The US sub-prime crisis has now been unfolding for months and has claimed some Australian victims, like Centro Properties. Our banks have had to raise interest rates because it has increased their funding costs and because they have lost capital participating in bail-outs of some US financial institutions.

Now the US government is injecting $145M in to the economy to try to avert a recession.

Modern economies run on trust, and changes in sentiment can affect economic circumstances more than the underlying problems on their own. So I'd be interested in knowing what posters here feel about this crisis and whether they are worried about the effect it might have on Australia, and whether that will change their behaviour in terms of spending and saving.

In the early 1970s the Bank of NSW [Westpac] was borrowing several billion dollars a day via Commercial Certificates of Deposit to stay liquid and paying interest rates of up to 23%! It can happen here. It has.

Moreover, for a Bank what is problemic when rates fall as in the US, Banks still must pay the higher old rates on existing term deposits lodged say two or three years previously

Sharemarkets go up and they go down, so I don't see that as a problem.

Where I see a problem is that roughly half of the money that banks
lend, comes from overseas financial sources, they dicatate the
terms.

Our tax system is flawed in that respect. There is no incentive for
people to save money in bank deposits. Inflation takes half the
returns, marginal rates of tax the other half. So people often
don't prefer to borrow more and buy a property, to try to protect
their savings. Our trade deficit is not so bad, its our current
account that is the problem, which reflects our lack of savings.
A Govt change in tax policy might work wonders in this respect.

It looks like our new bankers will be Asia and Arabia. Its
a changing world.

http://business.theage.com.au/the-end-of-the-world-as-we-know-it/20080119-1mx4.html

.

Being suspicious of anything to do with the New World (economic) Order I thought sub-prime might have been "arranged" in order to bring about the establishment of the microchip on either the right hand or forehead economy (Revelation 13:16-18 and 14:9-11). The chip is out there right now and one day there will have to be a switch over to it. If not...Bible prophecy is false. As Henry Kissinger once said, so someone reckoned some years ago, "if we want to control the people, we must know where they are". The microchip, with its small battery, gives the NWO that chance. The satellite picks up the signal from the chip, as you shop, and the watchers know where you have been... that whole day.

The subject interests me , I have been showing my concerns in threads here for months, if some are not concerned they should be.
America is bleeding money, in debt to some who are not its friends, Americas greatness came via money so too may its fall.
We however are not isolated from the problem, personal credit card debt is said to be $3.000 for every Australian, is that men women and children?
Very many are struggling to pay home loans content in the view by hard work and controlled spending they can do it.
Yet what if they have no job overnight? it my not be in the hands of Australians world wide problems can come overnight.
40 year olds have not seen true credit squeezes true unemployment or even true pain as often as older people have.
The purpose of lending money is to make money, that lost in Americas low doc loans will in time be paid for by others.
Conspiracy theory's are apart from reality and no help here however the impacts on the world must not be underestimated.
Even without Americas problems it is clear we one day will have our own credit bills arriving in Australia , money is never free.
The growing Australian superannuation funds may one day insure we do not borrow so much over seas.

Belly, a report out today http://www.nbr.co.nz/home/column_article.asp?id=19876&cid=16&cname=Property suggests that Australia's debt may be leveraged against an asset that is over-valued by almost 100% compared to the US - the private home.

That has to add an additional layer of risk to our situation.

You are so right "Belly" the whole of the Western world has been living on a sea of debt. We become richer by producing things and offering services, not by borrowing and spending and manipulating money. It might be a very short term solution to lower interest rates, but as you say nothing is free. Everything returns to the mean and just because our house rises in price, we are no "richer". We just live in an unrealistic cycle of inflation. Governments try and offer short term relief by printing money. I doubt the Sub prime problem will be solved in the US by the Fed dropping the rate and pumping in money. It will further reduce the value of the dollar and it will just keep people borrowing and spending. As Bill Bonner so succinctly said "you don't help a dipsomaniac by lowering the price of whiskey." It needs hard decisions that cause pain to all those that created this irrational exuberance.

I truly hope GrahamY is wrong, but I have an awful feeling the bubble's going to have to burst sooner or later. Now that our individual future security is tied to the stock market via compulsory superannuation, there's likely to be many unhappy campers from my (boomer) generation in a decade or so.

Now that I think of it, we may be literally campers. Just as well we own a block of land to camp on!

On a lighter note, how nice to see that we've been revisited by one of our dottier crackpots - beware the barcodes and microchips of the Apocalypse! I don't suppose Gibo owns a mobile phone, and if so, is he aware that his every movement can already be traced (at least when it's switched on)?!

CJ Morgan wrote.....

"Just as well we own a block of land to camp on!"

As do I CJ, except that should my income fail for whatever reason, then suddenly the Shire Council will realise that I owe them lots of back rates and they may be forced to sell me up and leave me with no place to reside.

Don't forget, Shires charge exorbitant interest on unpaid rates. My Shire charges 17.5% and it wouldn't take many years to reach the stage whereby a person living on limited or no income would become unable to pay the interest let alone the rates owed.

