Aussie Mortgages American Style #2

Sorry, about my absence, I have been out of town and also dealing with other matters and blogging went way down the list.

Anyway, we'll now resume normal programming.

The Australian sub prime Pandora's Box continues to reveal quite the toxic underworld that is Australian mortgage financing.

RBA exposes low-doc loans risk

BORROWERS using "low-doc" home loans are four times more likely to default than people on standard mortgages. 
 
The Reserve Bank said yesterday there was about $50 billion worth of low-doc loans, representing 5 per cent of bank balance sheets.

A tightening in credit standards and the introduction of anti-predatory-lending laws following the global financial crisis had contributed to a drop in new low-doc loans, which now represent only 1 per cent of the new home loans being written, the RBA said.

The RBA's analysis of low-doc loans came as new research at the central bank's annual economics conference suggested Australia's mortgage market might be about $100bn larger than the legal system, economy and credit checking systems required.

So $50B worth of loans are 4x more likely to default? 5% of the mortgage market are of this type. Only 1% of the new loans are now of this nature. Talk about shutting the gate after the horse has bolted.

The mortgage market is only $100B bigger than it should be? Pass the popcorn.

Even Auntie ABC is having a sniff.
Australia faces its sub-prime mortgage scandal

WOMAN II: My total loans were $4.5 million with no income and a 30-year period, which would take me up to 103.

WOMAN: From around the nation they gathered in Canberra as senators heard evidence on the low doc scandal.

DENISE BRAILEY: We need a Royal Commission into the banking sector. They're strong words, but that's what we need, because those figures are clearly wrong.

Ms Brailey has been tipping quite the bucket of shit on financial prudence and governance in Australia. You can almost sense the squirming from the Liberals as this poor regulatory nest of vipers is the cornerstone of Howard's prosperity.

Its a long read but well worth it. The Chair is Senator Bushby, Liberal Senator for Tasmania.

BFCSA (Hansard)

BRAILEY, Ms Denise, President, Banking and Finance Consumers Support Association Inc.

[14:18]

CHAIR: I now call the Banking and Finance Consumers Support Association. Good afternoon, Ms Brailey. I invite you to make an opening statement.

Ms Brailey : We have a number of members who have been what they see as victims of low doc loans and bad lending practices—and, indeed, are suffering, as Senator Cameron was saying earlier, the downside of taking the entire risk for some bad practices: losing their homes, their cars, their livelihoods; and being in very dire circumstances. I have also copied 10 copies for you of what I am about to about to deliver—not to read now.

CHAIR: Is it a particularly long statement you are about to read?

Ms Brailey : No, what I am going to read will take less than 10 minutes—maybe six minutes.

CHAIR: Okay. If we can keep it as short as possible so there is time for questions, that would be appreciated.

Ms Brailey : Yes, thank you, Mr Chairman. The main thing I am going to raise, the first issue, is that the government has bought $14 billion worth of RMBSs since the GFC and I understand has committed another $4 billion to further purchases. The Fitch ratings say that eight to 10 per cent of all these RMBSs are low doc and approximately are loans obtained by fraud, and the government is holding tainted securities and profiting from that fraud. We believe there is about $57 billion involved. And, judging by the average loans, which go above FOS's jurisdiction—we are talking about maybe 100,000 families affected—a government cannot, or at least cannot be seen to be profiting from that fraud of its constituents and must rectify that situation. The government must also rectify all of the other loans secured on falsified loan application forms—the documents that I have been gathering of late—because the government's regulator, ASIC, has failed to regulate the financial industry as required by the ASIC act. ASIC did nothing before the GFC, nothing during the GFC and have refused, by letters to me and to other people within our group, to do anything since the GFC, as the letters from BFCSA state.

So we see that the path to rectification centres on this premise: any lender who approved a loan without verifying the loan application data with the borrower was imprudent, negligent and in many cases just plain reckless. Indeed, most of the loans would have been rejected if the lenders had made a simple phone call to the borrowers—they chose, in a corporate decision, not to do so—and ascertained the borrowers' true financial circumstances, that would have revealed those flaws in the system and those practices. In the case of the 25 Australian Banking Association members, they are also in breach of their contract with the borrower to assess the borrower's ability to repay the loan, as provided for in article 25 of the Code of Banking Practice. No lender, and no holder of loan securities, including the government, should be allowed to maintain any loan which the lender would not have given had it applied the simplest of lending criteria tools—namely, verifying the loan application details with the borrower. And that simply was not done.

In the pack that I delivered, I have actually provided six links in the chain. There were six links purposely designed in this structure, and it is the structure that I and my members are aggrieved by. The banks provided commissions for mortgage managers, mortgage originators and mortgage introducers that came down in a chain to employing brokers. The brokers copped the full brunt of the blame that they were falsifying loan application forms. I have brought along with me today a small bundle—I have 4,000 of these—of documents relating to every bank represented by the top banks, as demonstrated by their names. The four majors are in there. They are all responsible, through a series of emails from banks to brokers, instructing the brokers how to get their deals across the line—'make the deal fit' was their usual interpretation. They targeted older people, carers, people on parenting allowance and the aged pension. These are all on flyers sent to 40,000 representatives throughout Australia, from the banks.

The culprit in the structure is actually progressed with the BDMs, the business development managers, who were employed by the banks; however, the paperwork suggests they were merely following policy changes that were both rapid and carried massive risk, which was to be borne by the consumer. These are serious allegations—I do not make them lightly. I have been researching this for over eight years. And the piece of the jigsaw, the proof that we require to bring it to the Senate, were these emails. The emails do not lie. They show a direct connection between the banks, at a high level of policy, and going under the radar of their own lending policy guidelines, to put these people in a position—most of them earning $40,000 or $50,000 a year—and giving them loans through a document called the 'service calculator'. The banks will not supply those service calculators to us. We want, somehow, the parliament to force these banks to give the copies of these documents that these people are entitled to that formed part of the reasoning why their loan should have been falsified through the service calculator—their income, for want of another word, was fudged towards $180,000 instead of $40,000, in all cases.

We have the loan application forms from over 400 people in the last six weeks. During that time, not one of them is a clean document—each one has been fraudulently dealt with. But the brokers will get the blame that they put the figures on, but the figures that they have written in the original loan application form are calculated by the banks' calculator through the system, as taught by the BDMs, or business development managers. This structure needs to be looked at before we can even start to work out whether we have a problem here in Australia. My evidence shows that we have a massive problem here in Australia with these low doc loans. I want to know what we are going to do about them, because the government has purchased around $20 billion worth of them. That is it, thank you.

CHAIR: Thank you, Ms Brailey. Just to clarify: you are saying that the people who are the borrowers under these loans did not know what was happening with these loans? Where is the level of knowledge that they would have had on this—that they knew they were getting a loan, but they did not know what the details were that were being put on the loans?

Ms Brailey : That is right.

CHAIR: What you are saying is that those applications were doctored after they had looked at them?

Ms Brailey : That is right. I have complained to each of the chairmen and CEOs of the banks involved. They have all had letters from me, in the last two or three years in particular. Each time I have said that these people got these loans without any knowledge or authority, given—

CHAIR: They knew they were getting a loan, though.

Ms Brailey : But they did get the loan; the banks will argue that they got the benefit of the loan—however, there was a sustainability factor: there was never any affordability criterion in the process.

CHAIR: So the issue from the consumers' perspective, which is whom you represent, is that people have been provided with loans that they should not have been, because they did not have the financial ability to meet the obligations under the arrangement as it ended up, and that put them in financial hardship because of what happened up the line?

Ms Brailey : Yes, precisely: the affordability factor was—

CHAIR: You used the term 'fraud'. Where is your allegation that the fraud occurs? At which stage of the process?

