The Panic That Could Have Collapsed The World Economy

This shows just how much thought and attention needs to be given before rushing into making half -baked plans to save banks. This is what I call a MAJOR PANIC!

LiveLeak caught a scary moment of previously undisclosed insight by Paul Kanjorski where he reveals some facts that have not been captured by the media previously. At 2 minutes and 20 seconds in the video below, Democratic Representative Kanjorski explains how the Federal Reserve told Congress members about a “tremendous draw-down of money market accounts in the United States, to the tune of $550 billion dollars.” According to Kanjorski, this electronic transfer occurred over the period of an hour or two. And it gets worse. Kanjorski paraphrases the following disclosure by Bernanke and Paulson:

On Thursday (Sept 18), at 11am the Federal Reserve noticed a tremendous draw-down of money market accounts in the U.S., to the tune of $550 billion was being drawn out in the matter of an hour or two. The Treasury opened up its window to help and pumped a $105 billion in the system and quickly realized that they could not stem the tide. We were having an electronic run on the banks. They decided to close the operation, close down the money accounts and announce a guarantee of $250,000 per account so there wouldn’t be further panic out there.

If they had not done that, their estimation is that by 2pm that afternoon, $5.5 trillion would have been drawn out of the money market system of the U.S., would have collapsed the entire economy of the U.S., and within 24 hours the world economy would have collapsed. It would have been the end of our economic system and our political system as we know it.

We are no better off today than we were 3 months ago because we have a decrease in the equity positions of banks because other assets are going sour by the moment.

Interestingly, Kanjorski, and likely more and more Democrats, are starting to shift to the camp that more time is needed to make a correct decision .

And how could this run have collapsed the global economy? Globalisation allowed the US to suck up the savings of the rest of the world and consume more than it produces and concentration of foreign investment dollars invested back into the US is staggering.

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58 Responses

  1. I don’t like the knife edge that we seemed to be so precariously teetering on.

    Out of the hands of the “ordinary” person too by the looks of it. Good enough to work in their factories & take their heavy hits when things go arse up though.

  2. Toiletboss

    This goes to show just how fragile the global banking/financial system really is.

    It’s scary stuff and it’s a very real threat.

  3. I’m assuming the $950 bonus offers ordinary Australians an opportunity to pay off bills or simply to try and keep their heads above water.

  4. In spite of maintaining profits it’s the concern about bad debt provisions that banks are now being forced to account for. This isn’t what I’d call a positive signal.

    http://www.theaustralian.news.com.au/business/story/0,28124,25039497-643,00.html

    THE Commonwealth Bank has increased bad debt provisions fourfold and is the first bank of the major four to declare its lucrative dividend is under threat. CBA dividend may be under threat.

    The CBA’s cash profit of $2.01 billion for the first half was down 16 per cent on the same time last year, but met the market’s revised expectation. The bank had said a fortnight ago that it would exceed analysts’ consensus.

    Net profit rose 9 per cent to $2.57 billion from $2.37 billion a year earlier.

    However, the market’s focus today has been on the CBA dividend policy, after the bank said it was not certain the payout ratio would be maintained.

    CBA will pay a fully-franked interim dividend of $1.13, unchanged from a year ago, but the final dividend was subject to market conditions in the second half of the financial year.

    “In the current uncertain economic environment, we cannot guarantee to maintain future dividends at past levels,” chairman John Schubert said.

    The warning from the CBA is the first sign that the major banks will struggle to maintain dividends, given the current economic troubles. Suncorp, a regional Queensland bank and insurer, said last week it would slash its dividends.

    The NAB and ANZ have warned there will be a sharp jump in provisions which will weigh down profit growth.

    The warning from the CBA is the first sign that the major banks will struggle to maintain dividends, given the current economic troubles. Suncorp, a regional Queensland bank and insurer, said last week it would slash its dividends.

    The NAB and ANZ have warned there will be a sharp jump in provisions which will weigh down profit growth.

    In the interim earnings report today, CBA recorded about a fourfold increase in potential bad debts on the back of the corporate slowdown.

  5. It would have been the end of our economic system and our political system as we know it

    That is pretty terrifying!

    Isn’t there a theory that we are only 48 hours from total world wide anarchy?

  6. Forget that, Joni, just watched the CFA bloke on telly and if the fires down here join up as is feared, we are in all sorts.

  7. Joni

    Isn’t there a theory that we are only 48 hours from total world wide anarchy?

    Please share. I don’t think people realise just how thin the ice is. The scary thing is that they were only able to slow the pace of the panic. If China and oil rich countries pull their many, many trillions of investment dollars out a shit fight will most certainly be on the cards.

  8. James

    I know – the continued impact of the fires in Victoria is reality.

  9. What it does go to show is that our own governments guarantee of all deposits was the correct thing to do.

    Those of you who read my comments would have read me telling of the massive exodus of funds from our banks to foreign countries if the Rudd Government did not guarantee all deposits. It was a decision on the run but one which is vinidcated and blows Bishop and Turnbull out of the water in regards to their proposed limited guarantee.