So I ask you CJ, do we really own the patch of land we call our own?
Aime.

*Now that our individual future security is tied to the stock market via compulsory superannuation, there's likely to be many unhappy campers from my (boomer) generation in a decade or so.*

I would not panic just yet CJ. The stockmarket is based on greed
and fear, but because people are selling, does not mean they think
that companies have no value. They just think that if everyone panics,
they might be able to buy the same shares back cheaper, a bit down
the track.

To judge your investments, look at the underlying health of the
companies that your super fund money is invested in. Most are sound
bluechips, making sound profits on your behalf.

They include our major banks, miners, retailers etc. BHP, Woolies,
Woodside, Westpac, etc, your super fund would have a % of its
investments in most of them. The idea is to spread the risk over
a number of companies and a number of sectors.

If their price drops by 30% tomorrow, its really not going to affect
you in the longer term, although it might be an opportunity for your
fund to buy more sound stocks and buy them cheaply.

The people likely to lose bigtime in a market downturn are speculators
who have borrrowed to buy shares on margin loans. Banks will call
in their margins and they will be forced to sell, many losing their
shirts.

Your super fund might then well be able to pick up these shares in
quite sound companies, on the cheap.

Yes, the share prices will recover and there are buying opertunities
sitting there now.

However I heard an interesting interview on the BBC world service.
Many bank bonds and notes have their interest payments insured.
ie, if the bank cannot pay the interest they call on the insurance
company to make up the difference.
Some of these financial insurers are in big trouble and likely to go
down the gurgler, leaving the bank and the bond/note holder with a
piece of paper.

A further worry is that many banks have the debt of their credit cards
insured also and if things get really bad the banks and credit card
companies may be overwhealmed by the debt.

Sleep tight !

Grahamy raises an interesting point, one I am aware of, this baby boomer took whistle blowers early retirement.
It was followed by my landing in the safety net of the job I was made for.
On getting my super post 55 years old in 2002 I selected one of 3 country village homes.
Each had a value of no more than $45.000 one year earlier but value on that day was[country town] 2 bedroom small total refurbished $80.000
One home away 3 bedroom refurbished $85.000 mine 5 bed rooms refurbished[ all new roofs new brick piers new paint , all transported and rebuilt, $98.000.
In ten months those I did not buy sold for $185.000 each.
I was offered $240.000 but will not sell.
both others are on the market the first resold for $169.000
The second has not had a looker at $200.000 and its market value is not more than the first, mine?
Who cares not for sale, no homes have been sold here for 12 months few in surrounding villages.
No disrespect but Mac mansions are unlikely to ever bring the money paid for them the housing race is likely to stall.
We need to understand money is not worthless plan for things to go wrong , they will sorry but they will.
Country village life is not for every one but hard times may yet see our village grow.

The mobiles phones are no concern CJ. Its the microchip on the right hand or forehead thats a big problem. God says no, we are not to take it (Revelation 14:9-11) and the rotten thing leaks from its lithium battery anyway and causes boils. Junk technology from the great golden technological age. You can click on mark of the beast boils if you like.

The bubble had to burst,just like in 1981 and 1989.This is why Kevin Rudd is already cutting back on Govt spending.He is preparing for the cost of dole payments that sent us into debt to the tune of 18% of GDP during the Keating/Hawke recession.$90 billion back then.Kevin however,has the future fund to fall back on.

If China is affected by the American malaise,then we too will catch a cold.It is just a matter of how deep and long the recession will last.So long as the Banks and Govts keep the money flowing and keep inflation under control,there is no reason why we should suffer as much as the US.
If you want to make some fast money,sell your house now and try to predict the bottom of the share market demise,since there will be some real bargins out there in the next few months.The only question is,can you fathom the depth of this bear market?

Gibo give it a rest mate! over night the fall in world stock markets was bad , it will get worse.
However personal debt will impact on us more, surely it is clear debt always has to be repaid and in troubled times that re paying becomes harder.
Rudd is doing what he must, but to blame him so early in his term for this is hugely funny.
We will be far better of than some, if we own our over priced homes and have no personal debts we can be much better of.
If not?
Rest assured arjay Kevin Rudd will win the next election clearly and be hard to remove in the one after.
I remind you the conservatives do not hold one state yet, no dream no nightmare just true Australians rejected them in every recent poll, ask your self why?

*This is why Kevin Rudd is already cutting back on Govt spending.He is preparing for the cost of dole payments*

Actually not so Arjay, he' trying to cut back Govt spending to have
an effect on inflation, which is still our major problem. The
Australian economy has been going too strong in some places, causing
all sorts of problems.

I have to give Kev his due here. He's bothered to come to WA,
understand the problems we have with too much growth and see what
can be done to solve some of those problems. The last Govt treated
us more like a cash cow to be milked, but seemed to have little idea
as to what was going on here.

I also am happy to hear that they are going to see what can be
done to give people incentives to save, something we Aussies are
not very good at, largely due to past tax policy. It has to
be addressed, to help with our current account and would give people
less incentive to just keep buying more houses when they have some
spare cash. No wonder we have a housing bubble. That hasn't popped
yet, but it can't be far away once credit tightens up and becomes
more expensive.

