Building the mortgage revolution

Most Australian households take home less than $50K a year. That’s not average wages, that’s average income per household. There are plenty of households, and people, that don’t pull a wage. See ABS stats if you’re curious.

Despite this, the vast majority of those households manage to acquit themselves financially. It’s called surviving, and the alternative is homelessness.

This is in stark contrast to the recent track record of the well-rewarded employees of some of the world’s largest banks during the global financial crisis.

I don’t capitalize the global financial crisis, because logic is hardly a proper noun.

It’s a banking crisis. It started when a whole bunch of people, a lot of them coked to the eyeballs, played pass-the-parcel with a whole lot of other people’s debt. They bundled these debts up and sold them as a bet – that the debts would be paid off.

Some very large banks bought into the bet and did their dough big time.

Corporate culture is wholly set against bad news. Bad news meant the sack, or at best, a transfer to somewhere harmless, and less lucrative. At the very least you were risking your bonus, which, as IPO shares picked up in contra deals with institutional investors – our superannuation, were almost certainly going to be a cashable asset, at a profit; certainly worth more than $50K a year.

So we leave a bunch of overpaid junkies in charge of this section and they all smile and nod and rake in the cash – then it all goes to shit.

The commodity was fundamentally flawed. It came from a drive to raise a whole pile of debt, and pass it on. It was a scam; a Ponzi Scheme (now there’s a proper noun!); a screw-up, and most certainly a poorly researched asset.

It came off the back of an explosion in credit for people previously considered a marginal security proposition, which morphed from easily available credit cards to mortgages on marginal housing acquisition; marginal in the sense that it relied on a housing bubble for people to make money and repay their mortgages. Joe Bageant was writing about it 2005. It was hardly a secret.

So the US housing bubble bursts and a chunk of assets are worthless. The debtors walk away from the wreckage and move to a trainer park outside Toledo. The banks stop giving each other money to get people into debt to make money to get people into dept to make money..,

As Kurt Vonnegut Jr. was wont to say: and so it goes.

In Australia we have four main banks. Outside of them there are a range of outfits from credit unions (some of which have aggregated over the last decade), community banks (which are more than Jimmy Stewart in It's A Wonderful Life telling everyone that their money was invested in their lives), to payday lenders and swarthy chaps in dark cars in supermarket car parks.

When the money dried up internationally the Rudd Government moved quickly to shore up the four main banks, the spine of Australia’s financial system. Our money.

Some people thought we would hit the wall hard, Steve Keen the most celebrated example. Australia was a country that has slashed employment in traditional primary industries, let its manufacturing industry roam free across Southeast Asia and kicked on with digging up rocks and a service economy which relies on the money churning around.

The Australia’s big four banks injected a lot of money into the Australian economy by borrowing quick money, and lots of it, and lending it to people. That was where the American banks came in. Problem was the American Banks had run out of dosh. Unless the Australian banks got money, and got it fast, the whole joint was going to end up like a Steinbeck novel.

The Rudd Government, or more accurately Treasury, put together a plan that was equal parts devious and genius.

The Rudd government couldn’t give the banks cash, because this was a free-market economy and the banks were at the epicenter of free-enterprise through offering credit. At the very least they were creating money that people needed to pay the bills and make Gerry Norman richer, etc.

The government gave the banks a AAA credit rating, underwriting them and making them a safe haven for what money was still in circulation internationally, which was still substantial despite its epicenter, Wall street, watching its assets diminish daily.

And they gave a lot of money, something around the size of the entire NSW budget, to households.

Ken Henry said go big, and go households. And they did, and why wouldn’t they, politicians love to spend money, but for the last thirty years they’ve been no good at raising it.

Most Australian households earn less than $50K a year after tax. They get along by running a continuing line of credit with financial institutions. In recent years it has ballooned to over 100 per cent of disposable income. So the households gave it to the banks.

We are a service economy. A lot of people run around in white vans with ladders, and utes, while a whole pile of invisible others cram into trains and buses from 6am onwards in our capital cities. It has been pretty much business-as-usual for this part of the economy. The concerns they had in 2007 are pretty much the same concerns they have now.

The Rudd government decided to call this Keynesian act of largesse to the major banks names like The Building the Education Revolution, and the Home Insulation Scheme, and so forth. There’s probably a pile of others – all with the same object, getting people who have mortgages paying their mortgage. By a good old-fashioned bit of pump priming, jobs for blokes with utes and ladders popped up like mushrooms.

Even those that don’t have mortgages have helped by creating a jobs boom at our retail oligopolies. And those people with the name badge at K mart certainly have a mortgage, or want one. You must really need money if you’re prepared to work retail for it.

This explains why the Rudd government has seemed distracted about the detail of the implementation side of all this spending, because its not about the project – it’s about making sure the money go round continues, with the bottom sink, or sump, being the banks.

It’s the reverse trickle down effect and it has worked a treat. It’s objective was to shore up the financial sector, and its done that in spades.

Meanwhile, the structural problems – infrastructure bottlenecks, skills shortages, overpriced housing, bubble merrily along as if nothing has happened.

And for people on $50K a year and less, nothing has.