    As to the stimulus packages, I do agree we don’t need to panic just yet and maybe we can take a breath before dishing out more money.

  10. James: have written via my home email address.

    As have written to close friends, in spite of bad news there is some good news in that friends’ daughter, hubby and bubs have been found safe and well. This is in the Yarra Glen area.

    I was eons ago a shire councillor for Lilydale Shire, now amalgamated into Yarra Ranges Shire and so thinking especially of people in this area. And Angel (I think) re her description of things down east. Hubby used to work on the rigs and so we have friends down there too.

  11. Shane

    “What it does go to show is that our own governments guarantee of all deposits was the correct thing to do.

    Those of you who read my comments would have read me telling of the massive exodus of funds from our banks to foreign countries if the Rudd Government did not guarantee all deposits. It was a decision on the run but one which is vinidcated and blows Bishop and Turnbull out of the water in regards to their proposed limited guarantee.

    As to the stimulus packages, I do agree we don’t need to panic just yet and maybe we can take a breath before dishing out more money.”

    Spot on Shane. And lets see what shakes out before committing more funds. I think Rudd is on the right track.

    As for Malcolm Turnbull, Gittins has got his number

    http://business.smh.com.au/business/with-best-intent-politics-intrudes-20090210-83fi.html?page=-1
    “Malcolm Turnbull’s opposition to the $42 billion package is humbug. It seems almost completely politically motivated. He accepts that there’s nothing sensible the Government can do to stop the downturn pushing the budget into deficit and he accepts the need for stimulus, which will add to the deficit. He claims the Government intends to borrow $200 billion (which is wilfully misleading) and then admits he would borrow only $22 to $27 billion less than Rudd plans to.

    And yet he cries crocodile tears about “mortgaging the future of our children and grandchildren” (a gross exaggeration of how long it will take to repay the debt), seeking to play on the public’s naive instinct that governments shouldn’t have debts.

    He’s trying to reinforce the Peter Costello-inculcated fiction that Labor is the party that gets the nation into debt whereas the Liberals are the party that pays it back and restores the budget to its God-ordered state of balance. (This conveniently overlooks that Paul Keating inherited a recession-swollen budget deficit from John Howard in 1983, which it took him five years to turn into an annual surplus.)

    Turnbull’s objection boils down to an arcane argument that a “permanent” tax cut would be more stimulatory than a once-only cash bonus. This is debatable. In any case, he’s not proposing a permanent tax cut, just that the tax cuts already planned for this July and next be brought forward.

    He seems to be playing on people’s unconscious perception that tax cuts are a legitimate return of people’s own money, whereas cash bonuses are just wasteful government spending.

    Because they fail to see the similarities between the two measures, people fear the bonuses will be wasted on gambling or plasma TV sets or, worse, saved, whereas no one ever questions what people choose to do with their tax cuts.

    But whatever his professed objections, Turnbull is desperately hoping the package will be passed by the minor parties in the Senate (who are busy playing their own attention-seeking games).

    He knows that, were he to succeed in blocking the package, he’d incur the wrath of voters hanging out for their bonuses, as well as put himself in a position where Rudd could shift to him the blame for every bad economic development from now on, which may explain why he seemed to be wilting yesterday.

    So why’s he doing it? Because, after feeling constrained to avoid resisting Labor’s changes to Work Choices and its climate change measures, his troops are desperate to start opposing things. Bipartisanship advantages governments and disadvantages oppositions.

    Opposing the package got Turnbull back into the media spotlight. But he’s also positioning himself for the next election. He wants to be able to say, “I told you it wouldn’t work – all we’ve got to show for it is all that terrible debt”.

    This, of course, is the big political risk for Rudd. The package is likely to work; it will, to some extent, make the downturn less severe than it would have been. But that success will be unobservable and the package is unlikely to prevent us falling into recession, with rapidly increasing unemployment.

    So it will be easy for people to imagine the package didn’t work. And because Rudd is firing his big guns before most of the bad news has arrived, leaving him with less ammunition to fire closer to the election, this will compound the perception of failure.

    Rudd is playing his own political games, of course. He’s aware his cash hand-outs will go down well with voters and his choice of spending projects met political as well as economic criteria.

    The most embarrassing proof of his packages’ political focus is his failure to include the unemployed in his first cash splash and neglect to mention what they get in the second. In normal times there’s little public sympathy for the jobless, so they lack political clout.

    Rudd calls for bipartisanship while attacking Turnbull at every opportunity. And his magazine article blaming “neo-liberals” for the global financial crisis is an attempt to fit up Turnbull, which conveniently ignores the truth that the Hawke-Keating government did far more to deregulate the economy than did the Howard government.

    More humbug.”

  12. Shane

    I think this is dangerous in the current climate, what are your thoughts? Will it end in tears do you think for many?