Put Bush Brown and Rudd in the same room one task fix this problem, they will not be able to.
Paying far too much for a home, buying more than you can afford is more our fault than theirs personal debt is personal problems.
Credit, how hard is it to understand if you haven't got it you should not spend it?
If we surf our way over this tsunami we will one day not be so lucky.
I take no joy in knowing one day a great deal of pain will come our way via this.
That house that resold for $169.000? its owner was buying it on credit paying $185.000 plus interest his loss was a warning to us all.

It's pretty evident that we're at less risk than the US, and that our economic ties to Asia put us in a better position than much of Europe.

Which does raise the question - while I concede our issues with housing ownership does provide a layer of risk to Australia, wouldn't our comparative strength when compared to other western economies make us a more attractive investment option when directly compared to the US and Europe?
Surely there are other investment opportunites here that foreign investors could embrace that aren't tied to the housing market. There's always a few investors out there, keen to take advantage of the situation.

Regardless of the financial situation, there is always a minority who can make money out of even the most dire catastrophe. I can't help but wonder whether there's a way Australia can position itself here, even if it does come at the expense of other western nations...

Yabby,an inflation rate of 3.5% is nothing compared to the Hawke/Keating era of almost 10%.The share market went up today but if you study the past declines,it goes down in the shape of a sine curve.It declnes but never fully regains the losses.In 1988 after that collapse,money went into property and after that boom we went into recession.It may take 12 mnths or two yrs before a recession bites,but all the signs are there to correct the deviant behaviour of the money markets.

The domestic housing market is over valued,so money may now go into the commercial market which gives better rental returns than housing.We are in a bit of a bind here.We don't need more shops to encourage more spending,and it is pointless building more factories since we have decided others will make our consumerables.What do Australians actually do?

Arjay, the price of shares in the end has to be related to the
profitability of companies. In the end those values are always
restored over time. Those people who have bought after previous
crashes have done pretty well over time.

The present problem simply relates back to the cowboy US financial
markets. People who lend on the basis of AAA rating in good faith,
won't do it again when they lose bigtime and thats what is happening
in both the subprime and bond markets. The US borrows heavily from
Arabs and Asians, its not their money that they lend to countries
like Australia. So NY as a trustworthy financial centre is now
in question, thus the turmoil.

If we have a recession, it will be in relation to what happens
in China and other parts of Asia. Personally I don't think that
will be such a bad thing, as money has lost its value here, with
so much too easy credit around for too long.

Australia still manufactures, just not cheap consumer goods. There
is no point making say leather shoes, when they can be imported for
5$. Best to do what smart economies do, manufacture specialised
equipment, niche products, brand products etc. We already do
a bit of that and could do alot more. Mining equipment, farming
equipment etc. I bought a mig welder the other day and I wanted
quality. So I bought WIA, locally made, rather then chance a cheap
import.

Remember that manufacture is only a small part of the consumer chain.
That 5$ pair of shoes might cost the consumer 40$, by the time its
gone through the marketing and distribution chain. So most employment
and money is generated after manufacture.

Actually, I'm rather curious as to the effects that increased oil costs will have on globalised trade.

Presumably, the cost savings obtained via cheap imports will have to be weighed up against the vastly inflated transport costs.

I think Yabby's point about quality, local made niche products needs to be evaluated in this context - sourcing product locally is going to look more and more attractive.
Already, I suspect supermarkets are reconsidering the benefits not only to their profit margins, but their image as well, in using local produce.
At present, that issue is largely related to consumables with a short shelf life, which already have a limited import potential - though I can see that changing as the oil prices bite.

So for all the problems that peak oil will bring about, I can see it providing at least one boon to smaller producers.
Of course, this will hit exporters hard as the transport companies seek to reduce costs by passing them on.

It will be interesting to see how these costs are spread and how they're balanced.

It will inevitably mean the larger producers will suffer.

Ultimately, I can see this leading to a reversal of the large scale production models - instead of large exporters, we may be seeing better quality from boutique producers, as the more efficient nearby outlets will seek their product.

As the share market starts a recovery, as heat goes out of the fear of the last few days the wise among us will know it is not yet over.
Housing is over priced and far too many are over committed, the money still to be made in housing may be made by others after some default here in Australia.
Our personal debt will not go away, our country's foreign debt must be paid.
Outside the Sydney stock exchange on the worse day of this week mum and dad investors spoke on TV we never thought this would happen they said, we thought it would grow forever.
It will not only the time of a true crash is unsure.

12 months ago we did not know about the sub prime issue, the thought that Labor would win the election so convincingly would have seen your sanity questioned.
Yet share prices do not rise forever, yes they will return to the heights but how many will be cast aside on the way?
Personal debt will be repaid ,must be repaid or true trouble awaits.
Our country's debt still exists and just maybe in 12 months we will return to threads like this and ask why did we ever think prosperity is forever?