Webdiary - Founded and Inspired by Margo Kingston

Malcolm, on 14th August (aeons ago in market terms) I said, apropos house prices: "The very top of the market is OK".

Well, reporting again from the trenches of looking at 20 or 30 houses per week, I can tell you that the top of the market (I can't say we're looking at the very top) is pretty damn soft. Houses and units on the lower north shore are being withdrawn before auction for lack of a buyer, or being sold before auction for less than the target price. An agent said to me yesterday that  the market was " down between 5% and 9%" since the summer, and he was presenting that as a more optimistic view than mine ...

I found your original input most interesting, Malcolm B Duncan, and look forward to any further (apparently weekly) posts.

And is that you with the sate stick?

Congratulations with the luncheon, so much more satisyingly, decadently luxe than a dinner....and it sounds as if the food may have been fresh: an unusual plus when one is buying food.

Richard:  Yippee! This could be it!  A piece expanding on your philosophy of food would make for an interesting read?

In 1980: a housewife's hobby. It was an undervalued terrace, which I happened to know had large rooms and high ceilings. My offer of $24000, - obviously dead cheap - was accepted, and I had no money at all. I wangled 18 from the building society, 4 from worstpac as a personal loan, and was freely lent 7 by my Mum, to do it up - which I did, (painting 12 foot ceilings while keeping an eye on the toddlers is not easy), with the help of a mature-age university student who came from a farm and could do everything. I rented it initially for $65 a week, so the rent paid it off while repayments rose. 6 or 7 years later, when renters wanted to buy, I offered it to them for 40...but they wouldn't go above 35. Two or three years after that I sold it to a friend who loved it, for $75000 - hardly a fortune ...(it is probably now worth over 400). But, I had turned nothing into something. The sale was mutually beneficial and satisfactory - she adores the place, and she still lives there with her family.

To those who see that price as excessive: the point I am making is that prices rise in fits and starts.

The fixed interest personal loan was paid off in 4 years: the 18000 floated, and, after 10 years, I still owed most of it.

They are the kinds of reasons that I have found the advice offered as prudent in the last 5-10 years, by people known to be disinterested - the ABC, smh etc, to be iffy, and sometimes just plain wrong. That property goes up 10% a year, for example. Repeated ad finitum. That "after a few years you will have "built up equity". Don't you need to have lived long enough, to know that these mantras are not true, when trusted sources constantly tell you that they are the reality?

Ditto with margin loans, except that such as Opes shows how even astute and experienced investors can be caught out by the nano-print.

People buy things because they think that they will improve their lives - and whatever they see that to be varies from person to person. I rarely enjoy eating out, Justin Obodie, I find the atmosphere artificial, the food overpriced (whether or not I am paying for it) and in spite of what they claim, poor ingredients disguised under various sauces. None of it tastes as delicious or bounteous as really fresh food, or home cooking. Hey, but you may well patronise better restaurants than I do.

I have financial concerns: I don't want my children to sign their lives over to a bank for 25 years in order to get a roof over their heads. The alternative to that is not pretty for my financial outlook, although traditionally farmers have always housed their children; an unrecognised oddity in the scheme of things. Somewhat Italian, rather than Anglo, in fact.

I too congratulate you, Eliot, on your financial management. If you ever decide to buy a house and in time start a family, I hope that your wife will be given the (nowadays becoming rarer) opportunity of working in the home and rearing her own children: something that some dislike, but that many of us knew at the time was, and remember, as a state of bliss. Something that, if there are any such things as "human rights" - which I'm not sure there are - must loom rather large, towards the top of the list: a woman's right to rear her own children.

But, I still feel a great deal of sympathy for those in trouble. Yes, they made foolish mistakes: I am sorry for them. Yes, they believed what they were told: I feel sorry for them. I have everything that I need, and more - but it was not always thus. To scorn people for not having financial experience or acumen is, to me, equivalent to deriding people because they are young, or because they can't spell, or do higher mathematics.

Kathy Farrelly, I have passed your comments on to a few young, and I can't describe the rage. You perfectly describe the way things once were, and the opportunities that were once available.

Jenny, you're right about reverse mortgages. When they first appeared I did the sums. Seemed like a good way for the bank to acquire one's home.

