I am more inclined to believe that the three markets are cyclically linked under normal circumstances, but I just wonder if these are normal circumstance. It definitely has the feeling of being something different this time - and not necessarily in a good way.
The trouble with any intervention (such as deposit guarantee) is that eventually the market will react in unforeseen ways that are counter productive to the original intention (not that it took a genius to see this outcome).
Long term I see issues as well and here are my thoughts. Institutions under capitalized or in trouble start raising their interest rates for depositors to acquire a larger capital base. Even if these institutions are taking big risks, money will flock to them - more so than would normally due to the perceived risks. This will force other banks capital bases to deplete which ultimately leads to a circle of raising interest rates on deposits system wide (as opposed to the market pricing risk based on fundamentals). This may mean banks find themselves in a situation where they are less inclined to drop as the reserve drops. I am not sure this will play out as I think there will be a lot of cash in banks as opposed to other investments so banks might not need all those depositors if lending slows but you never know. Rudd won't be so popular if people tie their mortgage rates going up because of this policy - I am the political fighting over this one will only intensify.
I actually voted for Rudd and have voted Labour for the past 10 years. If only I realized how stupid these clowns are I would never have voted for them. In my mind he has blown his wad of cash surplus prematurely - and this will only lead to disappointment. Him and Swan did a Ben and Hank and solved all our problems over a couple of beers one weekend without any debate or real thought. This is the seedy side of democracy - when dictatorial action is taken by muppets you sickeningly voted in. I never thought I would be changing my vote so quickly. If only Rudd had thought more like Stiglitz:
