Financial Crisis? What Crisis?

Despite the constant media predictions that we’re all heading for financial doom and armageddon, The RBA has issued a rather upbeat prognosis of Australia’s financial system suggesting that we may, once again, dodge the worst of the global recession, as we did in the Asian financial crisis and the “tech wreck” in 2001-02.

In a report published in The Australian, The RBA says that, while the banks of many countries are in the worst state they have been in since the Great Depression, our banks are highly profitable and still increasing their lending.

Although bad debts are rising, they remain very low compared with either other countries or previous recessions in Australia, and the Reserve Bank believes that households and business are in great shape to withstand the global downturn.

The bank’s upbeat assessment, contained in its twice-yearly review of financial stability published yesterday, said the Australian financial system has weathered the current challenges better than many other financial systems.

The Reserve Bank believes there is little chance of Australia’s housing market plunging as it has in the US and Britain, deepening the financial turmoil and undermining consumer spending.

“While further softness in the Australian housing market is possible, the market does not appear to have the same vulnerabilities that have been evident in some other countries,” it said.

Although business is finding it harder to get finance, few have been unable to refinance themselves when debts fall due.

Even in the commercial property sector, the $5.3 billion in new loans since last June has outstripped the $3.4 billion in repayments.

The Reserve Bank gave credit to the Government’s guarantees of bank deposits and wholesale funding, which it said had forestalled a run on the banks and had secured their access to funding.

It disclosed that there had been a jump in demand for banknotes following the collapse of Lehman Brothers last September, a sign that people were losing confidence in keeping their money in the bank. It said there had also been large shifts in deposits from smaller banks to the majors.

“With the safety of deposits no longer a notable concern for the public, the period since the introduction of the guarantee has seen continued strong deposit growth,” it said.

The banks have used the guarantee of wholesale funding to strengthen their balance sheet, repaying $95 billion in short-term debt and replacing it with longer-term finance.

Wayne Swan said the Reserve Bank’s comments proved the wisdom of the Government’s use of guarantees to bring needed stability.

“The importance of this simply can’t be underestimated in the midst of the chaos that has unfolded on financial markets internationally over the past year or more,” the Treasurer said.

The Reserve Bank said the strength of Australia’s finance system was evident in strong profits, low exposure to high-risk securities and continuing high credit ratings.

The Reserve Bank said Australian banks had been able to concentrate on profitable and relatively safe domestic lending to households over the past decade. They had not lent heavily abroad, where risks are higher, and they had avoided exposure to securities, such as collateralised debt obligations, that have brought such heavy losses to other banks.

The Reserve Bank said part of the credit was due to Australia’s consumer credit code, which allows courts to overturn mortgages if banks lend to people who they should know would have trouble meeting the payments. This had stopped the irresponsible lending that had occurred elsewhere.

The Reserve Bank believes Australia’s households are in good financial shape, and with the added boost of government cash hand-outs, incomes in the December quarter were 14 per cent higher than a year ago.

Households have become much more careful about borrowing, with debts rising more slowly than income for the first time in many years.

While much needs to be done to fix the global financial system, efforts are well underway and markets are beginning to show glimmers of hope as investors begin to realise that now is the ideal time to buy.

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37 Responses

  1. Check this out:

    http://business.smh.com.au/business/white-people-with-blue-eyes-caused-global-finacial-crisis-brazil-president-20090327-9ct5.html

    According to the Brazilian President, “white people with blue eyes” cause the GFC.

    Yairs, well…. I reckon it’s more of a multi-racial effort, myself.

    I dunno if those dweebs in AIG’s Financial Products Division who played a large part in causing it had blue eyes, but the CEO of Citibank, another big player in the causation stakes, was an Indian: One Vikran S. Pandit (now more commonly referred to in the Blogosphere as Vikram Bandit).

    See:

    One thing they all had in common was the fact that they were a bunch of inadequately regulated financial psychopaths, IMHO.

  2. BTW, in the first link above, you’ll notice that El Presidente (the guy with the full-face Derryn Hinch hair helmet) is looking very closely at Gordon Brown’s face.

    Perhaps he’s looking for evidence of guilt by checking-out the colour of his eyes.

  3. Phew! Thank God it’s over

    Families losing their homes as recession bites
    http://www.news.com.au/dailytelegraph/story/0,22049,25135472-5018705,00.html
    By Gemma Jones

    March 04, 2009 12:00am

    MORE than 7600 people have become economic refugees in the past 12 months, with a record number of families losing their homes as the economy dives.