    First-time buyers flood housing market
    http://www.news.com.au/dailytelegraph/story/0,22049,25039542-5013110,00.html
    FIRST-time home buyers are flooding into the housing market to take advantage of the federal government’s increased grants and low mortgage rates, new data suggests.

    First-time home buyers made up 25.4 per cent of home loans granted in December, the highest proportion since December 2001 – the height of the last major housing boom.

    As part of of last year’s $10.4 billion economic stimulus package, the government doubled the first home buyers grant to $14,000 for the purchase of existing homes, and to $21,000 for newly built properties, until June.

    The Reserve Bank of Australia (RBA) had cut its official cash rate by 300 basis points between September and December, a large proportion of which was matched in mortgage rates.

  13. The way things are going maybe we should turn cds & DVDs into currency. Then I could go “Hey! I’m rich.”

    All jokes aside, we Australians may have to start thinking seriously about selling more uranium to China, provided we put proper safeguards in place. I’m beginning to wonder if our restrictions are too Luddite…perhaps we’re catching ourselves up in irrational, unwarranted fears? It’s hard to see how the future energy system will serve us appropriately & still ensure we reduce carbon output and such if we don’t diversify more. I recall the fear of certain Romantics upon viewing steam engines…

    If the French can do it safely…

    That doesn’t mean we shouldn’t do as TB says & try for homes that are energy independent & water saving…but I’m beginning to wonder how most of us are going to find the cash for solar hot water heaters & grey water tanks even w/ the rebates…

    the Libs have left us in the lurch w/ healthcare, too much salt & sugar & fats allowed into the foods… many of us will have to pay heaps for dental & other work…& now here in Logan they’re going to charge fees for owning cats (during an economic downturn for gawd’s sake, imagine how many will be turfed out…and those who want to help them are apparently going to be told we can only have two cats…FASCISTS!)…& our electricity & food & water bills keep rising…and most of us are going to really spend on car or other transport maintenance…gawd knows when we’ll be able to afford another car…gotta keep the old one going as long as possible it seems. I’m altering my budget by the fortnight.

    We just gave to Wildlife Victoria, and get monthly deductions by WSPA (too many forget about the suffering of animals)…and then there are the prescriptions (full price). I mean we’re OK…have enuff to get by…& give a bit…but even I can’t see how we’re going to find the extra moolah to purchase GREEN goods.

    I’m not worried about doing it tough, saving the pennies, cutting back…been poor most of my life…but i’m becoming concerned about the MESS we’ve been left with. All this sh*t in the Middle East is driving me crazy, it’s so dangerous, irrational.

    And what if the climate change types are right? Isn’t it time to act now? The media & people didn’t act early enuff to stop Bush & co. invading Iraq…& look at the sh*tstorm it brought us & the Iraqis…they didn’t act early enuff to stop the economic downturn…

    and now they’re fckin’ around w/ the climate change debate…

    going by the results of our so called leaders decisions & in some cases, lack of, in the past few decades I’m not to confident about the future.

    As you’ve shown John, the financial system is broken…& many of the guys & gals who’ve broken it are still in charge of the ship.

    Apologies aren’t good enuff. We need “Clawback the taxpayers money” departments…a justice & finance related body that has real teeth & plenty of keen, honest investigators. If they can freeze & selloff the assets of the drug crims, why not the financial crims?

    N’

  14. N’

    …the financial system is broken…& many of the guys & gals who’ve broken it are still in charge of the ship. ”

    Agreed, a major rethink about our future direction is needed.

  15. John McPh..as mentioned previously (lots) my opinion is that it is always going to be about meeting the market. Under the Howard government the bar was raised higher and higher until we ended up with the most unaffordable housing in the whatever economies.

    Reason being, no public housing/the disinvestment in public housing. Public housing is always going to be the lowest common denominator. ‘Affordable housing’, it isn’t going to happen unless the market has a competitor aka public housing.

    And yes I know that there have in the past been some absolutely dreadful slums created under the guise of public housing, but without it (housing, not slums that is), what happens to the prices charged for new so called low-cost housing?

    Re current. I think wise choice..lock in while interest rates are low and take advantage of the largesse of the government. I could be a long time until it happens again.

    I personally have never been a fan of the 1st home buyers grant, believe that it’s poorly directly – should be means tests/limited to the median cost of the house of the region/that a number of people who are not 1st home buyers are more deserving of assistance.

    Anyway..with aplogies for just scan reading.

  16. Isn’t this a great start from the American Republican parties new chairman Michael Steele:

    STEELE: You’ve got to look at what’s going to create sustainable jobs.

    What this administration is talking about is making work. It is creating work.

    STEPHANOPOULOS: But that’s a job.

    STEELE: No, it’s not a job. A job is something that — that a business owner creates.
    ——

    groan…sums up so much about the thinking of the Right-Wing politicians these days…just plain pedantic, divisive, selfish, myopic & ignorant. Heads stuck up their own rich butts.