If you're lucky you will die before the bank gets the lot; if you're not so lucky , and live a bit longer, you will die broke. And if you're really unlucky and live to a ripe old age then you could well do it in a smelly old nursing home.

A long life and reverse mortgages don't work.

Eliot, you appear to be a sensible money manager; life ahead should be free of unnecessary financial stress. I've always stayed away from loans myself but did get a mortgage once. Sold the house after 5 years and moved state.

Otherwise you could call me a debt phobic; just hate the thought of owing money. This, of course, is a little extreme, for borrowing money in a sensible and prudent fashion is a good thing. But one has to do the sums first and manage the debt properly.

Sadly, many impressionable and ill-informed people (and hungry lenders) don't follow your approach; if they did we'd wouldn't need to spend your (our) taxes helping them when things go pear shaped.

I appreciate that you find it hard to understand why people want so much; however (basic) human nature is easily exploited, don't you think? Not everyone is like you, Eliot, and  these days your sensible approach to financial reality is something others choose to ignore at their peril.

Anyway, glad to hear you and the mrs. plan on having a family, you'll have a ball, find ends hard to meet sometimes and all that but hey, what is life all about. Kids are great.

My young bloke left home a few months back, he was the last to leave. I've enjoyed having my kids and niece around for over thirty years now and all of a sudden - no kids. It took me a few weeks to adjust and I felt an emotion I have never felt; can't describe it really, maybe I just missed them. I'm over it now and enjoy catching up over lunch and stuff like that.

I eat out heaps (daily) and have no financial worries. For me, being a debt phobic means no financial stress and most of all freedom. My life has been wonderful.

PS. Remember one for your dear wife, one for you and one for Peter, er, Australia.

Cheers old mate.

Justin Obodie: "Loans became free and easy and the have it now thing was exploited. Human nature doesn't change and even back in the old days most of us would have liked to have things now, but we couldn't, so we saved."

I've never had a loan, though I own a car outright, have put my wife through university, and we've never gone without anything. I don't have a credit card.

We'll take out a mortgage probably on a home eventually, though I've stashed away about $50,000 for a deposit. I've got about $6,000 in my ATM account.

And I pay a little bit more than the minimum super contribution.

And when my wife is working, that will ad about $50,000 to our combined income.

We're insured for health, disability benefits, and the car is fully comprehensively covered.

Now, we don't take overseas holidays or have a plasma television. The car's a second hand Camry and not a Hummer. We only occasionally eat out. But we both have mobile 'phones.

I have about 300 hard-cover books and a lap-top computer. And the flat is comfortably furnished.

My salary is just a tad above the national average.

Sure, we don't have kids, yet. But only one of us has worked for pay in the last four and a half years. And when we do have kids, we'll be eligible for some support.

Like, I just don't get the personal consumer credit crisis. What do people want so much they need to run up such massive levels of personal consumer debt?

Jenny's view about debt may be simplistic but it carries weight, at least from my observations.

When Hawke/Keating deregulated banks in the eighties it was obvious the old style prudent approach to saving, personal money management and debt was going to change fast.

Loans became free and easy and the have it now thing was exploited. Human nature doesn't change and even back in the old days most of us would have liked to have things now, but we couldn't, so we saved.

It took me 12 months to save for my first mangle (bike), and when I got it, at least, I felt I had earned it. Boy, did I look after it.

The (intelligent and prudent) expansion of money supply and easier credit is not necessarily a bad thing, it helps businesses to grow (sooner than later), which creates employment and, yes, allows people the pleasure of immediate satisfaction; capitalism at its finest, maybe. However, for many impressionable, ill informed and vulnerable punters, with the assistance of unethical bankers, marketers and the like, it could be bankruptcy or debt slavery.

There will be more of this to come.

Of course, for very big financial institutions bankruptcy and debt slavery may not be a problem when things go belly up; the punters will bail them out.

Early in the piece when this subprime thing started to go pear shape I mentioned we could expect a little bit of corporate communism; we have and we will see more.

The punters are stuffed; at least the vulnerable ones.

Don't trust bankers.

