, a designer should specify the use of less hazardous materials like water-based paints during construction or design safe access to rooftops to reduce the use of scaffolds and ladders.

On whether the new guidelines will push up the construction costs, property developer City Developments group general manager Chia Ngiang Hong said: ‘Even if there is any cost increase, it should be manageable and marginal.’

The Bad
A SHIPYARD worker drowned yesterday after falling off the scaffold of a vessel docked near the mouth of Sungei Pandan in the West Coast.
The body of Mr Suresh Ramakrishnan was recovered around 4.15pm, almost seven hours after he plummeted from a recently-christened barge.

His body was found without a life jacket and it is not clear if he had been wearing one.

Mr Ramakrishnan is the 10th reported death in the beleaguered shipyard and ship repair industry since June 8 this year. At least 20 other workers have been injured since then.

Mr Ramakrishnan, a Malaysian national in his late 30s, was working on scaffolding at the bow of a crane barge, the Jascon 25. The vessel was berthed in a shipyard near West Coast Park.

It is believed a guard rail on the scaffolding gave way around 9.30am, causing him to plummet into the water.

A safety harness was found on his body, though it is not clear if it had been attached to any form of support.

Workers at Kim Heng shipyard said two co-workers shouted for help after discovering Mr Ramakrishnan had plunged into the water. He is believed to have fallen from a height of about 8m.

Two other workers jumped into the river to search for him, but to no avail.

The police said they were notified at 10.10am - about 40 minutes after Mr Ramakrishnan fell into the water. The Singapore Civil Defence Force deployed divers from its Disaster Assistance and Rescue Team.

Two divers combed an area 20m in radius and 6m-deep before handing over the task to naval divers who later recovered the body.

Mr Ramakrishnan was found not far from where he fell, and without a life jacket.

According to the Workplace Safety and Health Regulations, employers are supposed to ensure that workers at risk of falling into the water are provided with ’suitable life jackets or other equipment’ to keep them afloat.

The Manpower Ministry has asked the shipyard to stop all work on the vessel pending investigations.

Last year, falls accounted for nearly one in every three worker deaths.

Last November, a 38-year-old man working on a container ship fell into the water off Tanjong Pagar after losing his balance. He was not wearing the mandatory safety harness. The coroner ruled the death an accident on Monday.

A ministry spokesman said yesterday that enforcement officers will carry out an islandwide safety blitz on shipyards and construction sites from January.

Additional reporting by Jermyn Chow

Source : Straits Times - 19 Nov 2008

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Five statutory boards bought credit-linked notes

Five statutory boards bought credit-linked notes

By Francis Chan

THE Monetary Authority of Singapore (MAS) - Singapore’s central bank and financial regulator - was among five statutory boards that invested in complicated credit-linked notes.
But none of the statutory boards - including the MAS - invested in notes that have now become worthless, such as DBS High Notes 5 and Merrill Lynch Jubilee Series 3 LinkEarner Notes.

The central bank had invested only 0.1 per cent of its portfolio in such investments, which in fact made a net gain over the past year.

A Ministry of Finance (MOF) spokesman, who revealed this to The Straits Times yesterday, did not give the actual size of the investment.

He was responding to queries after Finance Minister Tharman Shanmugaratnam told Parliament that five statutory boards had invested in credit-linked notes, but only named four: Singapore Civil Service College, Singapore Land Authority (SLA), Infocomm Development Authority of Singapore (IDA) and Professional Engineers Board.

Mr Tharman had emphasised in Parliament that the four boards had invested in credit-linked notes, but not the ones which have gone into default or suffered credit events that have caused their value to plummet to zero and triggered early redemption.

The notes that have suffered this fate include Lehman Minibonds, Merrill Lynch Jubilee Series 3 LinkEarner Notes, DBS High Notes 5 and Morgan Stanley Pinnacle Series 9 and 10 Notes.

Although he did not provide the actual amount invested by each of the four named statutory boards, he said that the exposure as a percentage of their total combined investment portfolio was only about 0.05 per cent.

These investments are currently suffering paper losses of about 14 per cent over the past year, he added.

‘On a mark-to-market basis, these credit-linked notes held by the four statutory boards have not performed very differently from the performance of global markets generally this year,’ he said.

‘The four statutory boards are nevertheless monitoring the situation on all their investments, and will take the necessary steps to minimise any losses in these investments.’

MOF later told The Straits Times that the four statutory boards have had positive returns on their overall investment portfolios this year, averaging about 2 per cent.

And for the past three years, the average annual return on their investment portfolios had averaged 3 per cent.

Mr Tharman was responding in Parliament yesterday to questions from Non-Constituency MP Sylvia Lim, who asked whether statutory boards had invested in risky structured products which were linked to bankrupt United States investment bank Lehman Brothers.

Nominated MP Siew Kum Hong also wanted to know if those investments were linked to collateralised debt obligations (CDO) or credit default swaps (CDS), which are both complex investment products at the centre of the global credit crunch.