Ms Brailey : I am a criminologist, Mr Chairman, so I understand a bit about that. The fraud is in misrepresenting the true income. It was very easy for several years, for all of us, to blame the brokers who, to use their analogy, fudged the figures. But what I have found out since is that, through a service calculator, each BDM would teach the brokers to use a service calculator online and put in certain parameters such that the calculator, belonging to the bank—engineered by the bank—would actually bring out a figure that was highly inflated, based on a possible rental from a property. But we even have vacant blocks of land on them. What, are the cows paying rent? There is just no truth in the document at all. But the end problem was the whole idea that they would get a tax advantage and that was calculated in—capital gains and all these incentives. The emails actually tell them that that is what the calculator does. As one broker put it very simply to me: 'Denise, without a calculator, we did not know what figure to put in. We put in the figure that the calculator brought to us. We were told to do that back at the office after we had the signature.' Therefore, there was no knowledge on the part of the consumer.

CHAIR: You are raising serious issues. We have heard from Treasury that the level of defaults under the securitised mortgages in Australia has been particularly low and there is no evidence of any systemic problem with the securities that form part of the RMBS packages in Australia. Clearly there were in America and other parts of the world. The evidence here suggests that there is no systemic issue. Obviously there will be individual cases that you can find where there have been some problems but there is no systemic problem. How do you respond to that?

Ms Brailey : That is why we need a royal commission into the banking sector—they are strong words but that is what we need, because those figures are clearly wrong. The way the figures are translating at the moment makes you think that but that is not the reality. The reality is that some of these people were given buffer loans to refinance, refinance and refinance, so they are never in default. I have a list 100 people who are still in their houses and have not paid a payment for four years simply because I have been there. There is a stalemate going on. They are not taking the houses but on the other hand the defaults are there, and I do not know what figures the bankers have decided to put those into.

CHAIR: That is interesting as well because we have also had a lot of complaints that the banks are too aggressive in coming and taking the collateral.

Senator WILLIAMS: There are many low doc loans or no doc loans issued from banks. I have some cases here today and one is of a woman in an aged-care facility and at the age of 98 she signed a document for a 30-year loan. She must have a good doctor! 

Ms Brailey : Yes, that is fairly prevalent.

Senator WILLIAMS: Of course on the advice of the bank manager she invested that and that company went broke. She is one of many. Are you telling me that these low doc loans and no doc loans were packaged up by some institutions and sold off to the Australian Office of Financial Management as residential mortgage backed securities?

Ms Brailey : Yes. 

Senator WILLIAMS: What is the figure there you think?

Ms Brailey : Fitch is saying that it is around eight to 10 per cent on low docs. I suspect that it is lower simply because inadequate figures have been provided.

Senator WILLIAMS: I asked witnesses earlier who about rates these packages of loans when they are sold off to the government or anyone else? I think the response was that it is Moody's and other rating agencies.

Ms Brailey : That is right.

Senator WILLIAMS: The similar lot who rated the subprime loans in America.

Ms Brailey : Exactly right.

Senator WILLIAMS: You mentioned the Financial Ombudsman Service, FOS. If you want to lodge a complaint with FOS, their maximum loan limit is $600,000—is that correct?

Ms Brailey : No, a correction there: it is $500,000 that they can investigate but only $280,000 in terms of compensation. That is a decrease on a $500,000 loan. So the victims, the consumers, who are still suffering this are told to wear half the problem, and they may end up in their seventies and their eighties with a $400,000 or $500,000 loan. 

Senator WILLIAMS: Were low doc loans for self-employed people only?

Ms Brailey : Yes, that was the original idea: low doc for self-employed, ABNs for two years minimum plus GST registered. In these emails, I have highlighted where they show, time and time again—and some in big letters: 'We do ABNs for a day. No LMI.'

Senator WILLIAMS: Who is saying, 'We do ABNs for a day?'

Ms Brailey : The banks. There are 36 lenders involved that I have emails from showing them all doing the same thing.

Senator WILLIAMS: Are you saying that to be self-employed and to prove that you have an ABN the banks will issue you with one? 

Ms Brailey : The brokers get them online. The BDMs teach the brokers to go online and get an ABN and then, 'You can do that if you have the ladies or gents TFN.'

Senator WILLIAMS: I have a document here from one of the big four banks. It says, 'What's new? Low doc loan policy requires a main income earner primary applicant to be self-employed. While self-employed status is declared by the customer in their loan application this information is not validated during the loan approval process.'

Ms Brailey : Yes, that is right. I have seen emails like that.

Senator WILLIAMS: I can ask the banks about this on Friday. You wrote to ASIC and in that letter dated 21 November 2011 you said, 'On behalf of all consumers of bank products and services in Australia the two key questions we are seeking answers to are these. Which bank flagged a hybrid low doc model to all the other lenders so that the product miraculously appeared on every lender's books at the same time?' Are you saying that one bank went out to the public saying, 'Here's our low doc loans' and all the other banks did the same thing on the same day?

Ms Brailey : I believe so. Evidence suggests that, but, again, that is why we need a royal commission. These are valid questions that go to the very heart of our banking system.

Senator WILLIAMS: The next question you asked is, 'Which bank designed the six degrees of separation between lender and borrower and ensured the plans were identical?'

Ms Brailey : That is the structure that I designed. There are six degrees of separation in order to escape liability—there cannot be any other reason. All they had to do was to get a white sheet of paper and put on it, 'We do low docs here' and stick it in the window, and they did not have to pay commissions to all these people, unless there was an ulterior motive.

Senator WILLIAMS: These people with low doc loans were classed as asset rich, income poor—is that correct?

Ms Brailey : Yes.

Senator WILLIAMS: Your letter says that public identification of pensioners in 2004 as a new $50 billion market by one particular investment bank ought to have sent regulatory alarm bells ringing.

Ms Brailey : Yes. It was published as well. I was front row when 1,000 planners were in the room and they were discussing ARIPs. I have never heard it before, asset rich, income poor—let's go after the pensioners. I thought, 'My god, this is where they are going.'

Senator WILLIAMS: So these pensioners, if we can call them that, might own their own home. The value of it would depend on where they live. In Inverell where I live, it might be $250,000 or $300,000 and in Sydney in might be $1 million.

Ms Brailey : In Chatswood in Sydney, an average suburb, a 1960s home would easily be $1.5 million.

Senator WILLIAMS: They would get a low doc loan, borrow half a million dollars and they would not have any income coming in to pay for that loan. They would invest the money wherever and then it would turn pear-shaped; hence they would have trouble. Are these low doc loans still being issued today?

Ms Brailey : My word they are because the broker channel really only sells low doc and no doc. We have tracked the no docs back to 2005-06 when the first couple came through. Thirty-six lenders became involved in the no docs. The only reason they came into play was that the brokers just did not get the service calculator and it all became too hard. So they ditched the service calculator and said, 'We don't have any income anymore.' Again, these emails say: 'No income. No asset and liability this statements.' I have one particular email where the BDM is particularly saying to the broker, 'If you want to switch from a low doc and no doc, you really have to write it up again because we know now what the asset and liability is, and we know at the income is, so you will have to do it again and submit it as a new one. You cannot just change over because we have seen the other two documents.'

Senator WILLIAMS: I was on the parliamentary joint committee that inquired into the crash of Storm Financial and Opes Prime et cetera. We saw the situation where a retired couple who may own their home that was worth $600,000 were lent $300,000 from whatever bank and then that became a deposit on a $1½ million loan in shares. The stock market crashed and everything went pear-shaped, and we all know what happened then. Many of those Storm loans would have been low doc loans as well, I imagine.

Ms Brailey : Yes, I have seen some of those and they were definitely fraudulent loan application forms by persons unknown. That is why I say, even to ASIC, 'by persons unknown'. Until we have an inquiry, we do not know whose writing is on those forms. Every form we have uncovered so far—and this is for the people who are behind me here today as well as the other 500 members—has had three people's handwriting on those forms. Unless the broker decides to write in three different hands—

Senator WILLIAMS: Let us just go through the application form. Normally an application form is three pages.

Ms Brailey : The banks have told us they were three pages. The banks gave the courts documents to say the loan application form was three pages. They were not; they were an 11-page document—always.