Over the past few weeks I have listen to the recently departed CEO, John Stewart, of the NAB bank and read the following in today's SMH by Sean Moore Chief administrative officer, Lehman Brothers, Sydney, implying nobody could see this (subprime - CDO) thing coming:

As you have been reporting for over a year, the extent of the collapse of the subprime market and the global credit crunch was unforeseen and has affected millions of investors worldwide.

In short, these guys are trying to cover their greed or their total incompetence. There were warnings years ago (conveniently dismissed) of this very thing happening, and if any bankers worth their multimillion dollar pay cheques didn't understand the structure and risk related to subprime mortgage based derivatives then what the hell are they being paid millions for?

The only thing that made the subprime model work was bullshit risk algorithms based on an ever increasing market and ever increasing prices - fairyland and these highly paid fuckwits bought it, or ignored it for reasons of greed.

Don't trust banks: the more they say they care the more they don't. Once upon a time if your cheque was about to bounce your local bank manager would call you to make sure you would cover the O/D. Now they just hit you with heaps of penalties while saying they care and will provide you with excellent service etc etc etc. Bullshit.

Remember: in general the more businesses promote something the less you can expect it.

My old bank manager never told me he cared; just behaved though he did.

Strong leadership would warn against such greed, Kathy Farrelly, but instead we have had a PM and Treasurer who have been belting us over the head for the past 11 years that the good times would roll on forever and, even worse, that they were personally responsible for those good times.

Odd for a supposed conservative government that produces nothing that will generate business, apart from a muddled tax policy which it claimed was reducing taxes despite it being the largest taxing government in history.

Responsible leaders would warn against foolish greed but the last treasurer who tried such tactics – Paul Keating and his "recession we had to have" – was slated from then until the cows might come home one day.

Either he wasn't telling the truth, which shouldn't have had any effect ,or he was, which the media should have examined prudently but as usual they played the man and not the facts. Hence Keating was one of the most maligned PMs we have ever had, far beyond what he deserved; indeed, there is much he should have been applauded for.

Now we have an Opposition leader who thinks the government is "talking down the economy" – complete hooey as private business will do as it wants and people will spend whatever spare money they have. What would "talking up" the economy involve? Perhaps telling citizens to "spend spend spend" – as the Pools winner in the UK proclaimed she was going to do about 15 years ago, which is what she did until she had blown her 6 million pounds within 5 years.

But a certain number will, if told repeatedly that the good times will last forever, that they have had huge wage rises under a government (wages have always gone up not down – unlike value for money) etc, continue spending even when they don't have spare cash and that is why Australians owe $44 billion on plastic, the third highest personal debt in the world.

Nor will Kevin Rudd be able to do much about events outside Australia that affect us – perhaps at most he can cushion the blow. So much for the last PM who it seems thought his destiny was to leave a record as the second longest serving PM and who terrified his fellow MPs into believing that one man leads the country. Sadly those same nitwits are in Opposition and can't even elect a leader they all agree on. And they believe they will take back government sometime soon!

Fiona, I've been told that in Melbourne one needs to tender for a flat nowadays. Would you know if this is commonplace? It certainly seems extraordinary.

Jenny Hume, back in the early 1980s I acted for the so-called "investment" arm of one of the major banks, and well remember drafting numerous mortgages with interest rates of 21% plus – many of them being to farmers. Those loans were all part of what is a long and dishonourable tradition in banking – that of taking advantage of the most vulnerable. There have been stellar examples more recently. Take, for example, that model of banking rectitude, the Commonwealth Bank of Australia:

ABC TV's Four Corners program has uncovered a spate of unaffordable loans given to Sudanese refugees whose chief income was from welfare payments.

The loans were made by the Commonwealth Bank, and, in one case, a family of nine was given finance that left it with about $3.60 per person, per day to live on.

The aptly rebadged NAB isn’t flawless either. Here’s what a former loans officer of that institution had to say back in March:

[A] former loan officer for the National Australia Bank (NAB) says that it is common for lenders to sell people bigger loans than they need.

Former NAB worker Kim White, now a telephone counsellor for the Financial Services Union, says he often speaks to bank employees who feel pressured to make loans to people who cannot afford them.