It was in response to Mr Siew’s question that Mr Tharman revealed a fifth unnamed statutory board had financial products linked to CDOs and CDS, aside from credit-linked notes.

‘These products comprise around 0.1 per cent of the statutory board’s portfolio, and have in fact made a net gain over the year,’ he added.

On how and why these statutory boards invest, Mr Tharman explained that all of them keep some surpluses for ‘future capital expenditures and as a buffer against unanticipated spending needs or budget shortfalls’.

‘They manage and invest these funds in financial assets to earn an appropriate return within acceptable risk limits, after taking into account their cashflow and liquidity needs,’ he added.

According to Mr Tharman, statutory boards also have to ensure they have appropriate investment management structures for proper oversight of its financial investments with prudent risk management.

Source : Straits Times - 19 Nov 2008

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More smaller Singapore HDB flats

More smaller Singapore HDB flats

Two- and three-room units in demand from low-income families, downgraders

By Aaron Low

SINGAPORE will have more two- and three-room HDB flats next year to meet rising demand.
The Government is building these smaller flats to help more low-income families own homes and those home owners who need to downgrade because of financial difficulties.

National Development Minister Mah Bow Tan made the announcement in Parliament yesterday.

However, he did not say how many more of these flats were to be built.

Instead, he stressed these flats were to meet a ‘niche demand’ and that the bulk of HDB homes being built will be three- and four-roomers.

The Housing Board stopped building two- and three-roomers in the 1980s.

But in 2004, three-roomers were re-introduced. Two years later, the HDB said it would resume building two-roomers to meet increasing demand and, since then, it has put on sale 539 of them.

The growing popularity of these smaller flats is a turnaround from the mid1990s when the overwhelming demand was for bigger four- and five-room flats, with few takers for the two- and three-roomers.

However, since 1997, following the Asian financial crisis, more and more people have clamoured for them as they were forced to downgrade.

These smaller homes, meant for lower-income families, cost between $77,000 and $275,000 each.

Adding to the demand in recent years are older singles, who have been snapping up the three-roomers in central areas such as Tiong Bahru and Queenstown.

Most recently, there was overwhelming interest when 150 smaller flats - from studios to three-roomers - were put on sale last month. These were sited across the island, from Geylang to Sengkang and Marine Parade.

In one week, 2,426 applications were received.

Realtors interviewed expect the demand to keep on rising, especially with the lousy economic outlook.

PropNex CEO Mohamed Ismail foresees the 2002 scenario re-enacted next year. ‘In the last cycle, with rising retrenchment figures, we saw many people who couldn’t maintain their four- and five-room flats selling them for smaller ones, some doing so even at a loss.’

In Parliament yesterday, MPs worried aloud about the economic impact of the global recession on their residents.

At least three MPs, including Madam Cynthia Phua (Aljunied GRC), said they were seeing four to five people each week seeking cheaper housing options.

Replying, Parliamentary Secretary for National Development Maliki Osman assured them the Government would do all it can to help Singaporeans hold on to their homes in bad economic times.

Mr Mah noted that HDB flats are affordable, pointing out that on average, owners use less than a quarter of their monthly household income for their mortgage. This is below the international benchmark of 30 per cent, he said.

Also, seven out of 10 new flat buyers service their mortgage entirely using their Central Provident Fund savings. ‘Based on this, HDB flats have remained affordable, even though property prices have risen over the years in tandem with Singapore’s economic growth,’ he said.

Source : Straits Times - 19 Nov 2008

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Funding boost for young entrepreneurs

Funding boost for young entrepreneurs

By NISHA RAMCHANDANI

SPRING Singapore launched a $12.5 million fund aimed at making seed money more accessible to young entrepreneurs to mark the official launch of Global Entrepreneurship Week 2008 yesterday.

The Young Entrepreneurs Scheme for Start-ups (YES! Start-ups) will tap the existing $25 million Entrepreneurial Talent Development Fund (ETDF) but allows a greater degree of flexibility. ETDF, which was started four years ago, has supported 48 business ventures so far, from nine participating polytechnics and universities.

YES! Start-ups is open to first-time entrepreneurs who are either Singapore citizens or PRs (permanent residents) aged 26 or under, to fund up to 80 per cent of their business venture. The other 20 per cent must be either self-funded or can be obtained from other sources such as schools. Upon approval, a Singapore-registered private limited company must be incorporated. Funding will be capped at $50,000 and will be available for the next five years. It aims to support 250 start-ups over this period.

‘We will continue to foster a pro-business environment and encourage entrepreneurship,’ Minister of State for Trade and Industry Lee Yi Shyan said at yesterday’s event. ‘This is important in these trying times. Entrepreneurial qualities such as resilience, a can-do attitude and relentless efforts will not only see us through this crisis but also help us emerge stronger.’

Global Entrepreneurship Week 2008 (Nov 17-23) is co-hosted by NUS Enterprise and the Action Community for Entrepreneurship. Thirty local partners - including institutes of higher learning, schools and private companies - have come together to organise 40 entrepreneurial events and activities.