    More here:

    http://www.smirkingchimp.com/thread/20226

    N’

  17. Thanks Min

    You make very valid points. My concern is that many of these first home-buyers are propping up market prices artificially and may just get a shock when the value of their houses drop, and in some cases below what they initially bought them for. Then there’s the increased risk of unemployment and carrying excess debt is something that shouldn’t be encourage at this time.

    And, on another front, the rapid deterioration of China’s economy is frightening which is another factor endangering our export market and the very real possibility of China’s next export being inflationary.

    China’s exports, imports fall sharply
    http://www.theaustralian.news.com.au/business/story/0,28124,25039979-643,00.html
    CHINA’S exports and imports fell in January for the third consecutive month and at an accelerated pace, an official report said.

    January’s exports fell 17.5 per cent from a year earlier to $US90.45 billion ($139 billion) and imports fell 43.1 per cent to $US51.34 billion, data from the General Administration of Customs showed.

    In December, exports dropped 2.8 per cent and imports fell 21.3 per cent from a year earlier.

    China’s trade surplus in January totalled $US39.11 billion, the customs administration said on its website, broadly in line with $US39.0 billion in December.

    The market had expected an 11.0 per cent drop in exports, a 25 per cent fall in imports, and a trade surplus of $US29.9 billion last month, according to the median forecasts of 15 economists surveyed earlier by Dow Jones Newswires.

  18. N’ Lol

    “Somebody’s going to have to break it to my parents that they they’ve never had a job – not even back in the 1940’s. While they went to college my father worked nights in a shipyard as a welder while my mother picked up cigarette butts in the parking lot of a defense plant.

    I guess those weren’t jobs either, because both of them were funded by government contracts. Then my Dad joined the service. That was government “work,” too. I wonder if Michael Steele wants to break it to these two people that they didn’t really have sixty years of productive service to society. (And, well into their eighties, they’re not done yet.)”

    Shit, does that mean that all the troops now fighting in Afghanistan and Iraq don’t have real jobs?

  19. John @ 3.05

    “I think this is dangerous in the current climate, what are your thoughts? Will it end in tears do you think for many?”

    Thanks for asking.

    I think it is not dangerous in any climate to attempt to get your own home. Risky yes ( but life is a risk), dangerous no. Some will win and some will lose but even if 51% win and 49% lose the benefit will outwiegh the loss.

    It helps stabilise our home ownership which plummeted under Howard as we became one of the countries with so many unaffordable housing areas in the world.

    Will there be tears, definately, but there are tears and losses in good and bad economic times.

    It is a great idea if they can afford it as it will get the young ones to start paying for something they will eventually own and that is good in any type of economic climate rather than spend it on lifes luxuries.

    The only ones to lose will be those that for some unforseen reason will be required to sell ( possibly at a loss). Like I have always said. If it is your castle and not a rental property why would you care if it was worth only $1, you are living in it with no intention to sell in the current market. Once again just like shares a paper loss unless you sell the asset. Only difference is that a home will never be totally worthless. A share may become totally worthless.

  20. nasking

    So what on earth do the republicans call staff of the FBI, the CIA , Homeland Security, Police, Ambos, Fireis, Teachers, Politicians etc , etc.

    Under his guise he should be scaked as his job was not created by a business owner.

    The party is full of nut jobs.

  21. Does this sort of story ever make anyone wonder just what might happen if we build a big trading scheme which trades in something unproductive, and will be operated by the same crooks who have been selling collaterised debt obligations this last decade?

  22. James

    I don’t have to wonder, it will happen again, history under capitalism and the desire to make wealth at any cost dictates it will happen again and again.

  23. “Shit, does that mean that all the troops now fighting in Afghanistan and Iraq don’t have real jobs?”

    An excellent point John.

    Yep, they ain’t got no jobs…they’re just working for THE MAN…:)

    But which MAN? Or MEN? Obviously the ones who have conveniently turned Socialist of late…but get all Scroogish when it comes to helping out the rest of the population.

    “Under his guise he should be scaked as his job was not created by a business owner.”

    True…they just pull the strings…unless of course he’s paid by the GOP…then it’s a hand puppet job.

    N’

  24. Shane

    I should have substituted ‘dangerous’ with ‘risky’ wink

    But purchasing a home at any price simply because you’re desperate to own a home doesn’t sound sensible or advisable especially for first home-owners who haves stars in their eyes.

  25. John McPhilbin, on February 11th, 2009 at 3:35 pm Said:
    My concern is that many of these first home-buyers are propping up market prices artificially and may just get a shock when the value of their houses drop, and in some cases below what they initially bought them for.

    That is what I was trying to say, but probably did so bady. That 1st home buyers are artificially proping up market values – because – there is no alternative (except renting) – that there needs to be an alternative such as public housing in order bring down the price of ‘affordable housing’.

    Perhaps you are right there..that one should not be encouraging home ownership at a time when people could lose their jobs. But on the other hand, if one loses one’s job and you’re just a tenant how quickly will you be out on the street. I believe that it’s 2 weeks in arrears.