Mr White has told Four Corners the pressure has led to several cases of suicide.

He says when he was working for NAB he would routinely sell people loans that they could not afford.

"We would be under pressure to upsell to the maximum that we could," he said.

"I upsold someone to $80,000 on more than one occasion when they only came in for a $20,000 or $30,000 loan."

Jenny, not everyone is as financially astute as you. On the contrary, the level of financial naïvety, to put it kindly, in the Australian community is breathtaking. Many people who fall into that category were deluded by that nice Mr Howard into believing that they could be “relaxed and comfortable”, that they had “never had it so good”, and that the strong economy would continue forever.

I seem to remember, by the way, that farmers can be naïve financially too – remember the Swiss loans of the 1980s? For those who don’t, this was the “affair” when Westpac (and other banks) suckered many farmers (and others) into taking out relatively low interest loans in Swiss francs (at about the same time Jenny and her family were encountering stratospheric interest rates in Oz). Unfortunately, not long after the loans were entered into, the Australian dollar plunged, so the actual interest rates that the borrowers had to pay skyrocketed. The following letter to the Wallis Inquiry into Australia’s financial system is worth reading:

As Chairman of the above Association, I wish to make a submission on behalf of our members to your inquiry.

We are a bunch of unfortunates who were induced by our banks in the 1980’s to take up their offer of a Swiss loan. The borrowers, who are roughly half farmers and half small business people, did not need much encouragement as the Swiss loan was 6-7% interest and onshore loans at the time were 12-14%. We were encouraged to maximise our loans and place the excess on IBD with the bank at 9-10% to generate further income. We did not need to have our arms screwed to comply with that one either.

When inquiring about pit-falls, we were told that there was a potential for adverse parity, but the very most this would be was 5-10% and even with this we would be way in front with our interest saving. Besides, we could always delay termination of the loan until the parity was in our favour. If we “hedged” the loan, the additional cost would negate any benefit of the loan but we could, if we wished, change our currency at “roll-over” (when interest was due) if the bank was given some days notice.

It must be remembered that this was still in the era when bankers held high esteem in the community and farmers and small business people always trusted their advice. However, many borrowers sought and received reassurance from senior officers of their bank. My wife and I (and a business associate) achieved this from the Chief NSW Manager of the Commonwealth Bank.

At this time the two most senior banks CBA and Westpac were vying with each other and heavily promoted FCL’s in newspapers, on TV, and at organised seminars, etc. As well, they gave very firm orders to their Field Officers, mainly the banks’ Branch Managers, to promote them to any client seeking credit (even an overdraft), even to the extent of saying it would be an FCL or nothing. The lesser banks then also had to supply FCL’s or lose their customers who had heard about these new cheap interest loans, (which were unavailable and unheard of before 1982) and in these instances the vital risks and loan administration were never explained.

You may wonder why banks would be clamouring to sell loans with 6-7% interest instead of onshore at 12-14%. At an earlier time I also wondered, but I have been subjected to a very harsh learning curve. The reasons are as follows:

(a) In the early 1980’s the banks were subjected to the much despised “Item 8”. This was the Treasurer limiting their lending to dampen an (allegedly) overheating economy. By lending from, for example, Singapore they came under the law of that country and the sky was the limit to their lending. “Item 8” was terminated in 1984 (I think) after deregulation.

(b) Lending from, for example, Singapore avoided the mandatary (at the time) 3-4% of the loan statutory deposits with the Reserve Bank (it earned little).

(c) At the time, the Australian company tax rate was 49%. In Singapore it was 10% but newly established companies got a tax holiday of five years. So tax was nil.

(d) Borrowers had a legal obligation to deduct 10% of interest on the FCL due the bank and remit it to the Tax Office. The banks offered to do all this for us and charged us extra so they would receive the full interest clear of tax. We have never found any evidence where they actually made this remittance, but we have plenty of evidence where they did not. We subsequently discovered that Taxation Law 261 forbade them to take money from us in this way and their lawful obligation is to return the money to the borrowers. (Their lawyers advised them at the outset they would be breaking the law by taking our money for their tax.)

