Sowing The Seeds Of A New Crisis

[cuttlefish]

lesson 1 ... read entire thread before replying to a post I see my comments have already been made by others.

 

[Timmy]

With respect all, this thread has strayed from its intended subject into the generation gap debate. It (the generation gap) is a lively topic and appears to be attracting interest ... but ... maybe not here?

There is a thread The kids of today..., where oldies can bitch about the youth of today and youngies can flip the bird to the oldies. Can we take further generation gap debate over there if possible?

 

[Bushman]

2. If the trigger is to be resi and comm property values decreasing, when will the banks actually admit to the values being lower and recognise that in their balance sheets and who is going to make them do that when the consequences of that are so serious?

NAB just raised an additional $2b-odd to sure up its Tier 1. What more 'fessing do you need? The question in Australia is more will equity markets keep bailing them out?

As for the US, comm property is the next shoe to drop. But with valuations already off by 30-50%, how much more do they have to fall? So maybe not a complete wipe-out.

Who has been reading about the burgeoning carbon derivatives market? Some are calling it the next CDO with an expected exposure of $2-3trillion. If the Dems do not step in and regulate 'shadow banking' then there could well be another Lehman and a credit freeze. Regulatory risk is still there as far as I can see.

B'ah hum bug brothers and sisters!!

 

[Knobby22]

Well I'm going to disagree.

All the "pundits" Fox commentators and Austrian school-uber conservatives have shown that they have no clothes.

They have been wrong about the Keynsian stimulus which they said wouldn't work. Now it has worked they are saying it's going to get worse (generally in 18 months time) and the system hasn't been cleaned out even though it obviously has had a great effect on many dodgy enterprises.

We would have gone into Depression if they had been listened to.

Honestly, I don't know how anyone could think we should be going back to the gold standard in this day and age.

The aim now is to slowly tighten monetary policy, bring back regulations to ensure banks act responsibly and enforce them.

ps. I was going to start this thread with the words "with respect" however it implies the opposite.

 

[Timmy]

Bushman, along this theme of banking regulation. I think the Basle Committee on Bank Supervision is due to issue a report in October to suggest ways of tightening regulation on banks etc. I am very hazy on the state of play with this, anyone who knows more please post it.

The reason I think this is important is one of the keys to Australia's relatively light scathing (at least so far) in the GFC and global recession is the regulation of the banks (APRA). Obviously there are a lot of other factors, but banking oversight and regulation in Aus. have helped. So I will be interested to see what sort of reforms are proposed for banking regulation and oversight in other Western countries.

 

[Timmy]

They have been wrong about the Keynsian stimulus which they said wouldn't work. Now it has worked they are saying it's going to get worse (generally in 18 months time) and the system hasn't been cleaned out even though it obviously has had a great effect on many dodgy enterprises.

Yep. I can't how see any responsible government could have done anything but implement a Keynesian response, as has been done. Scorched earthists will be along soon to disagree.

 

[cuttlefish]

Focusing on Australia specifically, I agree with comments that so far Australia is yet to experience anything that I would liken to severe downturn.

From my own empirical/subjective observations of whats going on around me in the street, the same patterns appear to be replaying and I can't see where truly productive new investment is occurring. The housing market is being stimulated by the first home owners grant and low interest rates are encouraging more to take on debt. In the meantime those that do own property are still redrawing to the limit of their most recent valuation to buy knick knacks (holidays, tv's, cars etc.). The auto market has been stimulated by big tax exemptions. How can this continue? How can Australia continue to fund these 'subsidies' designed to 'stimulate' the economy without stimulating real productivity initiatives. (I don't see roof insulation as quite fitting this goal either ).

In relation to the US they are generating enormous amounts of debt and again I can't see where real productivity is being created that will be able to service that debt over the long term.

In the meantime I'd be assuming that the problems with auto makers etc. will be having a real and negative impact on their current productivity levels. It would also appear that they may have to inject yet more capital into some of these institutions. Surely at some point they will generate more debt than they can service through productivity, meaning that they will then have to monetise which will be inflationary.

I don't have a good picture of where/what drives the bulk of US productivity - it sounds like the auto makers formed a significant enough part to have a big impact if they fail - but then again technology (apple, google, msoft, etc.) must mlso be an emerging influence - can these take the place of the other industries or can they modernise the other industries like auto so they can generate real productivity in a competivie global environment.

I still see a huge risk of the USD undergoing significant devaluation and a significant inflationary environment occuring inside the US - or alternately that their economy stagnates into a sort of semi-protected state with the USD possibly becoming regulated either officially or unofficially. This latter scenario could lead to some kind of free market currency substitute coming into play - whether or not thats gold or not is another matter but if the 'free market' surrounding the US dollar is eroded then some other free market benchmark will have to take its place. (actually both scenario's would lead to lack of confidence in the USD and the emergence of some other global benchmark currency to take its place).