  26. Min

    It’s a real dilemma for sure. Rental prices have gone through the roof and with the risk of people losing their jobs…. it’s a disaster waiting to happen if it isn’t already.

  27. John

    I agree purchasing a home at any price out of desperation is not the answer, however you were asking me about danger and risk and this needs to be put into perspective.

    If hundreds of thousands lose their homes in the next few years then I will concede defeat on this matter.

    If a few thousand lose their homes in the next few years, then this will be not much different to the standard repossession rate over a given period of peaks and troughs.

    The media make it look like a disaster which is far form the truth at this stage.

    My apologies for the following comments under the current conditions.
    It is a terrible analogy to use at the moment but with regards to mortgage foreclosures did you know that for every 1 home lost to fire, 3 are lost through death and 48 are lost through disablement. This is where insurance is essential for income and life , not just house and contents. You are 48 times more likely to lose you home through not having income due to disablement than you are to fire.

    Problem is we think it will not happen to us. Maybe in the current economic climate the lenders should only lend to those who can also afford life and income protection in addition to their home and contents insurance.

  28. John

    The Media also make it look like a Bank can repossess a house in no time flat.

    This is totally incorrect and there are many steps that must be taken before a home can be repossessed, especially due to lack of loan payments, and even more so if it is the family home.

    If it is your principal place of residence you are protected under the Consumer Credit Code which has stringent rules a funder must adhere to including a myriad of measures before respossession can even commence.

    I can assure you I witnessed people live in their homes for over 6 years making no payments to the Bank before action was taken.

  29. Only difference is that a home will never be totally worthless.

    Kind of, but it can get pretty close. There are large and small cities in America where you can buy a half-decent house for something like $8000 (and that was a few months ago – maybe less now) because the neighbourhood has deteriorated so badly that no-one wants to live there if they can help it. You can probably find these through US real estate websites if you look.

    Australia is a little different – US cities are incorporated entities and they can die from declining tax revenue base (exacerbated by stupid Republican ideology that has been enacted in many jurisdictions and puts artificially low caps on tax increases and/or mandates a balanced budget every single year). We don’t see that happening here – at least not via the same mechanism.

  30. Thanks Shane, it’s good to get and inside look at how it operates. My concern is that many thousands could end up foreclosing, however, as you’ve pointed out it’s not that easy for banks to push.

    Every effort, needs to be made to prevent this form happening for sure.

    “You are 48 times more likely to lose you home through not having income due to disablement than you are to fire.

    Problem is we think it will not happen to us. Maybe in the current economic climate the lenders should only lend to those who can also afford life and income protection in addition to their home and contents insurance.”

    Makes good sense!

    Lotharsson

    Very Interesting comparison

  31. Well said Lotharsson.

    Looking at the generosity & compassion of Australians today, and witnessing same from the various governments, I felt a real sense of PRIDE tonight.

    My inners warmed, the pressure reduced in my brain, my worries lessened…and the thought that the freeze & cold brought about by the Howard years of mean pragmatism & faux prosperity is thawing & warming got me feeling slightly more confident than earlier in the day.

    Australia has so much to offer, and has so much potential…and if only people continue to show the warmth & caring for their neighbours they have today, I reckon we might get thru this downturn OK…& property values will begin to equal out somewhat based on a renewed sense of classlessness.

    As someone born in the class-ridden society of England where some poor, young workers felt forced to drop their accents in order to get jobs, I found the lack of “airs” & toffiness refreshing & inspiring…Canada was similar…the “fair-go-for-all approach to life, the willingness to provide opportunities for all, great stuff…and when that began to disappear during the “prosperity era” I began to despair.

    Times ARE changing.

    Phew.

    N’

  32. I don’t know how much trust to put in the stats & prices on the website, but take a look at Detroit, Michigan at http://www.realestate.com.

    Overall there appear to be nearly twice as many homes listed as foreclosure sales as regular sales. If you change the URL to limit prices to $5000 you apparently get several hundred homes (only 1/3 of which are foreclosures). If you go to the last page (lowest price) the listings start at $1 – although those two look to be seeking offers (perhaps minimizing website listing fees). Nevertheless there are lots of listings apparently offering property for a few hundred dollars or more, which isn’t terribly inconsistent with the news article I read a while back.

  33. Nasking says: “…the financial system is broken…& many of the guys & gals who’ve broken it are still in charge of the ship….”

    There’s NO doubt about that.

    I remember a time when the Banks were run by people who looked and sounded like Presbyterian Ministers: Solid, sober, penny-pinching types with no discernable sense of humour. These guys would scrutinise every credit application with a nit-picking and ruthless efficiency, essentially making you prove that you financial position was so sound that you didn’t really need the money, before they’d lend it to you.

    Now, of course, the Banks (and other Financial Institutions) seem to be run by the sorts of spivs and Flash Harrys one finds lolling about places like the Randwick racetrack every Saturday during the Spring Carnival.

    This sort couldn’t lie straight in bed.