The ANZ to date is the only bank to return the stolen withholding tax money to their borrowers. With other banks, borrowers must serve a writ (at great cost) on their bank and on the way to court the bank will pay back the tax. There is probably many millions of tax dollars the banks just did not pay, thus making the whole deal tax free.

(e) We subsequently learnt that the Field Officers of banks had little, if any more background knowledge of Swiss franc loans than their clients. They just knew their bank had this cheap loan available and felt they were doing their clients (often their friends) a favour in making it available.

The senior Treasury and International Department people who designed the loan (they called it a product) knew differently. It is reasonable to claim they fully expected to cream 10-20% of tax free capital off their “captive clients” (their term). This was based on the AUD$ performance against the Swiss franc in previous years. They knew that in a given number of the 15 x 5 year loans possible to achieve in the last 15 years (the last of them would be of only 4 years, 3 years, 2 years and one year) one loan would be of benefit, one would break even and the other 13 would be disasters for the client and bonanzas for the bank. This period had seen the AUD$ fall in value from 5 Swiss francs to AUD$1 to 2 Swiss francs to AUD$1.

These senior bank officers also knew when promoting FCL’s in 1984, that although the AUD$ was holding well at that time, all the classic signs and situations that create a fall in a country’s currency, were in place in Australia. They had publications from banking advisory agencies telling them of the inevitable crash of the AUD$ in early 1985. So they pressured staff to write those FCL’s (we see all this so clearly, from discovered inter-bank memoranda from the time. They were jubilantly speaking of anticipated “super” profits - tax free).

What they did not anticipate was the magnitude of the fall when it did come. Apparently an unprecedented period of the AUD$ holding up will be inevitably followed by a fall sufficient to put the AUD$ back on the same decline it has always been on when looked at in 5 year terms.

Those bankers panicked. They were sure clients would be taking legal action and were surprised it was slow in coming. They planned their defence mode, no matter how devious (inter-bank memoranda show all this).

What they had planned for their clients as a “rough patch” had turned into a “super super” bonanza for the bank and utter disaster for the clients.

The loans had doubled and many borrowers were facing bankruptcy. Moteliers, developers, garage owners, solicitors, accountants, third generation farmers were walking away with just a suitcase. Over half the loans ended in divorce, there were suicides and one murder suicide as a direct result of the loans.

Unfortunately the economic lust of these bankers was still not slated. They told the more “astute” (their term) of their borrowers that the banks was now giving them the facility to deal in forward currency contracts and that the borrowers, at only the cost of $10.00 to $15.00 per contract, would be able to “recoup previous losses and mitigate against future losses”.

“What does all this mean,” wailed the borrowers “we have never heard of such procedures.” They were informed not to worry that the bank’s Dealing Room experts would tell them what to do. How and when to buy forward etc.

After many months of losing heaps on deals, the bank’s “experts” advised them to take, probably 9 out of 10 were duds, the borrower gave up in despair. This was probably the worst period of the loan, as we watched our life's work slip away. We were forced into a procedure like backing race horses (a thing we would never do) but unlike the punter we never had the occasional win. Anyone who has never suffered the experience could not imagine the sick despair we felt.

Borrowers were eventually forced to come onshore, to the highest interest rates in Australian history. The CBA calmly asked us to pay 25% interest on a loan that had more than doubled. More than half the borrowers were sold up, others continued to stumble along under great stress. Many are still under the same stress as the burden of debt has just been too great.

Many years ago now, I promoted the formation of our group and have been Chairman almost continuously. In that time, I have come to know hundreds of our members and the constant feature is that they are always decent people prepared to work hard to build a better way of life for their families. Their only failure was to trust their bank, as they trusted their doctor or minister.

The promotion of borrowers dealing in forward currency contracts was the ultimate confirmation of borrowers’ suspicions that their bank had a total lack of integrity. We came to realise (no one told us so how could we know) that it was the “bookie” telling us which horse to back. Every dollar we lost in dealing went as tax free capital to the bank.