 

[Uncle Festivus]

Well I'm going to disagree.

All the "pundits" Fox commentators and Austrian school-uber conservatives have shown that they have no clothes.

They have been wrong about the Keynsian stimulus which they said wouldn't work. Now it has worked they are saying it's going to get worse (generally in 18 months time) and the system hasn't been cleaned out even though it obviously has had a great effect on many dodgy enterprises.

We would have gone into Depression if they had been listened to.

Honestly, I don't know how anyone could think we should be going back to the gold standard in this day and age.

The aim now is to slowly tighten monetary policy, bring back regulations to ensure banks act responsibly and enforce them.

ps. I was going to start this thread with the words "with respect" however it implies the opposite.

Has it worked? At what cost? Who pays for it? Who will lend the money eg Net Long-Term TIC Flows was neg $20B for May? As usual, the beer & skittles mob have very little factual data to back up their claims, other than hope & rhetoric based mostly on the opinions of people who have comprehensively gotten it wrong from the start. The starting point for enlightenment for anyone wanting to know the real facts can be found from the Wardens Of Liquidity & Debt themselves -

http://research.stlouisfed.org/tips/alfred/index.html

Some nice parabolic curves to be found there, esp the debt one going off scale.

Yep. I can't how see any responsible government could have done anything but implement a Keynesian response, as has been done. Scorched earthists will be along soon to disagree.

An interesting concept - a responsible government? Yes, they have only done what they know how to do ie print money or expand the money supply to the banking system but have only succeeded in giving the equity markets a boost, which doesn't equate to economic salvation for the real economy; you know, the one where real humans have jobs and make things. Only problem is, all the making get's done in low wage countries now. China has been exporting wage deflation for several years now meaning that we have to lower our standard of living to compete with them, ie less discretionary cash, unless it's on credit - again.

There has been a temporary lift in discretionary spending due to lower rates, but when your freindly bank has to go to the open market to compete with the rest of the world, and central banks, then rates will rise, or as has been shown already they won't pass on any more RBA cut's.

The aim now is to know when to tighten monetary policy, of which Bernanke & co have admitted they don't have a clue when that will be...Mr Market will do it for them....

 

[Ageo]

They have been wrong about the Keynsian stimulus which they said wouldn't work. Now it has worked

Has it worked or has it delayed the inevitable?

Temporary fix's are not necessarily the solution to a problem.

 

[Buckeroo]

Bury it now! That way the you are sowing the seeds of your gold tree now, giving it ample time to grow and blossom. Just give me the exact address where u buried it so i can umm... come help water it and stuff.

Aw, that would be swell - address is 2000 Miles Road, South Pole, Antarctica.

 

[Buckeroo]

With respect all, this thread has strayed from its intended subject into the generation gap debate. It (the generation gap) is a lively topic and appears to be attracting interest ... but ... maybe not here?

There is a thread The kids of today..., where oldies can bitch about the youth of today and youngies can flip the bird to the oldies. Can we take further generation gap debate over there if possible?

Are you baiting the argument Timmy?.

Everyone knows the younger generations are sillier than a bird flying under water & the older generations think everyone that's younger, are sillier than a bird flying under water. Whats there to debate?

Cheers

 

[Knobby22]

Has it worked or has it delayed the inevitable?

Temporary fix's are not necessarily the solution to a problem.

Hey but everyone said it wouldn't work.

If the facts don't match the expected reality then maybe the assumptions are wrong.

 

[trainspotter]

Don't want to be seen as nit picking BUT:-

Penguins are birds who lost the ability to fly millions of years ago. These birds are such good swimmers that they seem to fly along in the water. They are as graceful and swift underwater as other birds are in the air.

Also remember seeing a David Attenborough thingy where some sea going Gannett bird crashes into the water and flaps it's wings underwater to "fly" towards it's prey. Thought this might help.

 

[Knobby22]

An interesting concept - a responsible government? Yes, they have only done what they know how to do ie print money or expand the money supply to the banking system but have only succeeded in giving the equity markets a boost, which doesn't equate to economic salvation for the real economy; you know, the one where real humans have jobs and make things. Only problem is, all the making get's done in low wage countries now. China has been exporting wage deflation for several years now meaning that we have to lower our standard of living to compete with them, ie less discretionary cash, unless it's on credit - again.

You are arguing at cross purposes, more people did keep their jobs.
Now what has to happen is that the governments become fiscally conservative and stop running deficits. I agree it would have been better if the USA and GBR hadn't run up huge debts before the cataclysm and instead had built up reserves as per Keynesian principles however the result is still good.

About China. We have been exporting to them our dirtiest industries and getting very cheap products in return. China will become a super power eventually, let natural economic forces develop. History shows our standard of living has been increasing in Australia. We didn't have incompetant government though.

And the crack about responsible government. Yes. Responsible. Not irresponsible like Bush was.

