Financial Crises - a rant

[Pfitzy]

So the US is going to shit in a major way and the Govt has refused to bail out the greedy fucks of organisations that are in part responsible for allowing it to happen - the majority of the blame has to reside of course with the idiots who borrowed WAY above their means. Especially in the US where foreclosure is the easy option in a system basically unregulated for all intents and purposes. I also quietly chuckle to myself about all these people in a blind panic about the share market collapsing, because my philosophy is: never invest in something that relies completely on human confidence. If you've got the spare cash (and I mean spare i.e. have other money safe elsewhere) then speculate on the market. Otherwise I reckon you're already gambling your superannuation with these idiots so why give them more money?

Anyhoo, all sorts of statements are being thrown around here in the merry old land of Oz. Rhe one that pisses me off the most came up tonight from one of the Macquarie Bank dickheads, saying that the Reserve Bank should slash interest rates. This fucks me right off because I saw this storm coming when we had rate increases last year and the sub-prime rumblings started to make themselves known. I fixed my interest at a fairly good rate for a few years on the majority of our loan. Now, because there are millions of dickheads out there who borrowed above their means, I have to pay? Get fucked! People wanted the big house/car/tv when capitalism was sucking their sausage and now they're getting bent over with no KY or a reach-around they want to be socialists and get the Reserve Bank to lower their grief.

What also pisses me off is the CEOs of these companies - and the boards of directors and all the other senior people responsible - are going to walk away from this with a shitload of dosh despite them knowing it was all poor policy. The US government has a bailout plan and while I don't 100% agree with governments shoring up private enterprise in this way, I can see their point; no need for another 1987. Also, if it keeps people in the housing market so they can face up to their responsibilities over there, it will help us stay stable here so that we DON'T have interest rate cuts and we can learn to deal with the issue instead of having lower rates let a few people off the hook to get another credit card, or another lease/personal loan etc.

I hope the banks here tighten their shit right up on the lending front and prepare their shareholders for a few lean years so that we can adjust our ridiculous real estate market and, in a sense, hit the "reset" button. That way we all win.

Rant over.

 

[Spook]

Lovely work. No individuals are accountable yet we all are? Upper management in these banks should be given the ass.

 

[Moses]

If the banks actually pull finger and tighten the loan criteria, this should decrease competition on sales and result in prices to drop, right?

I'll be in a position to buy a place in 12-18 months so this could actually work out well...

 

[Scarfman]

I currently don't own a house, so I actually have 100% of my savings in the share market.

On paper I've lost many 10s of thousands of dollars in the past year, but I don't really expect any better. I knew the system was capable of this kind of meltdown (and much worse) occasionally, so I can't be too upset when it happens.

Otherwise, I completely agree Nick. Bunch of cowboys with no real responsibility. But it's the world's poorest that I worry about more than myself.

 

[naza]

Lock these bankers up in Guantanamo Bay for economic terrorism ! These guys got million dollar bonuses last year and now they're looking for handouts ? Get stuffed. Karma's a bitch !!

 

[Cutter]

I agree with some of what you are saying, but not all of it.

Anyhoo, all sorts of statements are being thrown around here in the merry old land of Oz. Rhe one that pisses me off the most came up tonight from one of the Macquarie Bank dickheads, saying that the Reserve Bank should slash interest rates. This fucks me right off because I saw this storm coming when we had rate increases last year and the sub-prime rumblings started to make themselves known.

To be a pedant, did you see this storm coming or a storm coming? If the former, you're talents are wasted, Warren Buffet will have a job for you. Also, if the former, why didnt you sell your property so you could buy back in when the market dropped?

I fixed my interest at a fairly good rate for a few years on the majority of our loan. Now, because there are millions of dickheads out there who borrowed above their means, I have to pay? Get fucked! People wanted the big house/car/tv when capitalism was sucking their sausage and now they're getting bent over with no KY or a reach-around they want to be socialists and get the Reserve Bank to lower their grief.