    These were the people who, only a year or two ago, were advising customers that it was in their best interests to borrow as much as they cound and hock themselves to the hilt.

    Remember those ads on TV trying to convince people to borrow against whatever equity they had in their homes to pay for that new car, holiday or whatever? It was “no-risk” because the value of the house was always going to increase. Right?

    The poor suckers who took these sorts of offers-up are in the doo-doo now, that’s for sure.

    The mortgage rates might be down, but so too is the value of their home. And if the recessions costs them their jobs, they’re really screwed: They deafult on the mortgage and the Bank gets to chuck ’em out of the home they advised the punter to borrow against in the first place, and to sell-off that asset to whoever will buy it on a depressed market.

    Nice one.

    I’d like to see those guys and gals Nasking refers to forced to walk the plank.

  34. I left something out: Those TV ads I referred to were specifically pitched at people who’d either paid-off their mortgages or come within spitting-distance of doing so.

    In other words, the middle-aged Mums and Dads of the country.

    Talk about amoral.

  35. Evan

    Welcome…. The Equity Mate Ads come to mind from the Commonwealth Bank…Hey while the equity in your home is growing why not take advantage and buy a new car…boat…pay for your daughters wedding….travel the world…or perhaps invest in more housing….

    This is how I’ve expressed similar thoughts previously in a broader context.

    Socialism: capitalism’s best friend
    http://blogs.news.com.au/news/blogocracy/index.php/news/comments/socialism_capitalisms_best_friend/
    Weekend talkback Tim Dunlop Friday, June 22, 2007 at 10:22am

    Talking about mediocrity posing as genius, JWH has me worried and more than a little concerned about his true understanding of economic reality. He keeps repeating the same dangerous mantra interest rates are lower and people can borrow more.

    Household debt hits record

    John Howard said the heavier debt burden reflected rising affluence.

    It is the case that people are buying ever more expensive houses, and they are doing that because of a number of factors, the Prime Minister said. One of them is that interest rates are lower and people can borrow more.

    Are more and more people getting sucked into a dangerous debt trap that could lead to financial ruin for many? Lets look at some of the alleged facts and the potential downside, as I see them:

    Debt levels are rising, but we are choosing to use the debt more productively to buy assets that traditionally rise in value, like shares and property.

    However, the Reserve Bank’s figures on household finances show that assets are rising faster than debt. Households now have assets, including housing, superannuation and other investments, that are equal to eight times their annual income.

    This is a capital gain over the past three years equivalent to 60 per cent of a full year’s income.

    It is not only housing debt that is rising. Margin lending to buy shares has soared 40 per cent over the past year to reach $30.2 billion in March.

    Credit card debt rose at its fastest rate in three years, increasing by 8 per cent to just under $40 billion.

    Remember the Commonwealth Bank ˜Equity Mate commercials? Housing prices were booming and the Commonwealth Bank were encouraging everyone to borrow against their growing equity. The message was: take on debt while interest rates are low and your capital gains are BOOMING

    My point, growth in assets measured by capital gains from rising market levels can create an illusion that people are indeed becoming wealthier until at least some of these markets actually correct themselves – which is likely to happen when interest rates increase. Take the recent surge of money being thrown into superannuation funds and the corresponding rise in stock market prices – excess money (sometimes often highly leveraged – refer margin lending) thrown limited markets tends to push price levels to new and unsustainable highs – this no doubt increases asset/equity growth and the belief that money is being used productively – but what happens when the bubble bursts? – as it surely will – Billions of investment gains will magically disappear.

    AND LENDING ON MARGIN TO INVEST IN STOCK MARKETS IS AN HISTORICALLY DANGEROUS THING TO DO – taking on debt in the hope of making a profit in an historically high stock market have brought ruin to many an investor in the past.

    Something to think about, maybe?
    John McPhilbin of NSW
    Fri 22 Jun 07 (11:46am)

  36. Shit! June 2007, I really was ahead of the game. Then again, I think a lot of people knew what was coming.

  37. lotharson

    True the American system is a bit different and as I have said before in the US you can walk away form a mortgage and let the Bank wear the loss with no ramification on your credit rating.

    In Australia if you walk away you will still owe the Bank the difference between what you owe and what the Bank gets form the sale. This is a very, very, VERY strong incentive for people to do all they can to keep their home.

    It foesn’t matter if your home is worth only $1, you still own it and are paying it off. Eventually some recovery will happen.

    Totally agree with the Republican decimation of tax base. I commented on that in a previous blog. Just wish I could find the Time Magazine story on how businesses put their company up for the lowest taxing bidder of the states wihtout any regard for employees or the state they are currentyl in. An absoluetly disgraceful display of extreme capitalism at its worst with all risk and responsibility falling on rate payers.

    If we are not careful it will be happening here to the same extent. Look at Westpac and their loan centre in Adelaide. Virgin Blue and their head quarters in Brisbane. This disease of pitching aussie against aussie in the name of lower taxes for corporations needs to stop right now before the only control is big business.

