This article displays a failure to understand what has caused the crisis and why.

In brief, the US government said to the banks ‘We require you to make loans to people who are a credit risk of not being able to re-pay them. If you do not, we will penalise you, but if you do, we will protect your profits.’

This involved tens of millions of debtors and hundreds of billions of dollars, with enormous economic consequences. This is the prime cause, without which all the other problems under discussion would not exist.

The reason for US government policy in doing this was to make housing more affordable, for national socialist reasons. (The Democrats did it to ‘close the housing gap’, and the Republicans did it to promote an ‘ownership nation’.)

The instrument of these financial policies was to lower interest rates. This inflation of the money supply has three important effects. Firstly, it causes rising prices, starting in the sector receiving the newly created money, in this case, housing. Secondly, it causes massive system-wide malinvestments. The constantly rising prices deceive people into thinking there is an actual real demand for an investment, which, absent the inflation, would be seen to be loss-making. Thirdly, it causes the artificial boom in sectors where real demand is lacking. And it causes the following bust, which is when society undergoes the hardship of washing out the malinvestments caused by government’s interventions, and re-allocating capital to productive uses that really are in demand. This process involves enormous waste as stuff has to be taken out of uneconomic uses – such as big flash houses – and devoted to stuff that people actually want

Both Marx and Keynes had assumed that these problems just mysteriously and spontaneously arise out of capitalism, without understanding the connection between massive governmental manipulation of the money supply on the one hand, and its invariable and inevitable massive economic consequences on the other.

The waste and unfairness which results show the very reasons why free market economics oppose such political interventions which are based not on capitalism, but anti-capitalist Keynesian and Marxian beliefs, and public control of means of production, namely the supply of money.

In a system under private ownership of the means of production, such loans wouldn’t be made in the first place, but if they were, the problem would be eliminated early on in the piece by losses and bankruptcies. The only reason the entire cycle can take off and keep going is because government is backing it with money expropriated from everyone else in society – the poor, the unemployed, the homeless, the workers and so on, and paid to banks, real estate speculators, and home-owners. These are not negative effects of free markets, but the unintended consequences of government interventions which are intended to replace capitalism with a better and fairer economic system.

Marxian and Keynesian beliefs are the major cause of the problems of disadvantage to the poorest in society that they are now trying to cure with more of the same measures that caused the problems in the first place.

The cure is not more arbitrary meddling on the basis of refuted theories.

It is to abolish government’s self-interested and abusive control of the money supply.

Actually the crisis cause is one level deeper than the subprime loans.
The loans contained a clause where the interest rates would increase two years after the start.
It was recognised that some would default at that time and an educated
guess was made as to how many. This risk was insured.

However just as these loans were to be reset oil prices started up
to $147 US and this together with ethanol caused a large increase in
food prices. It was this co-incidence that caused a very much larger
number of loans to default.

There is a theory that this is the first financial crash of peak oil.
As we are on a plateau of production we can expect a series of
financial crashes as we move along the plateau until the plateau
ends and we start down the depletion slope.
The depressed economic condition will then be permanent.

*And until workers and citizens are so organised as to make a greater process of redistribution viable,*

The author once again forgets, that the redistribution is going on
every day, in a huge way. Marx might turn in his grave, if he
realised that the barriers between worker and capital provider
are vanishing as we speak.

9% of workers wages each week are paid into super funds, which
effectively makes workers the owners of most large Australian
companies quoted on the ASX.

The downside to all this is that workers as owners, also carry
the risk which capital providers do, ie. if the chief workers
(CEOs) screw up, they will wear a part of the loss.

Well in my opinion our financial crisis has been more as the result of over paid young people who, apart from a few bills here and there, spend every cent they earn, with some of them earning $2K plus per week.

Just take a look at the amount of bars, restaurants, cafes etc that have popped up in recent years and, they are all full of young people spending millions each week as they tend to save very little in most cases.

So here we have a situation where the cafe owner, enjoying the spoils of this spend thrift generation buys a bigger house, then the realestate sales person buys that flash new car, all on credit.

You know we live in an un-realistic world when first home buyers are looking in the $600K range!

Now, as we see the rather swift exiting of the housing market, which in turn effects the building trades which is where many of these young ones work, all of a sudden the cafe owners will find that the flocks of spend thrift youngsters will rapidly decline and all of a sudden they have huge debts with half the income they had banked on.

