Yes it does appear to be fraught with difficulties. It is handing out free insurance. In a liquid market like finance, everyone will move to take advantage of that free insurance. The more risky their venture, the more the incentive to get free insurance at our expense.

It also sounds like for large deposits the government is forcing the banks to insure and pay for it themselves. Why not just tighten the standards for holding cash in the bank to cover deposits? Maybe it's effectively the same thing. Either way it probably reduces the interest you get on your deposits.

A corelated article.




"THE Australian dollar has suffered its biggest sell-off since it was floated in 1983.

The dollar closed down in US trade on Friday at US61.78 cents, down US4.5 cents and down 37 per cent from the high of US98.49 cents it reached three months ago.

London's Financial Times says the Aussie dollar has become a "whipping boy" after noting that the currency was "once the darling of the foreign exchange market".

"It's just strange. It's just weird," BT Financial Group chief economist Chris Gaton told Fairfax.

"There's no rational reason for us to be at 62 cents."
Dr Gaton said about a third of the drop could be explained by the recent surge in the US dollar, which has risen against major currencies such as the euro and the British pound.

But the confounding drop is not all bad news, with economists saying it would provide a much-needed boost to exports amid a slowing domestic economy.

"It's something we shouldn't fear here in Australia," Commsec chief equities economist Craig James said. "


http://www.theaustralian.news.com.au/story/0,25197,24556799-12377,00.html


Of course there is a rational reason for the $A to be at $0.62 US.
Cause that is exactly the price people are willing to buy and sell it for.
Call it fear, call it greed, the price is right.

There was a high demand for the $A cause it was needed to buy the expensive resources.
we are the worlds supplier for resources
The demand for resources has dropped. The price for resources has dropped
The demand for the $A to pay for the resources has dropped, the price of the $A has dropped.

More expensive imports helps our balance of payments, our companies operating overseas have been greatly advantaged by the weaker $A. They now bring back many more $A to aussie than before.

Yes they are!