Source : Business Times - 19 Nov 2008

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Singapore Employment Act changes to benefit more workers

Singapore Employment Act changes to benefit more workers

However, some MPs fear they could add to local companies’ business costs

By CHUANG PECK MING

DESPITE the economic downturn, Parliament yesterday gave the green light for changes to the Employment Act, which some MPs fear could add to the cost burden of companies in Singapore.

Mr Gan: Imperative to get fundamentals right in employment framework
‘There are areas in the proposed amendments which I feel could be introduced at a more opportune time than now, when businesses and industries are scrambling to keep themselves afloat amid this financial storm,’ Lim Wee Kiak (Sembawang GRC) said during the debate on the Employment (Amendment) Bill.

‘Employers have faced many cost increases in the past two years, including wage inflation, extension of the skills development levy to include all workers, an increase in medical insurance premiums for workers, rent increase, raw material increase, transport cost increase, utility bill increases and many more,’ he said. ‘It seems to me that the amendment in this Act will further increase the business cost to our enterprises and erode our competitiveness.’

Among the changes that concern Dr Lim: the Act will cover more employees, including confidential staff; there will be a new salary threshold for workmen and a higher salary threshold for non-workmen, and a shorter qualifying period for paid sick leave.

Tabling the changes, which were first unveiled in September, Acting Manpower Minister Gan Kim Yong said that it is understandable that employers may be concerned about the impact on business costs. But the amendments will benefit mainly lower-wage and vulnerable workers ‘who will feel the bite of the economic downturn most keenly’.

‘Moreover, many of the changes, such as the extension of public holidays and sick leave benefits to all employees, are already industry norms and should not significantly increase business costs,’ he said.

Mr Gan said that it is ‘imperative that we set the fundamentals right in our employment framework so that our labour force will remain responsive and productive, so that we will be well-positioned for when the economy recovers’.

He said that the Singapore National Employers Federation and Singapore Business Federation were both ‘closely consulted’ about the changes, and employers generally accepted that they are good in the long term.

Last amended in 1995, the Employment Act has been in need of updating, Mr Gan said. More people are now employed in services; professionals, managers, executives and technicians form almost half of the work force; contract workers have increased and wages have increased.

‘In light of these changes, it is timely to update the Employment Act to ensure it remains relevant and responsive to the changing labour market conditions,’ he said. ‘Employment protection and benefits for certain groups of vulnerable workers need to be enhanced. Employment standards also need to be revised to better reflect employment norms while maintaining labour market flexibility.’

The changes, which take effect from Jan 1 next year, will extend the Act’s coverage of employees, update employment standards and perks, and boost penalties and enforcement powers.

Source : Business Times - 19 Nov 2008

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Fed has done what it can, says US central banker

Fed has done what it can, says US central banker

He warns of a painful process of readjustment ahead

(WASHINGTON) The US central bank has done what it can to buffer the economy through a downturn, and a painful process of readjustment is likely ahead, Kansas City Federal Reserve president Thomas Hoenig said on Monday.

Mr Hoenig: Sharp consumption reversal a major part of slowdown
‘The Fed has done about as much as it can do,’ he said in an interview on PBS’s Nightly Business Report. Interest rates are already extremely low, he noted, according to a transcript of the programme.

‘We might put it out there, but banks are not able to, given their own capital constraints, able to lend as aggressively,’ he added.

Mr Hoenig said that he was surprised at how quickly economic activity has slowed, but that a sharp reversal of consumption was clearly a key development.

‘The consumer factor was a major part of the strong slowdown and the actual entering into the recession,’ he said.

The Fed has this year cut interest rates to one per cent from 4.25 per cent, offered hundreds of billions of dollars in loans to financial institutions and helped bail out major firms as part of extraordinary efforts to cushion the economy.

Mr Hoenig, who is not a voting member of the Fed’s interest rate-setting committee this year or next, said that there are likely tough times ahead as financial institutions and households pare debt.

‘Part of it is working through the deleveraging,’ he said.

‘I don’t know of any painless way to rebalance your economy, you have to go through this adjustment, and we will get through it, but it’s not going to be without consequence,’ he added.

He told a banking audience earlier in the day that authorities should find ways beyond monetary policy to resolve future financial crises.

‘Going forward, it will be essential that our financial system have a wider range of policy and market-based options to resolve crises, with less reliance being placed on monetary policy,’ he said in remarks to a private Institute of International Bankers conference on financial regulation in New York.

Mr Hoenig said that ‘an enormous burden’ has been placed on monetary policy to resolve the crisis.

‘Monetary policy is not designed to address many of the underlying factors, particularly when the problems extend beyond liquidity and raise issues of solvency and informational shortcomings,’ he said.

Mr Hoenig said that policy-makers must set clearer rules for financial institutions, and establish a better crisis management framework. Authorities must also consider how to take away the temporary assistance programmes that they have established, he said. — Reuters

Source : Business Times - 19 Nov 2008

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