I have seen a lot of short term money made using gearing and derivatives and have felt over the past few years that all this financial engineering could not last. Wealth is found in manufacturing and services, not by waving wands over phantom products and then on-selling them to the next ignorant buyer. It all had to end, and my surprise is that it didn't collapse before this. Debt has to be paid back at some point and to believe it is an endless source of wealth is an illusion.
Unfortunately we all have to pay the price of the irrational people that think that everything continues to rise in value at an unsustainable rate.

in the end,it's just a ponzi game, innit?

capitalism and oligarchy are driving the human race toward extinction, but fortunately the process is slow enough to see me out. if i were younger i'd take the joke one step further: optimists buy gold, realists buy canned goods, pessimists learn to farm.

A great article.

I have been watching the credit card explosion by consumers for several years now.

Last figures being we - in Australia - owe over $43 million in credit card debt - and growing.

So what lessons are to be learned here -

1. If we don't have the money we put it on the card? therefore the banks love us.

2. If you are not able to repay the item purchased within 30 - 54 days depending on your card interest free period, why buy it as it just became so much dearer via the interest rate your institution charges.

3. Newspaper articles reveal most young people - when polled in the street - don't know the following -

1. How much they owe on their credit card/s.
2. What interest rate they are being charged on their card/s.

No wonder we - as a society - continue to spend and spend.

Until we all take a good look at our spending habits we are just continuing to ad to inflation.

Now is the time to re-look at our entire spending habits and really look at setting ourselves a budget to decrease our debt.

John Howard used to say during the election “Australians never had it so good”
What he meant to say was “Australians never could borrow so easy and so much”

One of the results was an incredible increase of house prices, since house owners could borrow more money, they could buy an other existing house as an investment and use negative gearing as well. This increased the house prices and gave us the impression that we had made a great investment, so we borrowed more and bought an other existing house and so on.
This made houses unaffordable for young people.

Now the government plans to release more land for houses, but they are being cautioned by the financial experts to be careful less they will cause a drop of house prices.

I think that we should make up our mind. Who are trying to help?
The YOUNG PEOPLE or the SPECULATORS?

A great irony is that this almost unlimited borrowing caused inflation and the reserve bank has to increase the interest rates.
This causes “mortgage stress” for all those greedy borrowers and the opposition in parliament, the previous government, now demands that the Rudd government helps to reduce this stress.

In general terms I agree with the article but I would like point out there are some points of exaggeration and use of emotive language.
The packages of “dud mortgages” were in the main mortgages with ‘normal’ risk but included a number of those that would eventually be dishonoured. The rate of default is less than 2% overall, so those parcels of “dud mortgages” would carry an equivalent level of mortgages destined to fail. It’s the sheer size of that market that produces the risks that every bank now shies away from.
I don’t think the suspicion of holding these failed mortgages actually fell on the over-geared companies. It is the risk that these companies would fail because the banks would not extend the loans they depended on that caused the share market to abandon them. The risk of over-gearing has been known for a long time, but while the managers were able to secure the loans necessary to continue the business, investors stuck by them. Even moderately geared companies can become unstuck in a credit squeeze – it depends a lot when the demand for credit arises.
The creation of new ways to do business like new credit instruments will always be accompanied by increased risk that can’t be totally foreseen. Some will turn out useful, some not. This one is CDOs (Collaterised Debt Obligations), the next one may be the current fad of CFDs (Contracts For Difference). Credit is a tool like any other, and may be misused.
I think the main problem is that the users of credit have not listened to the warnings that have been issued over past years. They would not respond to the tap on the shoulder, so now they are being belted across the ears.

Libra you said " I think the main problem is that the users of credit have not listened to the warnings that have been issued over past years. They would not respond to the tap on the shoulder, so now they are being belted across the ears."
Did the government and other authorities have the means to force reckless users of credit to listen to their warnings.
Like in the seventies the weekly repayments of a mortgage could not be more than 25% of the male's weekly wage.( excluding overtime)
Why was this rule dropped.
Could it be re-introduced in a revised fashion?
A similar attitude could be adopted towards credit and credit cards in general.
Maybe banks should have to reduce thier interest on a credit card account once they let the user borrow beyond certain a percentage of his weekly wage.
Of course this won't be fool prove, but it may make us think twice before borrowing and lending.

To THEODEB
I believe the rule of 25% limit for housing was a yardstick applied by the banks. I do not think it was in any way enforced by the government. In many cases income is a very rubbery figure, especially among the self-employed.
The borrower is the best judge of whether the loan is affordable or not. You wouldn’t really want the bank to determine that for you. The banks determine whether the individual’s situation ie the ability to repay puts them at greater risk.
I do think that the ability to sell the mortgages by the use of CDOs did encourage banks to ease their lending restrictions because they thought they had sold off the risk as well. I’m sure that if CDOs ever make a comeback, the buyers will be more wary and they will be harder to sell.
In your other comment you blamed investment in housing and negative gearing as the cause of current mortgage stress.
The current shortage of rental accommodation that is driving up the price of rents would argue against your point of view. Rental accommodation is primarily provided by investors in housing, and the provision of negative gearing offsets the drawback of low yields and low liquidity in this market.
I maintain that mortgage stress is more likely a factor of unrealistic expectations of the buyers. It is simply logical that a more modest ie a cheaper house provides less mortgage stress than a dearer one. Also these days a house comes with all the fittings, whitegoods, and two newish cars in the double garage. Surely the prime responsibility of the borrowers is to determine whether they are risking the welfare of their family with the new loan?

Just look at advertising and tell me that its not all about keeping up with the Joneses. I save and pay cash, and if i haven't got the money, I will do with-out, or better still, get a part-time job. Credit is the easy way out, and how many leeches and peer-pressure situations have sucked you in.

Being debt free, Will make you feel more in control, and how the rich make us feel, that we have too keep up.

Its up to you.