  38. Sign of the Times ???

    Driving along the Steve Irwin Way this morning, only 200m from Australia Zoo I passed a young man, who looked like a labourer. His car parked at the side of the road. Large boards with his mobile phone number on them hung from the open doors. The man standing very close to the road holding another board reading. JOB WANTED.

  39. Maybe if Corporate America paid its fair share of tax they would not be in the mess they are in.

    http://www.americanprogress.org/issues/2004/04/b45142.html

  40. John

    Not the Times story on tax breaks for business but a very interesting one with the same outcome.

    http://www.reclaimdemocracy.org/weekly_2003/state_subsidies_corporations_little_return.html

  41. JMc – one of your best posts (relatively short too, for you)…but also frightening – pity it will be forgotten in a few years…

    …I told my son and his wife the story of this thread last night at dinner and he looked me straight in the eye and said – “…so that’s why you’ve always said – own your own home first…and then the world is your oyster…” Ahhhhhhhhh! The joys of parenting! 😀

    BTW the other thing The Minister and I have always insisted upon, is that our home is our home not an investment asset – we expect our children to get it – however the possibility of a reverse mortgage has been discussed…of late…

    …just in case my calculations for the next 25 years are stuffed up by any more banks, beaurocrats or politicians…and excessive consumer spending 😕

  42. JMcP:

    Not a bad bit of sooth-saying in that 2007 post.

    And yeah, Howard was into it up to his ears, too. Debt as a sign of affluence eh?

    I wonder if he still thinks so.

  43. I’ve been thinking about this and I don’t buy it as a “panic” – at least not without further evidence.

    The claims are that:
    (1) $550 billion was withdrawn in about an hour or two.
    (2) A further $5000 billion or so was projected to be withdrawn in the next three hours or so.
    (3) The announcement of the increase of the FDIC guarantee from $100k to $250k stemmed the tide.

    For the tide-stemming to be a result of that announcement, I would infer that (probably, and in many but not all cases) the withdrawals were from accounts that held more than $100k but not much more than $250k – i.e. accounts which people felt were too risky when the guarantee was $100k but not when the guarantee was $250k.

    And $550 billion in $250k lots is more than 2 MILLION withdrawals from separate accounts. And the $5000 billion would be 20 million accounts. And you would expect the average account to be lower than $250k – and you could expect many withdrawals to leave around $100k still in the accounts (the guaranteed amount). This means the average withdrawal per account might be more like $100k – so we’re talking about 5 million withdrawals by 11am and 50 million by 2pm.

    It’s true that we don’t know if there were a lot of larger withdrawals going on that would skew the average amount, nor what the baseline withdrawal rates would look like on a normal day. We don’t even know which “money market accounts” the Fed was talking about – it may be that the institutions were drawing down large amounts in aggregate from the Fed in order to meet large numbers of withdrawals, it could be that some institutions were operating large numbers of separate bank accounts in order to get as much FDIC coverage as possible, and computerised trading on such accounts could have been ordering the withdrawals, it could have been something else…

    …but without that data the numbers have a whiff about them that piques my bulldust detectors.

    And then there’s the question of where the withdrawals were going TO – I doubt they could hand out that much cash in that time frame, so the money had to be going somewhere else (and thus perhaps it was merely moving, not threatening to collapse the entire system).

    But I could be completely wrong.

  44. Shane

    What a f$&king joke!

    “There is no official data on how much is distributed in subsidies across the country. Alan Peters, a professor of urban planning at the University of Iowa, and one or two other academics have tried to estimate the total loss of city and state tax revenue through abatements, lower income taxes, outright payments, training grants, wage subsidies and the like. Their estimates start at $30 billion a year and range up to $50 billion, with Mr. Peters putting the number somewhere in the $40 billions, based on a recent survey of tax expenditures.

    “It seems like almost every state is giving away grandmother, grandfather, the family jewels, you name it, everything,” Mr. Peters said. The anecdotal evidence of the escalating bidding war is greater than the statistical, he said.

    The giveaways come in many forms. Iowa, for example, has just authorized $75 million a year until 2010 to finance subsidies to corporations. The State of Washington has offered Boeing a $3.2 billion subsidy package to locate the manufacture of its 7E7 airliner in the state. New York is creating more “Empire Zones,” which are patches of land set aside in various counties where companies can locate nearly tax free. One way or another, the cities and states, in forfeiting more than $30 billion a year in tax revenue, are channeling to the private sector enough to hire 375,000 schoolteachers at $50,000 a year plus benefits.”

    The free-market takes care of all our needs (lol).

    It was interesting to hear Warren Buffett state recently that the a capitalist society driven solely by profits considers development of a drug to help old men get an erection more important than developing drugs cheaply enough to be able to supply undeveloped countries with the necessary drugs to treat the most basic of illnesses and viruses. Capital always goes to where profits are to be made.

    And according to your link taxpayers are paying through the nose to subsidise businesses who could care less about the common good.