Senator WILLIAMS: So when the customer signed off the loan application form, the customer signed three pages not 11?

Ms Brailey : Three pages, that is right.

Senator WILLIAMS: You are saying that after the customer signed those application forms, figures were altered on the 11-page form?

Ms Brailey : Yes. The way it worked was that the other pages of the application—and I have this complete one here—were inserted and that would be faxed through to the bank. The people would never see the rest of the document.

Senator WILLIAMS: Did you ever get a response from ASIC to your letter?

Ms Brailey : Yes. All they are saying of late is that they have the new NCCP laws and they cannot look into anything further, and we have letters that say they assess every case. They are motherhood statements. They say they assess every case but they are not doing anything about it.

Senator WILLIAMS: I am very familiar with the motherhood statements from ASIC. Were those applications for loans processed by solicitors?

Ms Brailey : Yes, and the predominant one I wish to bring to the attention of the committee is Gadens. Kemp Strang is in there a fair bit, but mostly the major banks use Gadens. I am tired of Gadens being the bully in this in terms of handing over the documents. The banks are sending these people around in circles saying, 'You've got to ring Gadens to get the copy of the documents because we have given it all to them.' Then Gadens say, 'You're not entitled to those documents.' I have Gadens' letters to me saying that the people are not entitled to those documents.

Senator WILLIAMS: Their loan application papers et cetera?

Ms Brailey : Yes. I am also asking for the service calculator. They say they did not sign the service calculator. For two or three years, I am the one who has had to argue on that level with the banks and their lawyers that these people are entitled to these documents—they have signed them, they went as a package and the bank relied upon them to furnish the loan. This is the document they relied on. The actual loan application form, the complete set, is 39 pages. 

Senator WILLIAMS: And the customer signed three pages.

Ms Brailey : Yes, and was never given a copy. That was one of the key indicators I raised with ASIC in 2003. The ATO did an investigation into this in 2005. It was broadcast on the ABC. I rang Mr Carmody at the time, or his office. I went to Sydney and spoke with two of their investigators on this issue and they told me at that time, 'Denise, if you're right then there is nothing in it for us.' They closed down the investigation. 'This is a job for ASIC.' But ASIC never did anything. So we went around again. I probably killed that investigation for the tax office. What they clearly saw was that both cannot be right. You have a tax return that says that somebody, like the people behind me here, might have $20,000 income and then over there it says that they have $180,000. Of course the tax department thought there were an awful lot of people not getting their tax returns right and that the true figure, if there are two figures and one is wrong, is in the tax return. But once they had a chat with me, and I took in six of these to show them what was going on, it all closed down and went away.

Senator CAMERON: Congratulations, Ms Brailey, on the work that you are doing, trying to protect people from the excesses of some of these banks. I do not want to go through all of the issues that Senator Williams has been through. As I understand it, you are acting mainly for people who have taken out low doc loans and these are predominantly individuals and companies—is that correct?

Ms Brailey : That is right.

Senator CAMERON: Would it surprise you to know that I have had complaints on similar terms to the ones you have raised but also from people who have been induced into borrowing to $2 million—

Ms Brailey : I think we have a lady in the room who has borrowed $4 million, and she is in her seventies on her own, a widow.

Senator CAMERON: Are you aware of an ANZ product called ING Wholesale Property Securities Trust?

Ms Brailey : I am not sure. I would have to take that on notice simply because I have seen ING on several documents, whether it is that particular trust you are talking about.

Senator CAMERON: This constituent who has written to me has indicated that he sought some financial advice from ANZ and he met with a relationship manager, an assistant manager and a financial planner. He was advised: 'Here's what we can do for you. Your money won't be at risk and you will get an ongoing income.' Is that a consistent position that you have heard?

Ms Brailey : That is right. The relationship manager is the one I referred to as the business development manager—they all have something similar.

Senator CAMERON: ANZ call them something different.

Ms Brailey : Yes, consistent with what I have been discussing.

Senator CAMERON: This individual constituent said that he was given a range of figures by ANZ. These figures were substituted after they had signed with a whole new set of figures that were completely inconsistent with the original figures and meant that there could never be any return from this investment. Have you heard of issues like that before?

Ms Brailey : Yes. 

Senator CAMERON: He goes on to say that he complained to the ANZ on many occasions. He complained about bullying tactics, high-pressure tactics, having all of the funds going to debt reduction, asking him to sign blank documents, telling him not to date documents, advising that he could not change any conditions he was not happy with, just sign the documents, fix them up and if he did not sign they would all be sent to Melbourne and he would be disadvantaged. Have you heard of issues like this?

Ms Brailey : There are issues like that, yes.

Senator CAMERON: He was told he would be investing in what he thought was a stand-alone fund, but the actual investment was in a holding fund which was a range of different funds. Is that common?

Ms Brailey : Yes, meaning the funds are gone.

Senator CAMERON: Yes. People are experiencing problems and these are people who probably should have known better than to sign documents and to leave things the way they were. But I suppose that is what happens.

Ms Brailey : They trusted the banking system.

Senator CAMERON: That is the issue—they trusted the system.

Ms Brailey : Yes, they did not give the funds to the chap down the road.

Senator CAMERON: I would like to take you through a couple of points. Professor Joe Stiglitz, a Nobel prize-winning economist, had a look at the banking system in the US and the issues that system brought about for the global financial crisis. He recommends a number of things to reduce rent-seeking in the global financial crisis in his latest book called The Price of Inequality. On page 269 he says what should happen is that there should be a curb on excessive risk-taking in the too-big-to-fail and too-interconnected-to-fail financial institutions. Do you agree with this?

Ms Brailey : Yes.

Senator CAMERON: You would agree with that curb on excess risk-taking in the banking system, that it is a good thing?

Ms Brailey : Yes, absolutely.

Senator CAMERON: Professor Stiglitz goes on to say that we should make banks more transparent, especially in their treatment of over-the-counter derivatives. That is consistent with your view?

Ms Brailey : Absolutely.

Senator CAMERON: He says that Warren Buffett said that these are 'financial weapons of mass destruction'. I think we have seen some of this.

Ms Brailey : I have seen the destruction. I am at the coalface of seeing that with my own eyes.

Senator CAMERON: He goes on to say that we should make banks and credit card companies more competitive and make sure that they act competitively.

Ms Brailey : I do not tend to be the expert on competition, but I can assure you that the commissions that were being set, as the professor said before, and the amounts of money being pumped through in bonuses and other incentives have been a real catalyst here.

Senator CAMERON: I will come to that, but this is about competition in the banking industry. Do you think there is enough competition in the banking industry?

Ms Brailey : I think that word is a bit overused in the context of this at the moment. I would not say that there should not be competition in the banking sector, but on the other hand what we need is an enforcement of law. We need strong enough regulations so these sorts of things are not happening.

Senator CAMERON: Professor Stiglitz says we should make it more difficult for banks to engage in predatory lending and abuse of credit card practices, and we should curb the bonuses that encourage excessive risk-taking and short-sighted behaviour. I suppose that is bonuses right through the banking system.

Ms Brailey : Yes, that has been a catalyst.

Senator CAMERON: He argues that offshore banking centres such as the Cayman Islands should be closed down because they are being used to facilitate this. Would you agree that these are issues that are important for this committee to consider?

Ms Brailey : I certainly do.

Senator CAMERON: Are you aware of the High Court decision on FirstMac in Queensland?

Ms Brailey : I am glad you brought that up. I was the person that put those people together in the first place. I then brought the legal issues up and I took them to Neil Jenman to see if he would fund the case—he is a friend of mine. That is how that case got up and running. We knew that normal processes of funding would only be for a few of these families—I had 50 families in that situation at that time in Sydney and we were only able to get funding for three families. As you know, that would be at least $1½ million if they go all the way and we would need deep pockets to keep going. I was in litigation funding myself and I understand those issues fully. I understand that particular case. I have 12 of the original files at home and they were all fraudulent loan application forms, exactly as you are seeing today. Nothing has changed since 2003.