A very decent man named Ian McKay, told us he was a 21 year old university graduate who obtained a job in the dealing room for ANZ. He was paid a fabulous wage (many of his work mates were drunk or stoned in the afternoon and could not work) and given a profit quota. He was assured of pay rises and advancement if he exceeded the quota, but was left in no doubt that his job was under threat if the quota was not met on a regular basis. He was instructed how to lie to the unsophisticated farmers and small business people, so they would lose and the bank would gain. His other customers were skilled foreign currency managers and there was only a small margin to be made out of them. I have his sworn statement.

As “captive client” we could not get quotes outside the bank, and we were ultimately to learn that we were not charged the $10 - $15 as promised but secretly up to $12000 per deal, which was just lumped in with our “losses” (bank gain). The CBA stole $120000 from my family in secret commissions alone in just a few months and from another borrower with a similar size loan, $400000 over the same period. God only knows how many millions of dollars were looted from the total of their borrowers in secret commissions alone.

Borrowers were to become very familiar with what banks refer to as the golden rule: “We have the gold so we make the rules”. This rule dominates Australian life today.

Borrowers in litigation were especially vulnerable. They often found that the lawyer to whom they were paying fabulous sums of money was actually working in the bank’s best interests. 50% of cases in the Civil Courts now involve banks and banks never quibble about the size of the account (as we might) because banks are awash with money. They are geese laying golden eggs for lawyers and little bankers are never loathe to spend shareholder’s money putting “recalcitrant” clients in their place.

This was one aspect that people from the land could never come to terms with and were totally bewildered by. They tell me they were taken to lunch and given red carpet treatment, but with the fall of the AUD$ and blow-out of their loan they instantly became the enemy and were treated accordingly.

Various borrowers in litigation with obviously good cases, found themselves abandoned by their legal team on the steps of the court house and had to accept a settlement very much in the bank’s favour (impossible to acquire and brief another team at short order) or face certain annihilation in the court and most likely bankruptcy. No money changed hands here, it was done by the bank saying to the borrower’s legal team: “settle this now or you get no more bank work”.

Judges are also vulnerable. They are notorious gamblers and often have a huge overdraft or a son or daughter seeking a loan. There have been various judgements that defied logic in efforts to exonerate the bank. In our own judgement which favoured the bank, the three Appeal Judges were quick to brand it “illogical and irrational”.

In the recent Drambo judgement handed down in Brisbane, Judge Sundberg decreed that Westpac was legally entitled to take $3M in secret commissions. This practice has been condemned in previous cases and international banking circles regard it as blatant theft.

I have been very saddened by my various forays into Canberra, along with various members of my Committee, seeking some form of justice from elected politicians. Whilst Juniors may have supported us, most Senior Ministers claimed we were “bank-bashers”. Ministers Hawk, Keating and Howard point blank refused to accept or discuss the “Westpac letters”. (No one seriously considering banking practices can avoid reading those letters.)

The National Crime Authority, Victorian and NSW Fraud Squads, the Trade Practices Commission, all refused to handle those letters, because they were irrefutable evidence of Westpac’s theft on the grand scale. All were terrified to move lest they be individually marked for life by the banks.

In Canberra we were soon to learn that the Liberal Party owes $12M to the NAB, the Labor Party $8M to the CBA and at election time, banks hand out very large sums in equal amounts to each political party. This is so it does not matter who goes into power the banks can at a later date say: “if you do not toe the line we will consider withdrawing our support at election time”. The party, of course, knows they are totally dependent on those donations to run the kind of campaign required to get into power.

Our borrowers have been very much disadvantaged by the Martin and Elliott Parliamentary Banking Inquiries. Despite the despair felt by some Committee members, the Inquiry was very much in the bank camp. We assert the banks lied extensively to the Inquiry and we will submit a document which we have compiled pointing out these lies. There are some kilos of documents which are required to support our claims and we are in the process of having a well known firm audit all the material and give us a document which verifies our claims. So, if required, we can also submit that when it arrives.

I will also enclose another document entitled “How they defrauded their Clients”.

Yours faithfully

Ian Fisher

Chairman, Foreign Currency Borrowers Association

One last point, Jenny. People have to live somewhere. The rental market in most Australian capital cities has been tight for a long time. It’s all very well to say that people should save until they can afford to buy a modest place – but where do they live in the meantime, and what if the only affordable (initially) places are of the McMansion house-and-land package that has been the only thing on the market in the new developments on the suburban fringes for an equally long time? A caravan, perhaps? Do you have any idea what the vacancy rates are like in long-term caravan parks?

