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Future Fund "can't save mortgage funds"

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Future Fund chairman David Murray says it is not the role of the $63 billion fund to bail out troubled mortgage-based investment funds.

Some mortgage-based investment funds have had to be frozen after they experienced an exodus of funds, following the federal government's guarantee of bank deposits.

Market-linked funds are not covered by the guarantee.

Last week, Prime Minister Kevin Rudd said that larger and more liquid institutions - including the major banks - could provide liquidity to various market-linked investment vehicles within the financial system by buying their securities.

The federal government had asked Mr Murray to assist Treasury in its talks with relevant financial institutions on the matter.

Asked if a sovereign wealth fund such as the Future Fund would invest in the mortgage funds to help them through the crisis, Mr Murray told Sky News' Sunday Business program that the Future Fund operated on commercial principles, not political principles.

"That doesn't mean that there wouldn't be some good investments in the market, in the debt markets, for sovereign wealth funds, for other institutional investors such as pension funds, but they should be decided by each fund on merit, not on some orchestrated basis by government," Mr Murray said.

The Future Fund was completely independent of government.

Mr Murray said the Future Fund could participate in the market, and if that had the effect of helping the mortgage funds, so be it.

"But we cannot sit down with government and say we must apply our funds towards some purpose - that would be inconsistent with our mandate, and it would be inconsistent with the objectives of the fund when it was formed," he said.

A political process would force a fund into a low long-run return.

Mr Murray said the federal government's move to guarantee bank deposits was "absolutely necessary" even though the decision may have lacked fine detail.

"The financial system around the world - and we're talking more the United States and Europe here more than anywhere else - got to a position where risk had to be transferred from the private sector," he said.

"Confidence was gone, banks wouldn't lend to one another, depositors were becoming very scared."

In such situations, governments had to act decisively and quickly to restore confidence.

"At that point, quite rightly, their concern is not about the fine detail. It's impossible to deal with the fine detail," Mr Murray said.

"You haven't got time for the fine detail. You must announce and worry about some of it later because of confidence in the markets."

Asked what he thought of the suggestion banks should lower their deposit interest rates to make themselves less attractive and thereby compel investors to leave their money in the mortgage funds, Mr Murray said: "This is a classic area of one necessary action causing distortions".

"I think it is better to smooth out the consequences as best you can rather than further complicating the operation of the whole system."

Mr Murray also said the Australian economy was definitely facing a slowdown.

"Whether we face a recession here, it's hard to say. The United States will. There are parts of Europe that are paying such a heavy interest bill for the last intervention ... that it will be very hard for them as well.

"I think the key to coming put of this will, strangely, be the United States.

"Because the United States has the size and the muscle to issue the bonds to help solve the problem, but it also has the enterprise of its people ... to come out quicker than others once the housing market in the United States settles down."