Senator CAMERON: What are the lessons for legislators in relation to this state decision and the High Court decision?

Ms Brailey : The lesson is that the legislators got it right. They actually provided the laws, but those laws were not being used. I wrote to the ASIC chairman—excuse my emotion in that—to say this was in the public interest and asking for funding to take this case, as an atypical case, to court. That funding was not forthcoming, and then ASIC had the gall to waste my time in 2009 by making me sit in the court for two days and listen to their twaddle about how they are helping us out. I must admit I get emotional about that. I had to fly to Sydney and listen to them for two days out of five they had allocated to this case.

Senator CAMERON: ASIC are appearing before this committee, so we will be able to ask them about the 'twaddle'.

Senator WILLIAMS: Next cab off the rank.

Ms Brailey : I would love you to do that.

Senator CAMERON: In Professor Stiglitz's book, he talks about some of the risk-taking behaviour of banks. He says that the risk-taking is a major source of the volatility in the economy. He says there are four explanations for the behaviour, and given that you have been dealing with banks I want to get your view on that. He says there are four possible explanations for this risk-taking behaviour. First, organisational incentives, and the banks actually push off much of the risk to government because they are too big to fail. That is a big debate that has been taking place worldwide. Second, individual incentives which he describes as agency problems. Those inside the bank have incentives that encourage risk-taking. Third, self-selection in that in any society there are those who are risk-loving and are attracted to the financial sector. You get people going into the financial sector who like risk-taking. Fourth, what he describes as pervasive irrationality. Those in the financial sector systematically underestimate risk and their investors do not understand the risks of leverage and underestimate its consequences. Do those issues resonate with you in your experience?

Ms Brailey : Yes, they were not real investors. They were mums and dads who owned their own homes and they were told: 'If you just borrow this amount of money for the next six months or so, suck it and see. Try and get yourself an extra $10,000 a year, and we can invest it for you.' That is where you find that the banks are interrelated at times with the source of the properties they are putting them into. That is what needs a royal commission. If we do not get it right this time we cannot have a son of Wallis. That is just a review. I cannot put it any more strongly than this: we need the Senate to push as hard as it can for a royal commission into the banking sector and have all this examined, so these people behind me get some justice.

Senator CAMERON: I suppose that is one way of going down that path. My experience of royal commissions in the building and construction industry has not been very good—lots of money spent, but not a lot of outcomes. Maybe there are other avenues we could have a look at, and that is the role of ASIC providing support for litigation and test cases like the one that you have raised.

Ms Brailey : I would not agree with that at all. I am sorry, but I have a different opinion. ASIC will not enforce the law. It has decriminalised that which parliament deemed criminal activity.

Senator CAMERON: ASIC has decriminalised it?

Ms Brailey : Yes. We are talking about policy, and ASIC blames the government for the policy, whichever government is in power. I just go around in a loop at a fairly high level with ASIC. I have got as far as talking to the deputy chairman at some time. I have had several discussions with ASIC on those sorts of levels. I am saying that unless we have documents from the banks tabled somewhere—these people do not have the money to take the banks to court and the banks know that—you will not get to the truth. You have $57 billion worth there and 100,000 families that are possibly infected with this problem. If we put blinkers on and say we do not want to look at it or it is all too hard or it is too costly, as you said before, the cost of this could be much, much worse if we ignore it.

Senator CAMERON: What we are being told by all the evidence that has come before us today—I think that is right—is that our banking industry is different from the international banking industry. We have a highly professional banking industry. The industry is regulated to such an extent that it is not tarnished by the problems that tarnished the US and the British banking systems, for instance. But what you are saying is that in our banking industry we have a degree of criminality—that is your allegation—and lack of any view that society counts for anything. Is that your submission here today?

Ms Brailey : That is right. We have this problem with all of these people. Do we wait until we have 100,000 outside parliament? It may sound dramatic, but we found utter fraud from the highest level of banking, not the underlings at the bottom in the various small departments. We are talking about a structure, somebody sat on the top of the banking world who flagged it to every other bank. Why? Because they did it in America, Too Big to Fail. That book goes into the mix as well. George Bush had the same problem in America as we do now. He went to the bankers who said, 'We are as bad as we are, but what are you going to do about it?' Who is in charge in our country, our nation? I want the parliament to take control of this situation, because I am trying to flag to parliament, in my own small and modest way, that there is a major problem out there. The figures show that there is no problem in the banking sector and these documents do not lie, but there is a problem in the banking sector, because one of us is lying—and it is not me.

Senator CAMERON: One last question, Stiglitz describes modern capitalism in the finance sector like this: those that win at it—that is, the capitalist system—often possess less admirable characteristics as well. The ability to skip the law or to shape the law in their own favour, the willingness to take advantage of others, even the poor and to play unfair when necessary. Is that how you would describe Australia's banking system?

Ms Brailey : Yes, I do.

Senator CAMERON: The same as Joseph Stiglitz describes it?

Ms Brailey : Yes, I am not making that comment lightly. I am saying, yes, I agree 100 per cent because of what I have seen for the last eight years starting with that High Court case. If I had not done what I had done at that moment in time in 2003 of taking the trouble—free of charge—spending 18 months gathering those people and those documents together, it would never have got to the High Court.

Senator WILLIAMS: You are calling for a royal commission. I have called for that before into white-collar crime in Australia. If only 10 per cent of what comes into my office is true, we have a problem.

 

Ms Brailey : Yes.

Senator WILLIAMS: Where does it stop? Look at the Health Services Union. Look where the money has gone there. I agree, we should have a royal commission and include the union in it as well for where people's union's fees or a people's money is being spent, laundry or what games are being played.

Ms Brailey : I managed to get a royal commission in Western Australia one time. I have got 12 inquiries through lobbying including a royal commission so far. That royal commission, although you could sit back and say well it did not do all the things we wanted it to do, it brought the documents out and it brought a lot of truth out we would not have got had we not had it.

Senator WILLIAMS: Well done.

The Chair is Senator Bushby, Liberal Senator for Tasmania.

The full transcript of the Hansard is available at:  
http://tinyurl.com/8n7b7gh

Denise Brailey's website is http://www.bfcsa.com.au/ and there are some interesting links there.

A Free Mercedes

How about a free Merc?
Shades of 2006: That's What Australia Housing Bubble Looks Like From US Perspective

The Australia housing market did not bust when it should of and the delay is going to be painful. The bigger the bubble, the bigger the crash, and the Australia bubble is bigger than we saw in the US.

On a timeline basis, Australia is about where the US was in 2006, essentially  a state of denial.

Developers are offering massive incentives such as cars, furniture, and vacations to move homes while chanting the ever-popular "now is a great time to buy a house" mantra.

Late last year, a $65,000 Mercedes was offered to the first buyer of one of four luxury apartments that remained unsold in a Brighton development. Rubicon Pacific used the teaser despite already dropping prices by $150,000 to $200,000 on apartments first listed at up to $1.3 million.

This is how downturns major start: price wars, incentives, and still no bidders. Given that it's only 2006, Australia has a long way to the bottom.

6 years of initially flat then downward prices makes it a 2018 at least.

Australia is Different To The USA

Indeed. We have more household debt.

Where do we sit globally?

The only country with a worse household balance sheet is Ireland. The Greeks and Spaniards have better household debt numbers.

Aussie Mortgages American Style

Aussie sub-prime data came out few days ago and the results are shocking. The story, as it unfolds, won't be anywhere near the front page of the capital city Murdoch rags and probably not until its too late and the market is in free fall.

I've put the story in its entirety below, just in case someone at Murdoch realises the truth does not set you free, especially if you get the bulk of your revenue from advertising and real estate marketing.

Courts rule against lenders as boom-time low-doc loan frenzy unravels

SUBPRIME-STYLE lending practices were rampant during the last property boom despite claims by lenders that local practices were superior to global standards.