There has been a great deal of financial imprudence in Australia over the past 15 years, but to attribute it to “purely” discretionary debt and/or to “the greed mentality that wants it all, wants the very best, and wants it now” seems to me somewhat simplistic.

Having been one for many years, I know that what they might lose in interest rates, they more than make up in tax breaks.

24% would have been 1990 ish, no? We all paid it. Dreadful and difficult.

But, we owed money because, for whatever good reason, we were spending more than we were earning.

That's why I have pity for the people caught these days. You don't? OK.

Michael de Angelos: "What we are seeing are two things: the result of a George Bush led attack on all government controls in his "small" government crusade which simply meant shifting government funds from regulators, and starving them of the power to control private corporations who are responsible for the current debacle, to other government areas like the purchase of weapons."

All modern day bubbles are created top down, and so are the bursting of them. This particular bubble isn't any different. Actually, this one began way back at the end of the Dot com bubble. Which btw was at the time Clinton was President - not that it means anything in particular.

Loose monetary policy creates an artificial situation of money being cheaper than it otherwise should be. This in turn allows for, and gives incentive for, overly speculative investment. The average man in the street calls this the "good times". As with all bubbles they eventually burst - and this one isn't any different. Hence, we have the boom bust cycle.

Actually the Australian Government is running about madly trying to begin another boom, after amazingly not only talking themselves into, but actively cheering on the sidelines for a bust. One of the most bizarre actions of any government in the western world. Shameful really.

Expansion of money is the reason for house prices doubling. Expansion of money is the reason for commodity price records. It logically follows that contracting supply will cause a reduction in these values (which you are currently seeing).

I understand this, and most people don't. That's why I am wealthy, and most people aren't.

Bullshitting and blame shifting (even to ones self) may be the successful political route. In finance it is, though, the equivalent of cutting your own throat.

PS The Australian Fed will cut interest rates. Banks will be very loath to pass those cuts on. That may just be the thing that saves Mr Rudd's political ass. That is indeed the market in action. The Australian Government should've cut taxes much more in the last budget - and it didn't take long to prove me absolutely right!

When you cheer on (and you will), the rate cuts, you'll be cheering on the makings of the next bubble - which you can complain, and blame, in about, oh, ten years.

It is confronting to attempt to understand your attitude, Jenny Hume, of tolerance towards your own family's reliance on borrowings and credit, compared to your attitude to those doing the same at present.

Jenny, one can always transfer one's super into a pension saving account. The interest rates are usually a couple of percentage points less than usual but at least the fund does not go backwards.

What Is The Predator State? By James K. Galbraith - August 11, 2008, 11:32AM

Richard: Hi Bernd.  Normally we wouldn't let a post like this through as it has no content.  However, I'm interested to know why you brought this link here.

What we are seeing are two things: the result of a George Bush led attack on all government controls in his "small" government crusade which simply meant shifting government funds from regulators, and starving them of the power to control private corporations who are responsible for the current debacle, to other government areas like the purchase of weapons.

Plus the inevitable gullibility of people to believe that rapidly rising property values will continue and constitute real wealth. It's Robber Baron stuff and what will always happen when capitalism is not controlled by strict corporate laws.

The title of the thread The South Sea Bubbles Again is apt and the capacity of the general public to fall for this hype is amazing.

In the 1970's a huge chain of jeans stores in the UK built quickly by raising funds from retirees etc via the stock market (promising huge returns). Extraordinarily, it was called the South Sea Bubble Company!

One would think the name was a clue – apparently thousands of small investors didn't and when the crash came and the money evaporated, hundreds of pensioners were left scratching their heads as to where their pension funds had vanished to.

Needless to say, the operator of that crash fled to Australia with a small fortune and found a friendly home here.

Michael de Angelos: "Welcome to rampant and uncontrolled capitalism! And the peasants are revolting!"

What utter bullshit. Capitalism had nothing to do with the bubble. Greed and speculation are a part of the capitalist system. That's not though, true capitalism. A person's house (unless Jed Clampett), doesn't double price in one year. What do you think is happening?