Why do you have to pay? If you mean the opportunity cost of lower interest rates, then bad luck. That is the risk when you fix your rates. The economy is slowing down, there are two tools to manage it and one is interest rates. Its not Macquarie's role to tell the RBA what to do, but it wont be a surprising response from the RBA in the circumstances. The real cost will be if there is a long economic slow down. Taxpayers will be forking out plenty for increased welfare if that is the case.

I hope the banks here tighten their shit right up on the lending front and prepare their shareholders for a few lean years so that we can adjust our ridiculous real estate market and, in a sense, hit the "reset" button. That way we all win.

You should be there with your Macquarie mates pushing for lower rates anyway. Without them, the value of your home is sure to drop like a stone and even with them it might do so. A significant housing market readjustment wont make everyone better off, only those without property. Anyone with property, and particularly those who have bought in the last 5-10 years, will be much worse off.

Count yourself lucky you have income and job security and can afford your own home. As Scarfman says, the ones that are really going to be hurting are the same ones that always hurt.

 

[Pfitzy]

Well, I didn't see the precise details of this storm coming (or I would have laid bets), but it is pretty clear that we've been living in a golden age as far as standard of living and credit goes. I knew were due for a significant downturn within the next 12-24 months. With this in mind, and the extra factor of having a new baby in the house, I fixed most of the mortgage in order to have a fix on my expenses.

The value of housing is overrated - its not an asset if you can't dispose of it without meaningful gain. I bought 8 years ago when it was still reasonable (relative term of course) in Western Sydney.

Cutting rates doesn't teach people anything... though of course its easy to say that nothing can sufficiently educate people against themselves when they're living hand-to-mouth - that's why they're in that situation in the first place. If the rate cut happens, people will pause for a few months to say "Phew! That was close" and then finance a new TV because they want Full HD. The consumerism rolls on...

 

[Cutter]

Well done for locking in your home loan and for buying before the market peak.

The value of housing is overrated - its not an asset if you can't dispose of it without meaningful gain. I bought 8 years ago when it was still reasonable (relative term of course) in Western Sydney.

As long as it has a value its an asset.

Cutting rates doesn't teach people anything... though of course its easy to say that nothing can sufficiently educate people against themselves when they're living hand-to-mouth - that's why they're in that situation in the first place. If the rate cut happens, people will pause for a few months to say "Phew! That was close" and then finance a new TV because they want Full HD. The consumerism rolls on...

Interest rates arent a punishment meted out by the reserve bank. They are a tool which, usually, helps to regulate demand in the economy. Easy access to credit is the problem, not the cost of it (imo).

The "instant gratification" society is a big part of the problem. Why wait until you can afford to buy something before you actually buy it?

Marketing's job is often to convince people they need things they dont. So, people are borrowing to buy things they dont need before they can afford them. Ross Gittins theorises that although our material standard of living has increased (bigger house, car, pool, holidays etc), we actually have less leisure time, less family time and are more stressed meaning that the our real standard of living hasnt increased. The problem is that those things arent measured by econocrats and therefore arent valued. Similarly, "externalities", meaning environmental damage, isnt measured and, until recently, hasnt been considered a cost. Whilst its now considered a cost, most industris dispute they have to pay for it. In the end, we will all end up paying for it albeit it might not be a measurable cost.

 

[Scarfman]

I haven't worked full-time since 1995. :thumb

I'm damnably poor, though ...

I reckon staring down the siren song of consumerism is about the highest calling of 21st century man.

 

[Virgil]

Lock these bankers up in Guantanamo Bay for economic terrorism ! These guys got million dollar bonuses last year and now they're looking for handouts ? Get stuffed. Karma's a bitch !!

First time ive found myself agreeing with Naza
This pic was posted over at the fern by Dodge, sums up all our feelings and most of the worlds i bet.