 

[Buckeroo]

So the questions for us, as the informed minority on ASF, are:

1. How do we trade/invest over the coming months/years? WHat signals do we keep our eyes on, as I keep beating myself over the head with the thread Immnent and Severe Market COrrection coming which I could and should have read and paid attention to but didn't!? When do we short (and should we??)? Do we buy gold?

2. If the trigger is to be resi and comm property values decreasing, when will the banks actually admit to the values being lower and recognise that in their balance sheets and who is going to make them do that when the consequences of that are so serious? As someone pointed out to me a while back, in Oz, the value of your house can decrease by 20% but the bank can't revalue it and demand that you pay up to bring your loan back to an acceptable LVR. This only happens if you have to refinance.

Look forward to more on this.

Good questions Jonojpsg - its a dilemma for me as well

My strategy is still defensive although dabbling in the market. Property I'm wary of, unless I can jump in & out quickly for a profit. I'm keeping a good eye on the US, as I reckon a world collapse will start with a loss of confidence in America just as before.

I will probably be defensive until the CDO issues have been resolved & the economy can support itself without stimulus.

Cheers

 

[cuttlefish]

Hey but everyone said it wouldn't work.

If the facts don't match the expected reality then maybe the assumptions are wrong.

The facts aren't in yet imo. As an analogy - if someone has three maxed out credit cards, then applies for a fourth with another institution and draws down on it to pay the interest off on the other three cards they can probably get by for quite a while before that one maxes out as well ... then they can apply for another though at some point the institutions will stop giving them credit. (or maybe not ... thats sort of why we are where we are in the first place ...).

This is analagous to what the current governments appear to be doing to me - the government is going into budget deficit to create stimulation packages that encourage people to spend their money in a non-productive way.

Where/how is the additional productivity needed to pay off this new govt debt (received by the govt in the form of taxes from productive tax payers) going to come from?

Similarly if the banks keep lending for mal-investment (e.g. allowing consumers to redraw against inflating property valuations for discretionary non-productive and non-investment spending) then how does this help stimulate the productive investment needed to create the jobs to allow these people to continue to service this non-productive debt?

 

[Buckeroo]

Don't want to be seen as nit picking BUT:-

Penguins are birds who lost the ability to fly millions of years ago. These birds are such good swimmers that they seem to fly along in the water. They are as graceful and swift underwater as other birds are in the air.

Also remember seeing a David Attenborough thingy where some sea going Gannett bird crashes into the water and flaps it's wings underwater to "fly" towards it's prey. Thought this might help.

Well, there you go, the younger generations aren't that silly after all

Cheers

 

[grace]

So the questions for us, as the informed minority on ASF, are:

As someone pointed out to me a while back, in Oz, the value of your house can decrease by 20% but the bank can't revalue it and demand that you pay up to bring your loan back to an acceptable LVR. This only happens if you have to refinance.

Look forward to more on this.

I've read this here and there on ASF but is it actually the case? I thought most mortgages had a "material change in circumstances" in there, which the Banks have certainly used in the past in commercial property in relation to a material change to the market. I am told this happened in rural lending with deregulation of the Dairy Industry when there were no defaults on accounts, just a material change in equity due to market conditions at the time. So, is it true that this doesn't exist in Residential mortgages??

 

[Uncle Festivus]

Similarly if the banks keep lending for mal-investment (e.g. allowing consumers to redraw against inflating property valuations for discretionary non-productive and non-investment spending) then how does this help stimulate the productive investment needed to create the jobs to allow these people to continue to service this non-productive debt?

That's the core of the problem yet some people still don't get it ie the problem(s) not fixed, only delayed?

Non Productive Debt!

 

[Knobby22]

The facts aren't in yet imo. As an analogy - if someone has three maxed out credit cards, then applies for a fourth with another institution and draws down on it to pay the interest off on the other three cards they can probably get by for quite a while before that one maxes out as well ... then they can apply for another though at some point the institutions will stop giving them credit. (or maybe not ... thats sort of why we are where we are in the first place ...).

This is analagous to what the current governments appear to be doing to me - the government is going into budget deficit to create stimulation packages that encourage people to spend their money in a non-productive way.

Where/how is the additional productivity needed to pay off this new govt debt (received by the govt in the form of taxes from productive tax payers) going to come from?

Similarly if the banks keep lending for mal-investment (e.g. allowing consumers to redraw against inflating property valuations for discretionary non-productive and non-investment spending) then how does this help stimulate the productive investment needed to create the jobs to allow these people to continue to service this non-productive debt?

I see the stimulation as cushioning the bad effects which obviously had to happen. By this occurring we did not enter a Depression and in Australia we appear to have pretty much missed out on the recession.

I don't see how mass destruction of the economy helps productivity. We need micro economic reform, something that recent governments have been struggling to provide.

In the rest of the world the property correction has occurred. I agree Australia's property is still overpriced but I envisage it will be a slow correction i.e. sub inflation growth in property for the next 7 years.