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The Forum > Article Comments > Sub-prime - just another banking crisis > Comments

Sub-prime - just another banking crisis : Comments

By Sinclair Davidson, published 22/4/2008

Comparing the US sub-prime crisis to the great depression, or the 1970's oil crisis, is simply overblown.

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'The important aspect to crises, however, is that they clear out the economic and financial deadwood. During a financial crisis those firms with poor strategy and non-viable business models are exposed. Many fail.'

'The bottom line is that people who make poor investments or have poor business strategies should lose their money.'

Yes & Yes

Q. Why have the central banks allowed it to happen? After all, they are supposed to be the experts?

Q. Why are they bailing out the companies that failed as per the above? Surely it is better to get rid of the deadwood.
Posted by DialecticBlue, Tuesday, 22 April 2008 12:49:23 PM
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The questions that inevitably crush my own thinking on these issues are very childish. Unfortunately my brain won't allow me to go any further until they are answered.

"The OECD has claimed the sub-prime crisis will eventually cost between US$350 billion to US$420 billion while the IMF estimate the eventual cost to be almost US$1 trillion."

Where have these billions gone?

Who had them, but has them no longer?

Who has them now?

What happened to cause them to move from one to the other?

Is there anybody out there who can explain this in terms that a twelve-year-old can understand?
Posted by Pericles, Tuesday, 22 April 2008 1:17:54 PM
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DialecticBlue

Two good questions!

04 April 2008 -
IMF stated that Aus property is 25 percent overvalued.
(see link to article ‘Risk of Local Property Correction High’):

http://www.news.com.au/business/story/0,23636,23482668-31037,00.html

21 April 2008 -
RBA bought A$780 million of mortgage-backed bonds in its biggest purchase of this type of debt to ‘support the nation's dormant home-loan securities market’ (see link from an article by L Cochrane & S Raja, Bloomberg):

http://www.bloomberg.com/apps/news?pid=20601081&sid=aegfyWnNxJyE

In the article it was stated RBA is attempting ‘to kick-start the mortgage-backed securities market’.

RBA now has bought a total ‘$2.35 billion of Australian mortgage-backed bonds in lending agreements.’

RBA chief Glen Stevens said (Apr 15) during times of unusual market duress, central banks should be prepared to move beyond the normal scope of operations to provide liquidity against a broad range of assets.

According to Stevens, Fed Reserve & European Central Bank officials said this month that the recent credit crunch is still unfolding and that banks have been urged to speed disclosure of losses and improve the way they value assets.

So, let me see if I understand.

04/04/08 - Property prices in Aus are deemed 25% overvalued by IMF

15/04/08 - The banks ‘have been urged to speed disclosure of losses and improve the way they value assets’.
In layman's terms - "the BANKS are DODGY"

21/04/08 – RBA buys a new record amount of Mortgage–Backed Bonds

Sooo. The banks are shy to lend to one another. Why is that?
Do they know something about the valuations of the other banks they are not telling us?

Lucky for us we have the spinner, rather, RBA in our corner.

What will be the outcome if things go pear-shaped?
Posted by mr nobody, Tuesday, 22 April 2008 2:12:17 PM
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Banks will also find it hard as they come off high interest [say 2010] rates to lower rates, because there will still be billions of dollars locked in at the old rates where the Banks must continue to pay the high rates. Australian banks can securitise there mortgages to more liquid overseas banks if liquity becomes a plom; i.e., sell say a $10 billion dollars of loans to another bank for $9 billion dollars. In the 1970s when liquidity was the Banks offered Commercial Certificates of Depsot at very high interest rates [18%-23%].

Banks can also be cunning with non disclosure to the RBA by leaving the principal of a large corporate loan as an ordinary loan account [not declared unproductive]and tranferring the interest only, which is declared, to an unproductive designation.

Our exposure to sub-prime is minor compared to the US. Managing maturity transformation when rates fall is more problemic for Bank profitability and the economy.
Posted by Oliver, Tuesday, 22 April 2008 2:32:03 PM
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Briefly, the crisis has its immediate origins in the turn away from producing goods to gambling. Thousands of production type firms have disappeared in the US such as industrial giants like US steel. Speculation instead of producing goods led to a situation where fraud, manipulation and outright criminality have become a central feature of the process of wealth accumulation. When the share market bubble burst in 2001, some of these methods came to light with the collapse of Enron and WorldCom. It saw the emergence of the fraudulent practices associated with “teaser rates,” “liar loans” and the packaging of debts of dubious quality into exotic financial instruments. This has resulted in tens of billions of dollars being wiped off the value of mortgage-backed securities held by the banks and investment houses, which no amount of interest rate cuts or additional credit will restore; such as Merrill Lynch, Citigroup, and now the collapse of Bear Stearns. In Australia, the international credit crunch triggered by the US sub-prime crisis since last August has already produced a trail of high-profile collapses by heavily-leveraged companies, including ABC Learning Centres, Centro Properties, finance companies RAMS, Allco and MFS, and stockbrokers Opes and Lift. For a whole historic period there has been an attempt to deny the scientific analysis of Marx that the development of capitalist society is governed by objective laws which necessarily lead to a social and economic crisis, posing the need for a higher form of social organization. But those laws, hidden from view in the “normal” operation of the capitalist economy, have now come to the surface in precisely the manner described by Marx, just as the “law of gravity ... asserts itself when a house falls about our ears.” Millions of people’s lives, their welfare, their jobs, the future education of their children, are dominated by the workings of a system over which they have no control and over which no one has any control. That is, the market rationality for the individual bank or financial institution produces social irrationality and madness.
Posted by johncee1945, Tuesday, 22 April 2008 5:56:13 PM
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johncee1945,

Also, when non-US MNCs expatriate devalued US dollar assets, this impacts on their consolidated balances.
Posted by Oliver, Tuesday, 22 April 2008 7:33:52 PM
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