The Australian has exclusively obtained hundreds of internal emails between lenders and mortgage brokers that lift the lid on the extent of aggressive -- and in many cases predatory -- lending practices in the five years leading up to the global financial crisis.

The emails, many of which are from some of the biggest lenders to chains of hundreds of mortgage brokers, show some spruiked imprudent lending practices to mortgage brokers, highlighting loopholes in their own lending requirements. The practices, which have embroiled the likes of Macquarie Bank, Westpac and GE Money, as well as mortgage brokers in every state, underpin what is emerging as the Australian version of US subprime problems.

Indeed its not different here.

As with the boom-time predatory lending practices in the US -- which triggered the global financial crisis -- The Australian has found low-income earners, the elderly, pensioners and those with limited financial experience have been hit hard by the practices.

Thousands of such borrowers -- tens of thousands by some estimates -- were stung by abuse of low-documentation and no-documentation loans, which required little or no evidence of a borrower's income, but which usually were secured by a person's family home.
The emails show it was standard practice for many major banks and scores of non-bank lenders to aggressively spruik such loans to their mortgage brokers, which dealt directly with unsophisticated or "mum and dad" clients. So-called low-doc loans, created in the 1990s, were used by a very small niche of self-employed people who were unable or unwilling to provide financial information to their banks to secure a loan.

They were in many cases tax-avoiding small business owners who had not declared their full income to the Australian Taxation Office, but who could afford home loan repayments.

Its as American as case of Budweiser.

It remains unclear why the low-doc model became necessary in the 1990s, as banks had been successfully lending to businesses and the self-employed for hundreds of years.

By about 2004, with the arrival of the US mortgage securitisation model in Australia, led by Macquarie Bank, the use of such loans exploded, eroding the traditional relationship between lenders and borrowers.

The face-to-face contact with borrowers was conducted by mortgage brokers, which offered products through "mortgage aggregators" working for "securitisers" -- such as Macquarie Bank -- which packaged the loans and sold them to the eventual loan owner -- investors on international money markets.

Why? The same reason as the American one, GREED.

Mortgage brokers had little incentive to ensure borrowers were able to make repayments on loans, as it was not their money.

They had plenty of incentives to ensure loans were granted in the form of upfront commissions of 1.5-2 per cent of the value of every loan written -- about twice the rates earned by their counterparts in the US and Britain.

Twice the commission rate? 2% on a $400K loan is $8,000. Convince the victim to get another $100K and you get that nice round $10,000.

The initial "lender", the securitiser, also had limited incentive to ensure borrowers would be able to meet loan repayments in the medium term, as loans were quickly offloaded to investors in the booming market.

The low-doc and no-doc loans, which meant borrowers were not required to prove income or ability to make loan repayments, were perfect for such an environment, and were widely abused.

Moral hazard?

By the first quarter of 2005, about $500 million worth of low-doc loans were being written weekly in Australia, according to the Market Intelligence Strategy Centre, an analyst.

In the year to June 2007, $8.8 billion of low-doc loans were written. That had fallen to just $2bn in the year to June last year, according to the centre.

$500,000,000 a week??!!

During the boom, banks and non-bank lenders were eager to sign up low-doc loans, but apparently not directly, instead leaving that to mortgage brokers.

Got to keep the hands well away from the murder weapon. "I had no idea your honour, I've never even met him".

According to the centre, about 95 per cent of low-doc and no-doc loans were written by mortgage brokers during the boom years.

By contrast, about 40 per cent of full-doc, or standard loans, were handled by brokers in that time, according to the Mortgage and Finance Association of Australia.

Banks and non-bank lenders handled most of the more stable traditional full-documentation loans, but they left brokers, who were highly motivated to approve loans, to sell the vast majority of their high-risk low-doc product to small investors.

A nest of vipers.

Securitisers such as Macquarie Bank then packaged those low-doc loans and quickly sold them to international investors.

If the Americans can do it, we can as well.

Here is the shocker...

Fitch Ratings estimates low-doc and no-doc loans now represent 8-10 per cent of the $1.2 trillion national mortgage market. That's between $96bn and $120bn.

One in 20 loans held by the big banks is low-doc or no-doc, with the figure rising to about one in 10 across the market, as non-bank lenders hold the highest proportion of such loans.

$96B to $120B in sub prime?

It has now emerged it was standard industry practice for lenders to not even call potential borrowers to check whether they could afford to make loan repayments, or to ensure the information on loan application forms was correct.

I had to check that I wasn't reading that in a US newspaper.

A key to low-documentation lending was that borrowers were self-employed, as such it was originally required that such borrowers produce an Australian business number that they had used for at least three years.

An ABN is all you needed. No proof of income.

From about 2002, as brokers grew increasingly fat on high loan turnover and bankers rich from securitising loans, lenders began further untying the already extremely loose requirements of the low-doc loan. Emails obtained by The Australian show Macquarie, Suncorp, GE Money and RAMS Home Loans Lenders began saying people could access such loans if they had an "ABN for one day".


"Under the PUMA (Macquarie) loan, we will need ABN for one day, don't disclose any assets, liabilities or income, is that any good for you," mortgage aggregator AFG wrote in 2006.

In March 2008, as the global financial crisis was taking hold, Suncorp wrote: "Did you know that at Suncorp we offer a low doc loan up to 70 per cent loan to value ratio with no minimum period for holding an ABN?"

Some lenders went further, writing low-doc loans to borrowers who had provable pay-as-you-go taxable incomes.


In these cases, lenders asked borrowers what income they earned, but not for payslips, tax returns or group certificates to verify claims.


In the case of no-doc loans, borrowers were not even required to state any income.

In some cases, evident in emails obtained by The Australian, brokers who had submitted such information in applying for loans were asked to remove income-verifying documentation.

But not only were ABN restrictions watered down, the lending standards of almost the entire lending business were trimmed.

Banking 'code of conduct' appears to be an oxymoron.

Many banks were in breach of their own code of conduct.

According to the Australian Bankers Association's Code of Banking Practice, 2003, banks must ensure borrowers are capable of meeting loan repayments.

Section 25 of the code states: "Before we offer or give you a credit facility (or increase an existing credit facility), we will exercise the care and skill of a diligent and prudent banker in selecting and applying our credit assessment methods and in forming our opinion about your ability to repay it."

The emails uncovered by The Australian reveal this conduct requirement was widely flouted.

Of a low-doc loan, a Westpac "relationship executive" in the bank's "broker unit" wrote to one broker in February 2006: "It has to be stated what they (the borrower) earn etc on our calculator, but it's not a formal assets and liabilities statement from an accountant.


"We need to ask what they earn etc, but we take what they say without proof."

Well the game is up and the judicial system isn't playing the right ball.

In a series of precedent-setting legal cases, nine judges before six courts have found in favour of borrowers stung by lenders who failed to ensure borrowers were able to repay before writing a loan.

In almost all cases in which borrowers have lost some or all of the money borrowed, judges have overwhelmingly sided with borrowers and ordered mortgages be extinguished, or drastically reduced, within 30 days.

John O'Donnell and wife Jill were encouraged in 2002 by an unscrupulous mortgage broker to "unlock the equity" in their home by borrowing $500,000 against it, despite the couple earning just $23,000 a year.

Back in 2002 repayments on a $500,000 loan was  around $45,000 per annum. How do you pay that on $23,000 a year?

The property scheme collapsed and the couple faced repossession of their home, but the NSW Supreme Court ordered three-quarters of that loan extinguished because the couple could not afford the loan in the first place and the lender had engaged in "unconcionable" conduct.

Oh dear. The property scheme collapsed.

In response to borrower claims, some lenders have tried to distance themselves from low-doc lending procedures, stating mortgage brokers were responsible for checking whether borrowers could repay the loans.

Judges have rejected that claim, as has the ABA.

ABA chief executive Steven Munchenberg said it was OK for lenders to require mortgage brokers to obtain documents, but lenders were regardless required to independently verify such information and verify that borrowers could afford loans.