    A further 28,000 are struggling to hold on and have flooded the State Government for financial help in the form of rent payments and bonds.

    Horror stories emerged from Housing NSW last night of families evicted because investment homes were being repossessed, while others had lost their jobs and were unable to pay rent.

    Housing Minister David Borger yesterday said the number of homeless families had increased 51 per cent and that staff were finding shelter for an extra 643 people a month.

    John Rolfe’s blog: Stories from the real economy

    “We are seeing people who are economic victims who have lost jobs and can no longer pay bills. They have racked up their credit cards,” he said.

    “There is a new category of economic refugee.”

    He said the economic crisis had hit families in Western Sydney particularly hard, with 20 per cent increases in rents in some areas forcing many from their homes.

    A family of African migrants in Mr Borger’s electorate was paying rent to an investment property owner but was evicted when the mortgage stopped being paid.

    Housing NSW worker Nick Ladeos, who works in Hurstville, said he recently had a homeless expectant mother with two young children seek help.

    Others arrive destitute because they have lost their jobs, he said.

    “What we do see is a lot of people who can’t pay the mortgage repayments or investors who can’t pay,” Mr Ladeos said.

    “The tenants already in there are getting evicted when the property is repossessed or needs to be sold.

    “Others have been laid off and they can’t meet the commitment of paying their weekly rent so they get behind and as much as they try and pay, they can’t.”

  4. Evan…

    Hmmm…I’d just like to know where the Brazilian President’s other hand is…!

  5. Well – Gordon is known for only having one good eye

    🙄

  6. oh John,

    Look at the bright side. Rather than saying “7600 people have become homeless refugees in the past 12 months”

    you could say “7600 people are no longer struggling to pay mortgages they cannot afford”

  7. Now nasking, they’ve only just met. I doubt the friendship is that close.

    Yet.

  8. sorry, reb…….

  9. All together now:

    #
    Tall and brown and old and Scottish,
    The guy from the banks of the clyde goes walking
    And when he passes, each one he passes goes –

    Oi – that’s him – the “prudent” one who helped create the bloody mess the financial systems are in…. Get him!

  10. Now be nice to Gordon, he’s not a bad bloke.

    Dour and colourless, maybe, but he seems to have far more substance than that blathering Osmond clone who preceded him in the job, Tony Blair.

    And his economics are good, sound Arthur Scargill-stuff too. None of this new age nonsense that has brought us to the brink of catastrophe.

    He might just save the Pit, yet.

  11. Evan, it is completely unsurprising that you’d be a fan of the economics of Arthur Scargill. He is also someone without a shred of understanding of the subject.

    When do you think the UK coal mines should open again?

  12. Ah yes, Tom, but he did try and save the Pits.

  13. I’ve gotta admit Tom, Maggie closing them there pits did have its upside.

    We ended-up with some terriffic music and films as a result. Like Punk Rock and Brassed-Off, to name but two examples.

    Lets face it, but for Maggie, Sid Vicious might just have ended-up another under-paid coal miner with bad teeth instead of the satirical genius he became.

    God Save the Queen (and her Fascist Regime).

  14. John

    What are those figures compared to ?. How many people are home owners in Australia.

    While any figures of homeless are disturbing, are all of the losses due simpy to jobs being lost or do the figures include those too lazy to pay their mortgage payments or enjoying a lifestyle fit for Rupert Murdoch ?. Do the figures include losses for those who did not take out illness or income protection ?

    I would like to see all of the results and total figures of comparison not simply the sensational side of these before commenting.

  15. Evan…

    She ain’t no human being.

    AND ENGLAND’S DREAMIN’….!!!!

  16. Stimulus package boosts housing and jobs….

    http://au.biz.yahoo.com/090326/2/25f7y.html

    Construction accounts for about nine per cent of all employment in Australia, nearly one million jobs, so increased first home buyer activity means jobs right across the economy.”

    But no!, it can’t be! We’re all meant to doomed to hell in a shitstorm! Rents are going to explode! Housing prices are going to collapse!!

    These fools who are first home buyers are gonna be ruined if interest rates go up cos they’ve shouldve stuck with rising rents instead.