It's not that long ago when the hardest part of being in realestate was finding a listing, now, the phone lies idel for many.

Quite simply, it was a bubble just waiting to burst. But so many thought it ever would.

Belly 9% of workers wages each week are paid into super funds,

Actually, the 9% is a gift from employers, very few workers actually contribute anything!

Further to my previous comments
Take growth areas from the bush to the beach. Many of these areas had high youth unemployment 8 years ago before the boom, now, anyone who wants a job has one, well that was untill two months ago. So here you have thousands of young people who collectively earn millions of dollars and in most cases spend the lot!

It is this influx of disposable money that has helped fuel an unsustainable ecconomy and not if, but when it goes, all hell will break loose.

There is even talk of these 'buy now pay latter' loans being squashed. Wow, won't that have an impact!

Interesting times ahead hey!

Good article.
I have to agree that the "houses for all" policy had a lot to do with the crisis. Trying to do social welfare by supplying loans is *not* the way to do public housing. (Building public housing is!)
When 50% of corperate profits come from "finance" then you know cart is before the horse somewhere.
Of course another real problem is the "android event horizon" we are approaching whereby Labour is loosing value in relation to capital due to automation. Add Globalised manufature and all workers in western countries are competing with machines and folks earning a fraction of their wages.
We cannot "invent" jobs fast enough to keep people employed, so middle management and finance to the rescue! Time for a 30 hour week and some limits on corporate profit distribution and renumeration.

Wow! Is Tristan Fabian's brother? How, er, elite! Change we can believe in!

Nothing about the derivatives trade again - not one word. Running into quadrillions of funny money, set up after the '87 crash by Greenspan and Co., with no explanation from Marxian or Keynesian meccano sets either. Another re-run of the "sub-prime started it all" myth. Yawn.

Again Tristian, you get an A for effort and an F for content.

As was mentioned by Diocletian, if Clinton hadn't leant on Fanny Mae and Freddie Mac to lend to those who were 'undesirables' then this would've been a much smaller 'meltdown' than it currently is. Sure, it was made under good intentions, however good intentions often have bad consequences.

"Those most vulnerable - including millions of working class Americans ...low interest rates as well as “teaser” rates which were only temporary. Other devices included low reserve requirements."

Here we go again - the Left trying to absolve the poor 'working people' of responsibility for their actions. These people entered into agreements knowing their own financial state and knowing whether they could repay the loans. To be sure, the option in the contract for them to walk away without the debt following them was foolish, however they got into the agreements themselves in the first place.

Time to come into the real world Tristian - no one was holding a gun to their heads to take out these loans.

Failed again Tristian. This article started off poorly and it didn't get any better.

Good on you for providing entertainment for us again tho!

The poor brought on the ubercrash - ho, ho, ho! I got my degree with some cash, connections and a sub-prime IQ, but the poor won't get in no matter what, ho, ho!

Now instead of the predictable cretinism and smugness, can some of these brilliant tories try to explain the multi-quadrillion USD derivatives bubble and its compulsory spread of mega-debt packages downwards? Or was that the product of homeless, workers and unemployed people (and no, by that second category I don't mean one of those nice European royal families you so admire and suck up to).

Mil-observer
It's explained in my first post in this thread. What part don't you understand?

It sincerely annoys me that so many companies are all coming out to attack governments for their own economic woes, how the motor car industry which has refused to produce more small cars and more alternate fuel cars attacks all of us for not buying large vehicles...

Look at CRA, a company owned primarily by Queen Liz. When BHP went to buy them they found that they are $40 billion in the red. How do they continue to trade while insolvent? How doe so many companies get away with creating more and more debt, whilst their bosses/ boards/ directors/ ceos... reap mega profits AND bonuses?

Governments ARE responsible to ensure that they get tougher with stricter controls and auditing standards and transparencies. Ofcourse the conservatives,a s in Australia, will oppose such controls. Afterall, to them the mega rich are always right and always must be protected, even to paying less tax than you or I.

But then I believe that the Australian liberal opposition are economic traitors, consistently attacking the economic credibility of the government, threatening its legislative program including taxation measures and proving that all they care about is absolute power and not the welfare of Australia

Ange,
There is a difference between being in the red and being insolvent.
The latter means you can't pay your bills.

It does not need the opposition to sabotage the government, they are
doing that quite successfully themselves.