Like Too Much Weak Beer

This man is now so desperate everything he says or does reeks of his frantic need to hold onto power no matter what comes. Grab an ale and rest a spell, reader, while I explain why.

As someone with long term experience in the finance industry, I strong urge everyone, homeloan holder or not, to attempt an understanding of the reasons behind the current so-called sub-prime mortgage ‘crisis’. There is an old, old adage used often in my game. The greater the return, the greater the risk. It holds true no matter what the circumstances. The current sub-prime mortgage debacle in the United States has come about because mortgage originators in that country saw huge potential returns from lending to dead-beat borrowers without due prudential oversight being used in credit assessment processes, Why? Because those originators were not taking the primary risk. It wasn’t their money they were lending out. It was third party investor funds. Money from the world’s largest and most liquid financial players who constantly seek out new investment markets in which to grow their funds. If you like, the Macquarie Banks, Bank Nationale de Paris, Babcock & Browns of the finance world. The originators only have to meet interest payments to the investors, which is relatively easy to do from those loans which haven’t fallen over in the meantime. You see, the difference between the US mortgage industry and the Australian mortgage industry is distinct. In the States, if you can’t pay your mortgage and want to walk away from your liability, you can. The lender takes possession and sells the property. If there’s a shortfall, the lender wears it. The borrower walks away owing nothing. In Oz, it’s vastly different. If you default here, the lenders will sell you up, collect on the mortgage insurance to cover any shortfall, then the mortgage insurer comes after you, the borrower. There is no escaping your liabilities in this country. That’s why there’s so many market investors retreating in the States. Why invest – effectively ‘lend’ – if there’s no comeback when things go pear-shaped?
The trouble is, it doesn’t take too many dead-beat’s to default on their loans before the investors are spooked sufficiently to back right out of the Commercial Paper marketplace, and suddenly, the sub-prime lending market shuts down. Without the ability to keep funding new and existing borrowings, and without investors who’ll buy loan books which may or may not contain dead-beat mortgage loans, the originators eventually feel the heat and under the US system, file for bankruptcy protection. Like a snowball rolling down a slope, the fear factor of backing a losing horse spreads through the industry like a bad fart in a stuffy room. That’s what’s currently happening in the US, and because Commercial Paper can be backed by any number of corporate investor entities from across the globe, it’s not hard to believe that Australian banks, insurance companies, superannuation fund trustees and the like have been effected just as players in the US, Europe and Japan have been in past weeks.
Claims by finance industry leaders that Australia is essentially sheltered, because our system of prudential lending processes are entirely different to that of the United States, is a complete and utter farce. The fact that low-doc/no-doc loans and non-conforming loans in this country are subjected to slightly different assessment criteria has no bearing whatsoever on the fact that Australian finance industry players ARE exposed to the US sub-prime market to varying degrees, some massively so. Most particularly the non-conforming lenders. Liberty Financial, Pepper Home Loans, Bluestone Mortgages are three of the biggest and all are very exposed. Pepper less so because their parent company is UK-based, but you can bet your bottom sub-prime dollar that even Barclays and HBOS are exposed to this fractious form of revolving finance.
You see, in the finance game, everyone’s happy as long as everyone pulls their weight. From the biggest mortgage marketplace investor to the lowliest working class minimum first home buyer. None can survive without the others. But if any one link in the chain breaks, then the whole show suddenly falls apart. In this current ‘crisis’ numerous links have failed. Make no mistakes, dear reader, Australian borrowers will feel the lash of this whip, there is nothing surer.
Which brings me back to the desperation oozing from every single frightened-rabbit pore of John Howard’s lousy hide. ‘Stick with Pete and me’, he’s saying. Stick with us because we know how to run an economy. He’s not only creating a totally false impression that, as politicians, he & Costello actually have some impact on this current set of fiscal circumstances, neither his government or any other government of any flavour can change what happens when the wheels of finance suddenly stop turning and everyone riding on the bus gets jolted out of their seats. The central bank in this country impacts on monetary policy and operates completely independent of political influence, as should always have been the case. If the RBA determines, as the Federal Reserve has in the US, that liquidity injections are required to soothe the fears of investors and borrowers alike, then it will do just that. To date, the RBA hasn’t has, it seems. Twice now, in a week. That inaction is unlikely to place upward pressure on rates depending on how hard the various financial institutions in this country are, or might be hit. Either way, inflation is going to rise. More so if the RBA acts, which probably explains why it hasn’t.
Australia’s economy is on a knife-edge and has been for a long time. We’ve not noticed that edge because of the fat time we’ve been having as a direct result of the Hawke-Keating reforms. It’s those reforms which have sheltered us over the past 15 years. Now we’re going to see just how effective those reforms really are. My betting is that we’ll see interest rates climb to 9% as a result of this fall-out and probably over the next two years. We’ve not yet seen any wages breakout either, don’t forget. If that happens, we may even see a technical recession.
Doom and gloom? Maybe. Too many variables as yet. Too many institutions not saying just how badly they’re exposed to investment in the US marketplace. Rates are going to rise though, there’s nothing more certain. Don’t go believing the spin from politicians, dear reader. It’s all piss and wind. There’s nothing Little Johnny can do to influence current events, just as there’s nothing Rudd can do likewise. Piss and wind, I tell you.