    Um it all makes perfect sense…

    Just you wait until the economy improves. Then you’ll be sorry, cos interest rates will go back up, and there will be more jobs again, and, oh, what was I saying again…

    Stop what you’re doing and go back to renting…

    NOW …..NOW….NOW!!!!!

  17. Shane

    Western Sydney I’m led to believe, not national.

  18. Ol’ blue eyes and the mob affiliations myth, again, huh? Ya know, that $hit is getting old, because the mob went legit decades ago, and all their money was cleaned and invested in G-O-O-D businesses by their smart bankers and accountants. Yuck, yuck, yuck.

  19. John

    I would rather see national figures than one area of one city that we all know has suffered more severely than any other area in Australia.

  20. Shane

    From what I’m led to believe the figures nationally are looking bleaker than anyone first thought. It’s yet to be officially confirmed however. Tip of the iceberg is a phrase I keep hearing. Can’t reveal my sources unfortunately.

  21. Shane

    I know it’s starting to look very messy here is Sydney.

    Bank urge developers to sell units off the plan
    By Andrew Carsell | March 27, 2009 12:00am
    http://www.news.com.au/dailytelegraph/money/story/0,26860,25247519-5015795,00.html

    AUSTRALIAN banks are demanding Sydney property developers sell 100 per cent of their apartments off the plan before receiving funding for housing projects.

    The Property Council of Australia yesterday confirmed such strict lending criteria had become commonplace in the industry, as banks tighten their lending practices.

    But the new edict is forcing many developers to delay or cancel scheduled projects at a time when Sydney desperately needs new housing to keep up with population growth.

    The Daily Telegraph revealed that more new dwellings will be built in Adelaide than in Sydney in 2009, with Australia’s biggest city predicted to have only 7300 new homes.

    That figure is well short of the 24,000 new homes expected to be built in Melbourne this year.

    Analysts believe the dramatic shortfall, up against an expected 23,000 population growth, is the result of a freeze on medium-to-high density housing projects that Sydney thrives upon.

    Banks, according to the Property Council of Australia, are simply making it too tough for most developers to even contemplate construction of apartment blocks or units.

    The council’s NSW executive director Ken Morrison said edicts that required developers to sell 100 per cent of their projects off the plan were ridiculous in this environment.

    “There is no doubt residential developers are being seriously affected and there is nothing Government can do about it,” he said.

    “We are going to see projects cancelled at a time when we need to see more developments.

    “Nothing is impossible, but (strict lending) is making it extremely difficult.

    “We are hearing stories of 100 per cent off the plan, it depends on what size projects.

    “But finance is much harder to find and when you do find it, it is much more expensive, and will exacerbate the housing problem that we have in Sydney.”

    One developer who talked to The Daily Telegraph on condition of anonymity, said one bank had required 110 per cent sold off the plan for one of his projects.

    If lending practices were not so strict, he said he would commence hundreds of millions of dollars in projects.

    “Now they are wanting 110 per cent pre-sale, the extra 10 per cent in the event of people defaulting in this current market,” he said.

    In one case he asked to borrow $30 million, gave $30 million of assets as a guarantee, and they still wanted a pre-sale of 90 per cent.

    The Commonwealth Bank said it wasn’t demanding 100 per cent, but “a little bit below that”.

  22. John

    You wanted controlled lending and now you are getting it via stricter conditions imposed by the banks.

    What is your point ?

  23. Controlled lending, about time don’t you think? Just something of interest given the link housing affordability.

  24. This period is when people get positioned to create real wealth because, for the first time in a decade, assets are historically cheap.

    So if you have a secure job and low levels of debt, or the financial ability to sit tight without drawing down too heavily on your assets, the next year or two will bring some interesting opportunities.

    The Aussie share market finished 2008 down around 45%, the worst single calendar year in history.

    For those who have to sell, property is a disaster, while even if you are selling at leisure, most parts of the property market are down 10% to 15%. But this does not mean that quality property and quality shares are poor investments or will fall forever.

    The bottom line is that for many people, 2009-10 will be a real debt reduction and wealth creation opportunity.

    A large number of people are already a lot better off.

    Mortgage interest rates have declined dramatically, as have petrol prices.

    Markets have already taken a flogging and priced in lots of bad news. Markets collapsed when we least expected it.

    As history shows us, they are likely to jump dramatically when we least expect it.

    If you have cash flow, job security and patience, my advice is simple. Buy good quality, investments while you can.

