Sep 082008

Let’s look back at the fiscal events of the past 12 months.

There’s the so-called sub-prime crisis, sparked off by a failure of highly geared US mortgage securitisers to accept the roll-over of some extremely dubiously assessed risk products in August last year. This failure of confidence in the American risk market immediately spread like the virus international financial markets are, revealing a highly incestuous relationship between American finance markets and every other national finance marketplace across the globe.

Here in Oz, we’ve been relatively sheltered from the global fallout of the so-called crisis, principally because of our cloistered credit regime and strict assessment criteria within individual funding organisations. We’ve suffered the expected rises in interest rates because of the loss of confidence between lenders – major banks and NBFI’s – because none have revealed honestly just what their international exposures are. We’re told none have devastating exposures, yet we’ve seen independent rate rises by the majors apart from those imposed by the Reserve Bank. Rises which are not refundable. Like taxes, when interest rates rise, they never fall again proportionately. Australia will recover faster than most other nations because of our commodity-centred economy, but that’s not to say we’ve remained unaffected by the debacle which is credit assessment in the United States. Australia runs on a two-tiered economy at present. The resources economy, which is still growing, albeit slower these days, and the rest of us who I’ve classed as the ‘have-nots’ in this supposedly booming economy. Were it not for the resource-rich states of WA and Qld, Australia would certainly be in recession today.

Which brings me back to the sub-prime crisis, as it’s called. In March this year, we saw the Bush administration ‘bale out’ the merchant banker, Bear-Stearns & Co Inc. rather than allow a pillar of the US financial marketplace to topple into it’s own cesspit of self-incurred debt. Today, we see that same administration effectively appoint liquidators for the mortgage securitisers, funders and guarantors, Fannie Mae and Freddie Mac. The liquidators, in reality tax-payer investors, being the US Federal Treasury and only for a limited period of time. By this time next year, unless confidence has returned to the US financial marketplace, effectively the US Treasury’s ‘investment’ in once government-owned now privatised instrumentalities will be realised upon. In other words, if the sub-prime crisis hasn’t ended within the next twelve months and confidence returned to the US economy in general, the multi-trillion dollar support of the Federal Reserve will be withdrawn from Fannie Mae and Freddie Mac. Of course, reality says that support will be ongoing should the desired ends not be achieved, realising a set of circumstances not unlike the inevitable draining of a bathtub, once the plug’s been pulled and thrown out the bathroom window.

It’s a huge gamble and as the linked article points out, a fatally flawed gamble, based entirely upon the ideal that the crisis in confidence will end within a given period of time. Fannie Mae and Freddie Mac hold more debt, as assets on their books, than Australia produces in Gross Domestic Product. The bale-out by the Bush administration effectively doubles the US national debt. That nation is still fighting wars of aggression on two fronts, costing billions monthly. I’m driven to wonder whether we are seeing the long, slow passing of a once great empire of capitalism and opportunity, simply because a few squandered that opportunity for short-term gain at the expense of the many. The world owns more of the United States economy than the American tax-payer does. Those tax-payers are simply passengers on a handcart headed for a hot and spiteful place. Let’s all hope that when she goes, the United States goes on her own and doesn’t drag other nations down with her.

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