 

[formeropenside]

I don't have a strong view here, simply because I think Oz will ride this out fairly well (although the carbon tax proposals may stuff things up considerably). Also, I'm an employee in my mid-30's with a small mortgage.

If I was about to retire by cashing in a stock portfolio, I might have a different view. But even though stock prices are falling, excluding the odd company which has collapsed, I expect dividends will stay at about the same level. So if I was a retiree living off investment return, it might not be the end of the earth either.

To the extent there is a problem, it is due to a combination of regulation, greed and stupidity.

 

[Scarfman]

Regulation is the problem?

I thought regulation was there to take care of the greed and stupidity.

Maybe you mean deregulation.

 

[formeropenside]

Regulation is the problem?

I thought regulation was there to take care of the greed and stupidity.

Maybe you mean deregulation.

No. The US banks - backed up by Fannie and Freddie - had to make a proportion/number of sub-prime loans: ie loans to generally minorites and people with poor or no credit history. Some of these doubtless were valid subprime transactions, but after a while the borrowers got worse and worse and the mortgage brokers less and less scrupulous.

Then someone packaged the loans together in a securitsation deal, and priced the loans badly.

But without the statutory requirement to make a certain proportion of subprime lending, this crisis would likely not have occurred. Thats not to say something else might not have gone wrong, but broadly thats what did go wrong.

 

[Moses]

Interesting read here: http://www.businessspectator.com.au/bs.nsf/Article/Property-will-suffer-JXV9B?OpenDocument&src=sph

Many property people have a view that the property market and the share market are entirely separate and are governed by different forces. While that is true when the stock market has a small rise or fall, when there are major share market moves that view is complete rubbish. It is the same market moving in different time zones. This applies to both commercial and residential property.

I have told this story many times before, but September 30 2008 seems a good time to repeat it because this story is about what happens on the way down and on the recovery.

After the 1987 share crash a young property entrepreneur phoned me and asked me what would happen to the Australian property market. There had been unlimited credit and he had large highly leveraged property holdings. I told him the property market would be decimated in the same way as the share market. He believed me, and sold all his properties. But the property market kept surging and all his mates were buying and the banks were saying how stupid he has been listening to a journalist and selling his properties. They even offered him even more credit than before to rectify his ?mistake?.

He went back into the property market and then he went bankrupt.

His bankers suffered big, well deserved losses. Interestingly he successfully operated a small restaurant during his bankruptcy and in the decades that followed he recovered and made a lot of money which underlines the fact that good times do return. I have not spoken to him recently. I hope he remembers 1987.

However in 2008, unlike 1987, it will not take 18 months for the property market to be hit. It?s already on the slide and there is no chance of the banks flooding the market with money. The property market is governed by two forces ? the availability of borrowings to buy property and the cost of buildings. We have seen in the US that when money was withdrawn from the housing market, prices fell about 30 per cent ? to well below the cost of building them. Building has therefore virtually stopped. The latest fall on Wall Street will give the US house market another battering.

Here in Australia our property prices will be governed by just how much banks are able to lend on property. Watch the global interbank market because that tells you how much money banks will have and how much it will cost.

Adam Carr?s comment today is vital today in understanding what?s happening to banks. Yesterday I was yarning to one of Australia?s largest apartment developers. He was optimistic because banks were loaning money to purchasers of his units. But the sharp fall on Wall Street is savaging the interbank market and the main aim of banks will be to fund their existing loans. They will be tougher on new loans.

The fall in the share prices means new capital is very expensive and they need huge sums to cover the difficulty of overseas borrowing. Here the Reserve Bank and government will help but it will still be tough. In separate articles today I will be covering the new Chinese and Middle East situations which are also important in our market.

In the UK we have seen dramatic falls in property values because the banks held back their lending. In turn, that has sent banks to the wall because of the bad debts. There were very few bankers in the UK who remembered 1987 and 1960 so they blundered into the same mistakes and paid the price.