    Can they get cheaper? Yes they can, but that’s not really the point. Look at history. None of us has a crystal ball, so markets will bottom when they bottom.

    All I can do is encourage us to look at history and recognise that the world population is still growing, that demand for houses, goods and services will continue and that a “glass half full” attitude will help us to protect our wealth, and for younger Australians and those still at work to grow wealth.

    Paul Clithero, March 2009

  25. John

    Yes and no. There are now very good applications being refused by ivory tower sitters who have no idea and are simply number crunching on a computer, “Computer says NO”.

    Also you are talking about plunging home prices but in the same breath saying rents will go up by 20%. If rents go up investors will re enter the market as they will be getting a better return than bank accounts or shares that is only logical.

    The First Home Buyers will slow down because the Banks have put the brakes on not the Government via more stringent lending criteria, While you may be pleased with this those prospective first home buyers will have to face up to 20% rental increases rather than paying repayments to pay off their own home. I know which one I think is better for average person.

  26. Shane

    I think the point I was trying to make was the urgent need for state and federal governments to address hosuing affordability in a sensible way and not leave it up to the private sector.

    http://www.news.com.au/dailytelegraph/story/0,22049,25237078-5013110,00.html

    MORE homes will be built in Adelaide than in Sydney in 2009, proof that the housing crisis engulfing the nation’s biggest city is reaching alarming proportions.

    Figures obtained by The Daily Telegraph show an estimated 7300 new dwellings will be built in Sydney this year, the lowest rate of growth in more than 50 years and roughly a third of the homes built in 2003.

    The bleak projections are in stark contrast to Melbourne, where an estimated 23,000 new dwellings will be built this year. Across the border in Adelaide – a city boasting a population one quarter of the size of Sydney – about 7500 new homes are scheduled, while Brisbane expects 13,450 new homes to be built.

    Reb

    I have absolutely no doubt that there are bargains to be had, in fact, I can see many. A point that needs to be understood is the type of advice dispensed prior to this non-existent crisis has adversely effected the confidence of those who would least afford to lose.

    Most people don’t have a clue there’s often a real gap (sometimes overpriced, sometime underpriced) between price and value. If you believe you’ve found some real bargains go ahead and dive in, don’t let me stop ya (wink)

    And again, it takes some real understanding of what constitutes real value before advantage can be taken.

    Private debt, unemployment, and mortgage/rents will continue to be major obstacles regardless. People can only afford to live within their means and many are finding that really tough.

  27. John,

    Totally agree.

    Everyone was led to believe that the dream would continue – house prices would continue to rise (better get in quick or you’ll be left behind), the sharemarket would continue to boom (better use the equity in your house to invest in a share portfolio, or better still take out another mortgage based on the current value of those shares you’ve just bought, to buy more).

    And, take out another mortgage in order to contribute one million dollars into your super fund before the offer expires…!

    Now look at the state of play. There are casulaties everywhere..

    I’m fortunate that I’ve only lost money in Super.

    I don’t have the luxury of excess money to invest in shares.

    What I don’t understand why the real estate industry constantly bleats on about there being a shortage of properties for sale.

    There are properties for sale everywhere, but probably not set at the price (ie low enough) that the seller can afford to sell at.

    At any rate, it seems that the FHOG has been successful at keeping the real estate market at the low-end.

    It’ll be interesting to see what happens when the FHOG comes to an end.

  28. Tony, on March 28th, 2009 at 10:25 am Said:

    He raises some valid points, and, I am sure that these actions would not have been taken if the situation was not so dire.I can only imagine the horror on hte faces of the Labor party members as it was put forward that they would reintroduce government debt.

    He might come across better if perhaps he validated some of his own points

    eg, IS England going into this in the worst condition than any other G20 nation. Japan is a basket case, so it could be argued that they began at a worst point.

    He also does not explain how much existing debt their was, and how much this had been added to. I am assuming 20 billion pounds added to the debt?

    Then he talks about other nations having paid of their debt.

    I will use Australia as an example. Yes, we have paid of our GOVERNMENT debt. This is the debt that basically we owe ourselves. Over the course of doing this, we trebled our INTERNATIONAL debt, and sold everything but the kitchen sink.