The Depression We Had To Have

George Soros is no screaming Trotskyite, but even he can see what's happening to global capital.
In an interview with the Austrian newspaper Der Standard, he has blamed "market fundamentalism" for the crisis afflicting global capital markets. He could have a point.
Deregulated financial markets in the US allowed capital traders to create easy credit, with no oversight from the Federal reserve. This is turn led to inflated property values as a whole bunch of people jumped into a market they had no place being in the first place.
The loans were chalked up by financial institutions - some of them banks, but a lot simply mortgage warehouses - who onsold these liabilities to a lot of chumps left holding a pile of candy no one wants to eat.
The financial institutions reward themselves with NINE figure incomes (The CEO of one mortgage warehouse, Countrywide, was on US$615 Million a year) and walk away whistling while the end-gamers - often retirement funds and municipalities (including here in Australia) take a bath.
Meanwhile, the poor marker who took the loan just loses their house. In reaction - and this is reaction as in reactionary - the leading candidates in the current race to be Emporer Of The World are falling over themselves to embrace Keynesian pump priming. This will, of course, horrify the very "market fundamentalists" Soros has been warning about. But will the pump priming make any difference?
Welcome To The Wankersphere has pointed out that the US recession - which is an actuality, if not technical reality - stems from over inflated asset values, not a lack of economic activity. Yet. Which is precisely the problem that bedevils the Australian finance market. People borrowing against homes that are vastly over inflated. It's not hard to see what will happen once the Easy Credit crisis starts to haemorrhage around the globe.
We are already seeing it with the bearish stock market fluctuating like manic depressive on amphetamines. The real crunch will come in the form of a credit squeeze, the like of which we have not seen in some time. Which is no doubt why Central Banks are flooding capital markets in an attempt to stay that frabjous day.
But western capital reserves are not exactly flush - witness the US deficit - and diving further into an already empty cookie jar will have to be paid for somehow. Which is when the Chinese will come along with the greatest foreclosure of all, and bye-bye liberal democracy for the duration.
Mind you, this seems to fly obliquely over the heads of a general populace - concerned more about partying teenagers and sooky cricketers than the fact that the roof over their heads is about to disappear like Dorothy's house in Kansas.
Housing is a significant player in the Australian economy - if it tanks then it is going to screw up the retirement and savings plans of millions of Australians. The flow on through the economy by a credit squeeze will affect the big employment sectors of retail and hospitality. We could see money dry up, along with jobs. All this at a time when the economy is 'growing'.
Of course a lot of this stems from the legacy of ten years of doing nothing with the proceeds of a mining boom apart from splashing cash around and inflating a housing bubble (that's now about to burst).
While responsibility lies with Howard and Costello, this won't wash with the Australian public - they'll be calling for Wayne Swan's head on a stick by Christmas. I noticed that the Harvey Norman retail chain has announced sales growth of over A$3 Billion, or a little over 12%, for the first half of this financial year. The bulk of these sales will be on credit, and if we drop into a recession that looks like being of the scale that Soros predicts, Harvey Norman won't see half of that money.
This is the problem with credit - it only works if there's a capacity to repay - and years of supply side market fundamentalism has destroyed the household sector's ability to do exactly that.
I was travelling back from Lithgow before New Year and was amazed at the number of cars, boats and bikes saw on the side of the road for sale.
The last time I remember this phenomenon was in 1990 when the then treasurer Paul Keating was assuring us that there was no recession . Later that became the recession we had to have.
This recession promises to be much deeper, as Soros has pointed out. The financial sector has gone a bridge too far - simultaneously calling for, and getting, policies that squeeze those on the bottom, then trying to milk those very same people through credit, as Ralph Nader pointed out this week.
They could never have it both ways and now the harvest shall be reaped. And a bitter harvest it will prove to be.

The Man Who Wasn't There

Interesting developments in the race to be Emporer Of The World, with new data in the US showing the country is pretty much in recession. Which, of course, is no news to working stiffs in the States, as they've been pushing shit uphill with a toothpick since the big NAFTA job losses started to bite, and modern management practices meant growth went north while wages went south. In short Yanks are working harder for less. This successful business model has been having the sort of effect on the US middle class that Vikings had on monasteries in Britain in the ninth century - it's a litany of pillage and plunder from corporate America. Democrat presidential candidate John Edwards, of course, cottoned on to this sentiment writ large amongst American proles being squeezed by unsustainable credit and declining incomes. His anti-corporate position was viewed with concern, not just by Wall Street, but by hard heads in the Democratic National Committee, who have long plumped for the corporate friendly Clinton II. But this piece in The Nation by William Greider illuminates how Hillary and the ubiquitous Barak are now jumping on Edwards' Keynesian bandwagon. They're not alone, over to you Bill:

Bill Gross, the insightful managing director of PIMCO, the major bond-investment house, has called for virtually doubling the federal deficit in order pump hundreds of billions into new economic activity. When bond holders are more alarmed about the economy than political leaders, you know something is backwards in American politics.

This is gonna be one hell of a ride kids. There may just be enough fuel in the tank for this election to turn into an "I'm more left wing than you" slanging match. Bring it on I say; after all, these people are shallow enough and hopeless enough to get led around by pundits and pollsters then this is the sort of lunatic groupthink it leads to. In the meantime the architect of returning to the sanity of a pump priming economy after three decades of supply side economic madness, John Edwards, has been run over in the stampede by Obama and Clinton to seize the populist high ground. Strange days indeed. As the good Doctor would say, Mahalo

These Were The Days

The Blog That Never Sleeps has been using the festering season as an opportunity to shift office. I am making room for my legal counsel to move in - he is taking over the office and the office has moved into the salubrious surrounds of the art-deco loungeroom here at Sleepless Central. It also moves me further from the Balcony Of Death and the ever present threat of death by pigeon. In the process I am going through piles of files assembled over the last fifteen years or so; they are very revealing about certain people that have shot to prominence in one way or another in recent times. Take the following quote:

The financial markets are populated by a lot of immature, younger-type people who play with their computers and drive home in their Porsches, and who have no understanding of the of the human or economic discussions of unemployment

Who is this rabid Trotskyite? None other than Wayne Swan, now Federal Treasurer, but said in 1994 when he was chairman of the ALP Caucus Economics Committee.