"Under the legislation and as a matter of common legal principle under the code, you are required to ensure that you have the information and that it is accurate," Mr Munchenberg said.

"Under existing law if it is established that a loan was made and a consumer could not comply with the terms without substantial hardship they could reopen and adjust that transaction. That law has been there since 1996."

Award-winning consumer advocate Denise Brailey of the Banking and Finance Consumers Support Association has, with The Australian, been closely following loan application irregularities for several years.

"But these emails prove unconscionable and predatory lending practices were happening across the board," Ms Brailey said.

She said she was in contact with more than 100 borrowers stung by predatory lending practices. Such borrowers came from every state and territory, as well as New Zealand, and they all had one thing in common.

She instructed the borrowers to contact their lenders and request copies of their loan application forms. "In every single case they have come back astounded," Ms Brailey said.

"Their incomes are vastly inflated and in most cases there are two, even three different sets of handwriting on the forms."

Other major concerns, which also point directly to imprudent lending, was the writing of 30-year loans to people in their 70s and 80s.

In May 2008, as the global crisis unfolded, Capital First wrote to one broker that "the maximum borrower age is now 70 years".

In the emails, lenders spruik to brokers the availability of "unregulated" loans.

That means loan application forms were ticked for "investment or business purposes" and so were not covered by national credit laws.

It is not clear whether such waivers actually remove a borrower's rights, but courts have to date indicated this is unlikely.

This has only just started and its going to get very interesting. The evidence and data presented clears away the last vestige of prudence regarding bank lending and the Australian Real Estate ponzi scheme that was borne around the time Howard came to power.

It will end badly just like the USA, Ireland and Spain. I wonder how long the main stream media can keep it under wraps? When you see it on TVFTFS (TV for the fucking stupid - eg 7,9 or 10 news, A Current Affair, Today Tonight etc) you know the game is up.

Why Greece Is Better OUT of the Euro

Ann Pettifor, London based economist, explains why its citizens are better off with drachmas after a short and sharp economic contraction as opposed to years of austerity and social unrest.



The bankers and kleptocrats may not agree.

RBA Governor Stevens' "Glass Half Full" Speech - The Party is Over!

Awesome speech. My estimation of the guy has gone up 500%. You can almost feel the ructions in the force and smell the property speculators soiling themselves.

There was an expectation by the herd (bordering on a perception of an unalienable right) that the Reserve Bank would keep the property bubble inflated even if it went to Zero Interest Rate Policy (ZIRP) and money printing. Well guess what? You're in trouble.

The speech is here: The Glass Half Ful (with graphs)

Excerpt:

But there is another aspect of the ‘multi-speed’ experience, which I suspect explains a good deal of the dissatisfaction we see, and it has to do with the behaviour of the household sector. Some parts of the economy that depend on household spending are still experiencing relatively weak conditions, compared with what they have been used to. But this isn’t because the mining boom spillovers have failed to arrive. It is, instead, the result of other changes that actually have nothing to do with the mining boom per se, but a lot to do with events that occurred largely before the mining boom really began.

The story is summed up in the two charts shown below. The first shows household consumption spending and income, both measured in per capita terms, and adjusting for inflation (Graph 2).[2] In brief, household spending grew faster than income for a lengthy period up to about 2005. The arithmetically equivalent statement is that the rate of saving from current income declined, by about 5 percentage points over that period.

It was no coincidence that households felt they were getting wealthier. Gross assets held by households more than doubled between 1995 and 2007. The value of real assets – principally dwellings – rose by more than 6 per cent per annum in real, per capita terms over the period (Graph 3).

Only a small part of this was explained by an increase in per capita expenditure on dwellings. The bulk of it came from rising prices. Moreover, a good deal of borrowing was done to hold these assets and household leverage increased. The ratio of aggregate household debt to gross assets rose, peaking at about 20 per cent. There was definitely a large rise in measured net worth, but relative to aggregate annual income, gross debt rose from 70 per cent in 1995, to about 150 per cent in 2007. Correspondingly, by 2007 the share of current income devoted to servicing that debt had risen from 7 per cent to 12 per cent, despite interest rates in 2007 being below those in 1995.

It is still not generally appreciated how striking these trends were. I cannot say that it is unprecedented for spending to grow consistently faster than income, because it had already been doing that for the 20 years prior to 1995. That is, the saving rate had been on a long-term downward trend since the mid 1970s. But it is very unusual in history for people to save as little from current income as they were doing by the mid 2000s. And it is very unusual, historically, for real assets per person to rise at 6 per cent or more per annum. It is also very unusual for households actually to withdraw equity from their houses, to use for other purposes, but for a few years in the mid 2000s that seemed to have been occurring.

Of course, Australia was not alone in seeing trends like this. There were qualitatively similar trends in several other countries, particularly English-speaking countries that experienced financial innovation. The international backdrop to this period was the so-called ‘great moderation’, in which there was a decline in macroeconomic variability. There were still business cycles but downturns were much less severe than in the 1970s or 1980s, inflation was low and not very variable, which meant that nominal interest rates also were generally low and not very variable, and compensation for risk became very modest.[3]

This ‘moderation’ came to an end with the crisis beginning in 2007. And with a few years of perspective, it is increasingly clear that Australian households began to change their behaviour at that time, or even a little before. The rate of saving from current income stopped falling probably around 2003 or 2004, and began to increase (we now know), slowly at first as the income gains from the first phase of the resources boom started in about 2005 or 2006, and then more quickly in 2008 and 2009.

Real consumption spending per head initially remained pretty strong in this period, reaching a peak in 2008. It then declined for a year or so, before resuming growth in the second half of 2009. That growth has, however, been much slower than had been observed previously. In the nearly three years from mid 2009 through to the March quarter 2012, real consumption per head rose at an annual pace of about 1½ per cent.

This is more than a full percentage point lower than the growth rate from 1995 to 2005. But this sort of growth is in fact quite comparable with the kind of growth seen in the couple of decades leading up to 1995. It is line with the quite respectable growth in income. But the gap between the current level of consumption and where it would have been had the previous trend continued is quite significant. If we then consider the growth of foreign online sales and so on, and the fact that consumers seem more inclined to consume services – experiences, as opposed to goods – we can see this is a significant change for the retail sector.

No doubt reinforcing this trend towards more circumspect, but more typical, behaviour is that the earlier strong upward trend in real assets per head has abated over recent years. In fact, real household assets per head today are about the same as they were five years ago, with a dip during the crisis, a subsequent partial recovery and then a slow drift down over the past couple of years. Both dwelling prices and share prices – the two really big components of wealth – have followed that pattern.

At some point, wealth will begin to increase again. After all, people are saving a reasonable amount from current income and placing the proceeds into various assets (especially, of late, deposits in financial institutions). That is, they are building wealth the old fashioned way. Ultimately these flows will be reflected in higher holdings of real and financial assets, at least once debt levels are regarded as comfortable. Asset valuation changes can of course dominate saving flows in shifting wealth over short periods and they are inherently unpredictable. So no one can predict the course of these measures of wealth over any particular short period. But wealth will surely resume an upward track, sooner or later.[4]

When it does, however, it is unlikely to be at 6 or 7 per cent per year in real, per capita terms. I would guess that over the long term, something more like 3 per cent would be nearer the mark.

I think this is a profoundly important point and worth emphasising. The decade or more up to about 2007 was unusual. It would be quite surprising, really, if the same trends – persistent strong increases in asset values, very strong growth in per capita consumption, increasing leverage, little or no saving from current income – were to re-emerge any time soon. That is, the gap between consumption today and the old trend level on the chart is not going to close. I noted to another audience about three years ago that the prominence of household demand in driving growth in the 1990s and 2000s was unlikely to be repeated.[5] If there were business strategies that assumed a resumption of the earlier trend, they will surely be disappointed in time, if they have not been already.