    This leaves us in a very precarious situation, with our only source of real value now coming from resources, as everything of value that the government might draw income from is gone (additional taxes not withstanding). The only option we have now is to go back into government debt. Of course, we could ‘do nothing’, but, since I am already hurting immensly from these developments, I am glad for any sort of fiscal policy to try and alleviate this pain.

    And as has been mentioned adnauseam, the additional debt fostered onto us by Kevs policies only adds a small percentage to that that already existed. I wonder how that compares in England?

  29. Additional evidence that the problem is at the top end of the market:

    http://www.news.com.au/business/money/story/0,28323,25252270-5013951,00.html

    Coastal developments failing to sell
    Experts say developments too elaborate

  30. Reb

    One of the points I’ve been trying to make, and I haven’t probably explained my position well enough, is that ‘if you know how to spot value, you’re quite lucky, however too many people have been duped by very bad advice. My aim has not so much been to panic people, but to get them to stop and have a very good look at what’s happening.

    I’ve often despaired at the crap so-called financial experts have been peddling.

    I’m sure people like yourself know exactly what you’re doing, however, many people have been duped simply because they took advice from people who have been driven more by self-interest than any real interest in the prosperity and welfare of those they peddle their crap to.

    My previous threads have been contentious for that reason.

    I’d much prefer people became much more cautious about the advice they’ve been taking by getting them to realise that economic and financial reality are not what they’ve been led to believe it is when good times seemed to be making everyone more wealthier than they actually were.

    This forum, in my opinion, has been a great place to raise these issue – I always knew it would be emotion charged – which is a good thing if it helps people lift the veil of their own lack of knowledge and understanding of the dangers.

  31. Another sign of much tighter lending conditions

    Foreign banks cut property lending
    http://www.theaustralian.news.com.au/story/0,25197,25253314-601,00.html
    DEXIA SA, Bank of Tokyo Mitsubishi, BOS International, ING and Merrill Lynch have been named as some of 23 foreign banks that are withdrawing or have signalled plans to scale back their commercial property lending in Australia.

  32. John @ 11.54..

    Well said.

    And I hope you will continue to post your views and perspectives on the forum as they are indeed valued (even if we do disagree occasionally)…

    😉

  33. Reb:

    It’ll be interesting to see what happens when the FHOG comes to an end.

    Agreed reb (and for John too of course)..am wondering why there has been so little speculation about ‘what happens next’. To me, usual is speculation after speculation from the popular press about what might be other policies, yet this time and on such an important issue, not a mention (as least not that I can locate).

  34. I can imagine all the finger pointing going on right now

    Out of commission: how the lure of big fees leads to bad advice
    http://business.smh.com.au/business/out-of-commission-how-the-lure-of-big-fees-leads-to-bad-advice-20090327-9e5b.html
    There’s nothing like a financial crisis to highlight the insidious effects of conflicts of interest.

    Oiling the wheels of wealth accumulation by greasing a few palms does not seem a big deal when everyone is making money. But when those easy profits turn to big losses, the finger-pointing starts. And the easiest targets are those whose loyalties are divided.

    The financial planning industry has come under the gun – yet again – with the collapse of Storm Financial and revelations that clients were encouraged to take out big loans to punt on the sharemarket. But Storm was no Robinson Crusoe. It may have been more aggressive than most, but borrowing to invest was a popular planning strategy during the boom that is now coming back to bite both investors and their advisers.

    Let’s be blunt. If you are on a high income and prepared to take on extra risk, borrowing to invest can be a sound financial strategy – at least while markets are rising. Those investors who knowingly took on the risks of borrowing and reaped the profits in the good times have little cause for complaint now.

  35. reb, on March 28th, 2009 at 12:09 pm Said:

    John @ 11.54..

    Well said.

    And I hope you will continue to post your views and perspectives on the forum as they are indeed valued (even if we do disagree occasionally)…

    If we agreed all the time where would the challenge and fun be Reb? I do have a few avenues I’m pursuing which will keep me busy, however, I’ll always try to join in because I know I’ll get honest opinions whether I agree or not, which I find very valuable. Lets keep it honest and remain friends.

    Frankly, I’ve learned not to put much faith in ‘yes’ people, which is something I don’t encounter here, and when I do it’s only because there is genuine agreement. Hard to put a price on that – keeping it real is priceless.

    Cheers

    John Mc

  36. “the inadequacy of pension plan assets to meet their payout liabilities to retirees is well on the way to becoming our next financial scandal”

    shhh.

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