WHEN CREDIT BECOMES DEBT...
For anyone who has had even a passing interest in Australia's economy for the last few years would have been getting concerned that there was a bit too much easy credit around. You only had to take note of the unsolicited credit card offers that turned up in your letter box to know that someone was throwing money around, possibly even carelessly.
It wasn't only with credit cards. People would have realised that many offers that seemed to start out with quite reasonable interest rates also had a "reset" clause that clicked in some year or two down the track. As things seemed to be pretty stable at that time many would have been lulled into believing that any reset adjustment would be pretty much in line with normal banking practice and so would have taken what appeared to be a reasonable punt. Particularly as property values were rising and there seemed to be a financial out if things got tough.
It is estimated that in Australia some 800,000 people now find themselves in serious financial trouble due mainly to very stable wages, increased costs of living and increased interest rates. So much so that many loans are now in default beyond the sixty-day mark.
This brings in the next factor in what is turning out to be something of a contagion. While Australia has had a banking industry that by and large has been responsible there are some financial fringe dwellers offering deals where they borrowed short and lent long. Under these circumstances these lenders have to continually have access to cheap commercial bills to keep their schemes rolling and these lenders now find that there is no such thing. The consequences of this are immediate and obvious and Central Banks around the world have been throwing big money at this type of situation for some weeks now, without notable success, but undoubtedly racking up a fair sort of taxpayer bill for the future.
Some lenders, and fairly large ones at that, took a different approach. They lent the money, "bundled" up the mortgages and sold them as securitised debt far and wide. The major origin for this tactic was in the United States and they sold the bundled mortgages around the world as securities. This has gone on for many years but it is only in more recent times that the mortgage quality has slipped to the point where the security is often worthless. So now there is another group in the community that are suffering, and these people are the "bond" or "security holders".
It's not however only the lenders that bear some responsibility for the present predicament of so many people. Housing costs have shot through the roof making housing unaffordable to the great bulk of our younger people. Government charges both State and Local have substantially contributed to house prices and in many instances unnecessarily. The list is too long to go through and most people are aware of the major costs items in any case, but to take an example consider State Government Stamp Duty.
When the Goods and Services Tax [GST] was introduced a selling point used to market the imposition of this new tax to the public was that the revenue would go to the States and other State taxes would be abolished, such as Stamp Duties. Now while over the years, and it is years now since the GST was introduced, some concessions have been made particularly with mortgage transfers but the effective bits of Land Tax and Stamp Duty remain.
Why the Federal Government has just sat back and faithlessly allowed the States to continue with those taxes, notwithstanding the original and marketed concept beggars' belief, but here we have it. Perhaps there may be some arrangement behind the scenes regarding the States co-operation in privatisation or some other such arrangement. Or then again it could be just a lack of will.
What we do know is that even retaining the Stamp Duties and Land Taxes the States have managed to rack up a combined debt of some $80 billion which tends to indicate that there is gross inefficiency or even incompetence somewhere in the system. In fact that figure is about the figure that Treasurer Costello says is the amount of "Labor Debt" that his administration removed over the last 10 years. The whole thing is starting to look a little like the shell and pea trick of old.
The financial lending crisis has now become so bad world wide that drastic measures are now being undertaken to prevent the possibility of a recession. This week, in order to free up credit between lending institutions the US Federal Reserve Bank dropped interest rates by 50 points [half a percent] on both the rate charged between banks and the rate at which the Fed would lend to the banks.
It's effect on the stock market seems to have lasted exactly two days and has devalued the US dollar heavily. This methodology was used by the previous Fed Chairman Greenspan to overcome what became known as the "dot.com" bubble. We are now in the "credit crisis". Circumstances are now of course different with the United States heavily in debt with on going enormous expenses related to, among other things, overseas conflicts. Currently, the US debt level stands at $US9.185 trillion, which is up from $US5.6 trillion in 2000. The private debt figure must be truly frightening.
In any event it is highly unlikely that any interest reduction will flow through to the domestic borrowers as the decreasing of interest rates tend to enhance inflation which in the end comes down to what it costs the consumer to live. Banks may also have losses to recoup and this can only come from their customers.
Hopefully the end point of all this is that the excess will be removed from the market slowly and that the minimum number of people will be severely disrupted or disadvantaged as a consequence. In short, that they can turn it into a "soft landing".
But reducing interest rates is a bit like drinking Tequila, once you have one you have to have another, so obviously we have a long way to go before we are out of trouble and, things could get worse.
Either that or we need some decent management in the interest of the people rather than the institutions that now appear to be taking over the control of government from an ever-compliant mob of party politicians.
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