There will be blame on the burst bubble, there's always blame. Do you really believe anyone will learn a lesson? What'll happen in ten years time? Of course people will ask for "regulation" - anyone ever thought the "regulators" were the beginning of the mess?

No matter how much people like to look down on those that failed - or pretend to sympathise with them - for many of these people this was their shot at the title, and some will come through this. That really is all a person can ask for.

So Michael, you can pack that sham away.

BTW very good article and worth reading. I'd advise any person to read this.

PS The United States and UK are taking a pounding in property - it now is starting to spread. Australia has an advantage in bankruptcy law, and belief in owning one's home. The market still has "at least" ten per cent to decrease.

According to Bloombergs, foreclosures in the US are up 55%. A property crash in America will be a disaster. Property prices already coast along in Middle America but have been artiicially boosted over the past few years.

Now banks are finding in depressed areas like Detroit, already a disaster zone for unemployment with the oil crisis and auto factories laying off thousands, houses can't be shifted. They are selling them for whatever they can. One apparently changed hands for a token $1 last week and a new problem is arising. They are finding that if they displace the occupants and a house is seen to be empty it will be completely trashed within a week.

Welcome to rampant and uncontrolled capitalism! And the peasants are revolting! How odd that the same things happened to economies under George Bush, Tony Blair and John Howard.

As the Iraq War and the "war on terra" lose their significance, a new Cold War is needed to divert attention. How opportune for Georgia and Russia to be at each other's throats!

I remember when I lived down the south coast at Shellharbour about five years ago.  There was a development boom similar to western Sydney. Lots of McMansions sprouting up all over the place, in this new development called Shell Cove, on the promise of a new marina, ideallic lifestyle, beach side living (it wasn't actually next to the beach) etc etc.

One thing that struck me was the number of these impressive looking homes that had sheets or blankets for curtains. The owners were obviously extended to the point where they couldn't afford decent fittings.

Well the marina is not a goer, the idyllic lifestyle is wearing thin, as is the two hour trip to Sydney by train, and the sprawl that was once  farming land now extends from Shellharbour to Kiama.

When the For Sale signs start going up en masse, I'm guessing there will be a mad rush to get out, pushing down prices and generating a selling frenzy similar to that which is now occuring in the US.

Richard:  It leaves a mighty question, Ron.  When they get out, where do they go? How are the rental vacancy percentages?  In Adelaide it's one.  I'm looking for one in Brompton, if anyone's got it.

Could you please change your registration to Ron Sands? It would be much appreciated.

Spending Wednesdays, Thursdays and Saturdays looking at places to buy on the Lower North Shore, it is interesting how prices are coming down really sharply, and almost nothing is going to auction. When we bought this house in '99 you could only buy before the auction if you offered over the odds. Now agents seem to be advising to accept the first firm offer they get that's over their reserve ... all of which suggests to me that renting and waiting for the fall to run out may make more sense. 

Lots of properties coming off the market unsold. Lots of others where the glossy handed out says "expressions of interest by 6 July" or similar.  

Right now we've seen units on Balmoral slopes that would sell for $3M+ and rent for $1450pw. $3M in a term deposit account will get you $3352 per week after 30% tax. Rent and bank nearly $2K per week. Does not compute unless prices are going up more than 4%pa, which they aren't.

According to some woman on the radio yesterday - I didn't listen long enough to get her name, because I couldn't take the "um, yes, no, well, you know" twice in every sentence - 28% of Aussie families own an investment property. Negative equity on your super isn't a good look, either. 

I can see it all about to hit the fan. Those ridiculous prices being paid for harbourside pads must end in tears. Sadly then it flows to the hardest working Aussies on mortgages.

Banks are out of control. My dad was a bank manager all his life – in the days when they still retained employees for that long and gave them generous superannuation benefits. He became a manager early in his life because he convinced the bank to lend to those who had the greatest problem getting loans – new immigrants from Italy and Greece. When they succeeded and became established businessmen they didn't forget – some even came to his funeral.

When I was young I discussed with him the possibility of joining the same bank. "Good God no !" he replied, "find an honest job".