    TB & Evan

    Lol I’ve been repeating the same thing ever since. At one stage there a few inferred that if it all came to pass like I’d predicted that I’d be partly to blame and you too TB.

  45. Lotharsson

    “But I could be completely wrong.”

    Frankly it’s really hard to tell, and if it wasn’t an actual full-scale panic we can at least conclude that Bernanke and Paulson
    soiled their unerwear BIG TIME (wink)

  46. ‘Underwear’, ‘knickers’ whatever they were wearing. Then again given how hard both of them have had their balls squeezed they may have decided to just let them hand freely that day (lol)

  47. John

    Isn’t it amazing how the big business capitalists pretend that they make money. pay taxes and save tax payers a fortune becasue they are private enterprise, when in fact they on the public teat far worse than politicians themselves. Blood sucking parasitic leeches sucking the funds from the average tax payer.

    I certainly won’t be flying United Airlines as the thought of flying with a company that has taken taxes via the back door from pensioners in the US who cannot afford heating fuel, repulses me in the extreme.

    Did you watch the Wal Mart story ?

  48. Shane

    Completely agree. I haven’t had time to watch the Wal Mart story as yet but I’ve set it aside and will definitely watch it when convenient. You’ve peaked my interest.

  49. lotharsson

    The quote says it was being drawn out of the US money market system, which to me indicates it was being either horded or transferred overseas.

    Either way a massive destabilisation of the market.

  50. Shane

    “Either way a massive destabilisation of the market.”

    It seems to get back to the fact, that the mass movement of funds show just how fragile the financial system is. And Bernanke and Paulson knew it.

  51. I am a capitalist. I have my own business. Yet I am revolted at these type of actions and people the likes of Bolt and Akerman who support this type of right wing lunacy in the name of capitalism.

    I just wish people would look past their political leanings and read for themselves. It may just open their eyes.

    This is another example of the mess the USA is in, its tax base destroyed and its people being gradually reduced to servants of big buinsess by donating their taxes via the state governments.

  52. Truth be known capitalism has some really good and valuable traits and the baby should not be thrown out with the bathwater.

    It simply cannot continue to operate as freely has it has been. The government (indeed government the world over) have a significant role in ensuring this does not happen again, and that every effort also needs to be made to focus investments in underdeveloped countries.

    Expanding markets under controlled conditions needs to be the aim of the game.

  53. John posted this on another thread as well, but also relevant here given we are talking about governments and their actions.

    Amazing poll results. I think the conservatives of the world including some in the Liberal Party need to take a sober look at these.

    http://www.news.com.au/story/0,27574,25043897-29277,00.html

  54. Catallaxy Files: More Keynes-scepticism

    http://www.catallaxyfiles.com/blog/?p=4154

  55. Banking CEOs: We didn’t think the bailout was necessary

    Do any of you remember the bailout being sold as not particularly necessary, but nonetheless probably kinda-sorta prudent?

    I didn’t think so.

  56. Banking CEOs: We didn’t think the bailout was necessary

    I see none of them bothered to thank Congress for bailing out AIG – who (for example) probably owed Goldman Sachs about $20 billion and couldn’t pay it. I guess Goldman didn’t really need that $20 billion, and without it wouldn’t have defaulted on any of its payments to its debtors…?

    Or as dday says:

    Please. There is no way a bunch of insolvent banks can even make it without government help. If there was, the loans would be repaid tomorrow. They can’t raise the equity that needs to be offered to taxpayers in place of their money. And let’s get to what this is really about – banksters want to save their precious bonuses, the ones they’ve been handing out to their employees without even hesitating, despite playing with taxpayer money. The claim in the House session today was that TARP money didn’t go toward bonuses, which makes no sense whatsoever since money in the hands of the bank is money in the hands of the bank no matter where it came from.

    BTW, to my mind the actual CEO quotes in your link undermine the conclusion you quoted.

    “…for prudential reasons, it was necessary for the systemic safety and soundness. And as subsequent events have borne out, I think it has provided safety and soundness, and taken some of the risk away from the system.”

    “…But I think in light of the severity of the recession, and in light of the speed at which the economy deteriorated, I think we have lent more money because we had the TARP funds and that level of capital.”

    And bear in mind – these are some of the so-called Masters of the Universe who got their firms into a terrible mess in part because they had no insight into the economic future, so they aren’t exactly the most compelling authority on what was necessary and what was not from an economic perspective. Worse still, they have a vested interest (financial and reputational) in pretending their actions didn’t contribute to the near calamity and that they don’t need government money…

  57. Tony @ 2.51pm

    What is your point.?

  58. Shane

    “Business is seen as being significantly responsible for the credit crunch and global warming, but is not trusted to invest in trying to find a solution.

    Two-thirds of Australian respondents believe government, business and NGOs should collaborate to solve global issues, while just 22 per cent – like Western European respondents – wanted the free market to function independently. ”

    It’s all a matter of trust – thanks for the ref. The profit motive of the ‘invisible hand’ has very real limits.

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