Most of our bankers have forgotten 1987 and 1960 but have seen what happened in the UK and will try to be smarter. Whether they are able to do so will depend on the availability of funds (The danger for Australian Banks, September 29). Australian banks are helped because they have better balance sheets than most. But these are factors on the margin, because what we are seeing in the share market, including the listed property trust market, is a downward adjustment of asset values. Banks just happen to be part of the facilitation of this asset value reduction. If they were to try and hold the property market as they did in 1987 they would be merely delaying the day of judgement.

We are fortunate, in that unlike 1987 we do not have a glut of houses and commercial property. But that will not stop the downward adjustment. Businesses will fail or contract, causing more office space to be available. My apartment developer says that more people are now cramming into his apartments so that they can afford the rents or purchases. Empty holiday houses will be sold to people who will snap up the bargains and live in them.

The fact that there are no gluts means that the fall will be reduced, but it won't be prevented. How much values fall depends on which property areas we are talking about. One leading banker told a conference last weekend that the property decline would be between 10 and 15 per cent. He did not dream US politicians would be so stupid. The fall will now be greater.

 

[Pfitzy]

Moses - I was reading something similar over at smh. We'll do better than the USA because of the demand for housing in our major areas. It will be to the detriment of smaller urbations but that's the way most things are headed at the moment. The rural sector will still cop it and being a country boy its a bit sad.

As long as it has a value its an asset.

Technically yes. But if I sell my car, tv, or (if I owned any) shares I don't NEED to replace them. If I sell my house I either need to buy another one or start renting somewhere which in the Sydney market is nearly the same cost as a mortgage. Therefore the house can't be considered something I can liquidate for quick funds... unless I want to sleep a family of four in a tent That's part of the false economy Sydney has - especially the mortgage belt here in the West: People saw their house prices go up and thought they could sell at profit, without thinking about the fact that their gain was everyone else's too so they were back to square one. The Boomers who had older housing in what became fashionable areas at the ones who made a killing, then they invested in the property market driving the cycle onward.

Personally I'd love to do the tree change thing but have you seen housing prices in major rural areas? :

Interest rates arent a punishment meted out by the reserve bank. They are a tool which, usually, helps to regulate demand in the economy. Easy access to credit is the problem, not the cost of it (imo).

Of course. The issue is with interest rates in single figures, lenders are putting a lower risk profile on customers because their own risk is lowered. Never would have happened if our interest rates were in the high teens, even though each percentage increase would have been a small increase overall. Mortgages were a lot smaller back in the 80s but incomes and profits were lower too.

 

[Gagger]

What a situation.

A bunch of crunts who's sole job is to turn a buck screw the world by packaging turds in such a complex way that even they can't smell the stench.

When the crunts they sell the packaged turds to realize what they've got cos the wind changes direction, they shit themselves and decide not to lend any more money or pass on rate cuts to any fucker, no matter what governments do to interest rates. This earns them more money.

Pulson, an ex chief crunt who left with a payout of $14m, tells the US taxpayer to write his mates a blank $700 billion cheque, or else. When aforementioned greedy crunts don't get their money no strings attached immediately they crack a shit and drop the Market.

In fact, this new shitty Market means you can buy up some other crunt you've been eyeing for a bargain.

So, what do we thnk they'll do when the $700 bill gets pumped in - lend it out to you and me, or sit there and count it?

 

[Pfitzy]

Invest it in penny stocks, tell everyone what a great company its going to be, then count the earnings when the idiots in the market run toward it like its the second coming. Once they sell their stake and the stocks plummet, repeat the procedure. There's a sucker born every 15 seconds.

 

[the gambler]

Personally I'd love to do the tree change thing but have you seen housing prices in major rural areas?

Mt Druit isnt a rural area?

 

[Pfitzy]

Its a bogan-villea

 

[rugbywhisperer]

Costs of new housing in Gold Coast/Brisbane hasn't wavered yet, in fact year to date figures suggest a 6% growth for the past 6 months.