There were several parts of the economy that benefited from that earlier period, and that are finding the going much tougher now. Retailing was obviously one, but so was banking. Banks and other financial institutions enjoyed rapid balance sheet and profit expansion as they lent to households and some businesses. But they can see that period has now finished. Businesses that serviced rapid turnover in the dwelling stock (such as real estate agents, mortgage brokers) are seeing those revenue streams considerably reduced, and are having to adjust their strategies and capacity to suit changed conditions. For example, the rate of dwelling turnover is about one-third less than it was on average over the previous decade, and about half its peak levels. This is affecting state government stamp duty collections as well as the real estate sector.

We can also see some echoes of these changing trends in household demand in business investment spending.

This chart shows business investment, split into mining and non-mining, and measured in real, per capita terms, so as to be consistent with the earlier charts (Graph 4). Investment has been on a stronger upward trend since the mid 1990s than it had been for a number of years before that. In particular, business investment in real per capita terms has grown, on average, by over 6 per cent per annum since 1995, more than double the average pace over the preceding 35 years. Moreover a lot of this was in the non-mining sector, and it began before the present run up in mining investment really got going. Some of this growth reflected the same ‘consumer facing’ growth sectors mentioned above. Of the four sectors that had the fastest growing investment spending over that period, three were finance, one called ‘rental hiring and real estate services’, and retail trade. Some of these sectors are slowing their investment rates now.

Meanwhile, mining investment has recently been rising at an extraordinary pace. In 2005, mining investment was near its long-run average of around 2 per cent of GDP. By mid 2014 we expect it to reach at least 9 per cent of GDP. If that occurs, mining investment will be about as large as business investment in the rest of the private economy combined. As a result of that, total business investment will reach new highs this year, and next. Hence there is a very large build-up in the nation's capital stock occurring. If it is well managed and soundly based, that ought to allow the possibility of further growth in output and incomes. The investment phase of the mining boom will start to tail off in a couple of years' time, after which the shipments of natural resources should step up significantly.

We might expect by then as well that some other areas of investment spending that are weak at present will be picking up. More generally, I suspect we will discuss the nature of investment quite a bit in coming years as we grapple with structural change in the economy and powerful shifts in the population's needs (think of investment in the aged-care sector, for example, or public infrastructure needs). We will also be looking for productivity pay-offs from the various investments.

But the key message for today is that the multi-speed economy is not just about the mining sector squeezing other sectors by drawing away labour and capital and pushing up the exchange rate. It is doing that, but slower growth in sectors that had earlier done well from unusually strong gains in household spending would have been occurring anyway, even if the mining boom had never come along. It is these changes in behaviour by households, in asset markets and in credit demand, that I think lie behind much of the disquiet – dissatisfaction even – that so many seem to have been expressing. But this would, as I say, have occurred with or without the mining boom. In fact, without the mining boom and its spillovers, we would have been feeling the effects of those adjustments rather more acutely than we do now. The period of household gearing up could have ended in a much less benign way.

Implications for Policy

What are the implications of these trends for economic policy, and particularly monetary policy? Does it have a role in helping the adjustment?

One thing we should not do, in my judgement, is to try to engineer a return to the boom. Many people say that we need more ‘confidence’ in the economy among both households and businesses. We do, but it has to be the right sort of confidence. The kind of confidence based on nothing more than expectations of ever-increasing housing prices, with the associated willingness to continue increasing leverage, on the assumption that this is a sure way to wealth, would not be the right kind. Unfortunately, we have been rather too prone to that misplaced optimism on occasion. You don’t have to be a believer in bubbles to think that a return to sizeable price increases and higher household gearing from still reasonably high current levels would be a risky approach. It would surely be a false basis for confidence. The intended effect of recent policy actions is certainly not to pump up speculative demand for assets.[6] As it happens, our judgement is that the risk of re-igniting a boom in borrowing and prices is not very high, and this was a key consideration in decisions to lower interest rates over the past eight months.

Hence, I do not think we should set monetary policy to foster a renewed gearing up by households. We can help, at the margin, the process of borrowers getting their balance sheets into better shape. To the extent that softer demand conditions have resulted from households or some businesses restraining spending in an effort to get debt down, and this leads to lower inflation, our inflation targeting framework tells us to ease monetary policy. That is what we have been doing. The reduction in interest rates over the past eight months or so – 125 basis points on the cash rate and something less than that, but still quite a significant fall, in the structure of intermediaries' lending rates – will speed up, at the margin, the process of deleveraging for those who need or want to undertake it.

In saying that, of course, we cannot neglect the interests of those who live off the return from their savings and who rightly expect us to preserve the real value of those savings. Popular discussion of interest rates routinely ignores this element, focusing almost exclusively on the minority of the population – just over one-third – who occupy a dwelling they have mortgaged. The central bank has to adopt a broader focus. And to repeat, it is not our intention either to engineer a return to a housing price boom, or to overturn the current prudent habits of households. All that said, returns available to savers in deposits (with a little shopping around) remain well ahead of inflation, and have very low risk.

So monetary policy has been cognisant of the changed habits of households and the process of balance sheet strengthening, and has been set accordingly. As such, it has been responding, to the extent it prudently can, to one element of the multi-speed economy – the one where it is most relevant.

What monetary policy cannot do is make the broader pressures for structural adjustment go away. Not only are the consumption boom and the household borrowing boom not coming back, but the industry and geographical shifts in the drivers of growth cannot be much affected by monetary policy. To a large extent, they reflect changes in the world economy, which monetary policy cannot influence. Even if, as a society, we wanted to resist the implications of those changes other tools would be needed.

In fact Australia does better to accommodate these changes, and to think about what other policies might make adjustment less difficult and quicker for those adversely affected. It is in this area, in fact, that we need more confidence: confidence in our capacity to respond to changed circumstances, to respond to new opportunities, and to produce goods and services which meet market demands. It is also to be hoped that some of the recent positive data outcomes will give pause to reflect that, actually, things have so far turned out not too badly.

Key Points:

Trend data

• Household spending grew faster than income for a lengthy period up to about 2005
• Households felt they were getting wealthier
• Gross assets held by households more than doubled between 1995 and 2007. The value of real assets – principally dwellings – rose by more than 6 per cent per annum in real, per capita terms over the period (John Howard's bubbliciously prosperous years)
• Only a small part of this was explained by an increase in per capita expenditure on dwellings. The bulk of it came from rising prices
• Borrowing was done to hold these assets and household leverage increased
• The ratio of aggregate household debt to gross assets rose, peaking at about 20 per cent
• There was definitely a large rise in measured net worth, fuelled by debt (if I hear one more lemming say "I've had success with property", I'm getting a gun licence - EVERYBODY got ahead)
• Relative to aggregate annual income, gross debt rose from 70 per cent in 1995, to about 150 per cent in 2007 (but Peter Costello was the world's greatest treasurer, you mean were just doubled the credit limit and felt richer?)
• By 2007 the share of current income devoted to servicing that debt had risen from 7 per cent to 12 per cent, despite interest rates in 2007 being below those in 1995

An aberration

• It is still not generally appreciated how striking these trends were (the Wildebeeste mated with an Ostrich factor)
• It is very unusual in history for people to save as little from current income as they were doing by the mid 2000s
• It is very unusual, historically, for real assets per person to rise at 6 per cent or more per annum
• It is also very unusual for households actually to withdraw equity from their houses, to use for other purposes, but for a few years in the mid 2000s that seemed to have been occurring (PONZI cash in !!!)

Global banking

• Australia was not alone in seeing trends like this. There were qualitatively similar trends in several other countries, particularly English-speaking countries that experienced financial innovation (Ireland, UK and USA)
• Taking risks became almost risk free

Savings, consumption and reality

• The rate of saving from current income stopped falling probably around 2003 or 2004, and began to increase (we now know), slowly at first as the income gains from the first phase of the resources boom started in about 2005 or 2006, and then more quickly in 2008 and 2009 (borrow and speculate in a Ponzi scheme and use the gains to spend)
• Real consumption spending per head initially remained pretty strong in this period, reaching a peak in 2008
• It then declined for a year or so, before resuming growth in the second half of 2009 (GFC then Rudd stimulus and FHOG grants boosting home equity)
• In the nearly three years from mid 2009 through to the March quarter 2012, real consumption per head rose at an annual pace of about 1½ per cent  (home quity ATM is 'out of service')
• This is more than a full percentage point lower than the growth rate from 1995 to 2005. But this sort of growth is in fact quite comparable with the kind of growth seen in the couple of decades leading up to 1995. It is line with the quite respectable growth in income
• The gap between the current level of consumption and where it would have been had the previous trend continued is quite significant  (party is over! bar is closed!)

Pop goes the bubble

• Real household assets per head today are about the same as they were five years ago, with a dip during the crisis, a subsequent partial recovery and then a slow drift down over the past couple of years. Both dwelling prices and share prices – the two really big components of wealth – have followed that pattern (its effectively 2007, FIVE YEARS OF GAINS ARE GONE!!! How far back will we go?)

The glimmer of the false dawn?

• At some point, wealth will begin to increase again (When? At least 6 years from 2009 peak?)
• After all, people are saving a reasonable amount from current income and placing the proceeds into various assets (especially, of late, deposits in financial institutions). That is, they are building wealth the old fashioned way
• Ultimately these flows will be reflected in higher holdings of real and financial assets, at least once debt levels are regarded as comfortable (It won't fall forever and there will be a bottom, though the Irish, Spanish and Americans etc are still waiting for theirs. Mariana's Trench is 35,800ft deep but it does have a bottom!)
• The RBA can't predict the course of these measures of wealth over any particular short period. But wealth will surely resume an upward track, sooner or later (Japan is near the bottom 22 years from the top)

When the party starts again, the bar will be closed and its square dancing only

• When it does bottom future gains are unlikely to be at 6 or 7 per cent per year in real, per capita terms. I would guess that over the long term, something more like 3 per cent would be nearer the mark (CPI gains only - the doubling every 7 or 10 years bullsh*t is OVER!!)
• The decade or more up to about 2007 was unusual (lets call it the Howard Era or GADO period - Greed And Debt Orgy)
• It would be quite surprising, really, if the same trends – persistent strong increases in asset values, very strong growth in per capita consumption, increasing leverage, little or no saving from current income – were to re-emerge any time soon
• The prominence of household demand in driving growth in the 1990s and 2000s was unlikely to be repeated
• If there were business strategies that assumed a resumption of the earlier trend, they will surely be disappointed in time, if they have not been already

Who needs to seriously look at alternative career options

• There were several parts of the economy that benefited from that earlier period, and that are finding the going much tougher now. Retailing was obviously one, but so was banking. Banks and other financial institutions enjoyed rapid balance sheet and profit expansion as they lent to households and some businesses. But they can see that period has now finished  (FINITO!!)
• Businesses that serviced rapid turnover in the dwelling stock (such as real estate agents, mortgage brokers) are seeing those revenue streams considerably reduced, and are having to adjust their strategies and capacity to suit changed conditions
• For example, the rate of dwelling turnover is about one-third less than it was on average over the previous decade, and about half its peak levels
• Low turnover is affecting state government stamp duty collections as well as the real estate sector (they'll slash the public service, scrimp on infrastructure and get their debt ratings downgraded)
• We can also see some echoes of these changing trends in household demand in business investment spending
• Of the four sectors that had the fastest growing investment spending over that period, three were finance, one called ‘rental hiring and real estate services’, and retail trade. Some of these sectors are slowing their investment rates now
• The investment phase of the mining boom will start to tail off in a couple of years' time
• The multi-speed economy is NOT about the mining sector squeezing other sectors by drawing away labour and capital and pushing up the exchange rate
• Slower growth in sectors that had earlier done well from unusually strong gains in household spending (fuelled by house price rises) would have been occurring anyway, even if the mining boom had never come along
• The Changes in behaviour by households, in asset markets and in credit demand, that lie behind much of the disquiet – dissatisfaction even – that so many seem to have been expressing stems from the lack of home equity growth (disquiet? Some are sh*tting themselves on realising it was just a Ponzi scheme)

All bubbles burst and the RBA will not reinflate Australia's

• Without the mining boom and its spillovers, we would have been feeling the effects of those adjustments rather more acutely than we do now
• The period of household gearing up could have ended in a much less benign way (its not over Glenn, its only starting)
• The RBA should not do try to engineer a return to the boom (come on Glenn, stop f*cking around, call it a bubble)
• Many people say that we need more ‘confidence’ in the economy among both households and businesses. We do, but it has to be the right sort of confidence
• The kind of confidence based on nothing more than expectations of ever-increasing housing prices, with the associated willingness to continue increasing leverage, on the assumption that this is a sure way to wealth, would not be the right kind

Herd theory, naivety and stupidity

• We have been rather too prone to the misplaced optimism on the expectation of ever increasing house prices (Wildebeeste factor)
• You don’t have to be a believer in bubbles to think that a return to sizeable price increases and higher household gearing from still reasonably high current levels would be a risky approach and a false basis for confidence
• The intended effect of recent policy actions is certainly not to pump up speculative demand for assets. The risk of re-igniting a boom in borrowing and prices is not very high, and this was a key consideration in decisions to lower interest rates over the past eight months (start bubbling again and UP those interest rates will go!!)

RBA policy on the indebted and savers and re affirming the party is over

• Inflation targeting framework sets monetary policy. The reduction in interest rates over the past eight months or so – 125 basis points on the cash rate and something less than that, but still quite a significant fall, in the structure of intermediaries' lending rates – will speed up, at the margin, the process of deleveraging for those who need or want to undertake it (don't take on more debt, pay down the loans you have)
• The RBA cannot neglect the interests of those who live off the return from their savings and who rightly expect us to preserve the real value of those savings (this is important, the RBA will NOT go to zero rates, returns on deposits are important)
• Popular discussion of interest rates routinely ignores savers, focusing almost exclusively on the minority of the population – just over one-third – who occupy a dwelling they have mortgaged
• The central bank has to adopt a broader focus and it is not the intention either to engineer a return to a housing price boom, or to overturn the current prudent habits of households (keep saying it Glenn and the Wildebeeste may listen)
• Returns available to savers in deposits (with a little shopping around) remain well ahead of inflation, and have very low risk
• Monetary policy has been cognisant of the changed habits of households and the process of balance sheet strengthening, and has been set accordingly
• It has been responding, to the extent it prudently can, to one element of the multi-speed economy – the one where it is most relevant.
• Monetary policy cannot make the broader pressures for structural adjustment go away (ie the recessions you HAVE to HAVE in a market economy)
• The consumption boom and the household borrowing boom not coming back (keep saying it Glenn and the Wildebeeste may listen)
• Industry and geographical shifts in the drivers of growth cannot be much affected by monetary policy. To a large extent, they reflect changes in the world economy, which monetary policy cannot influence. Even if, as a society, we wanted to resist the implications of those changes other tools would be needed (ie in case of a mining slowdown due China's hard landing and/or Euro/USA meltdown)

Well that sucks. No more risk free real estate to riches schemes. Baby boomers with investment properties are going to jump? First in best dressed or hope to hell and hang in there?

Don't you just hate waking up the day after a crazy party, one that you thought would never end?

The Fiscal Cliff

Heard of it yet? You will hear the term more often in the second half of 2012.

Cliff Dive?

AMERICANS have watched austerity sweep Europe with a certain Schadenfreude. But eight months from now they may get a dose of the same medicine. The political compromises that have produced much of America’s deficit of 8% of GDP are programmed to go into reverse at the end of the year, two months after the election. A stimulus package consisting of a payroll-tax cut, investment tax credit and enhanced unemployment insurance expires then, as do George W. Bush’s tax cuts (which have already been extended by two years from their original end-date of 2010). At the same time an automatic, across-the-board cut in domestic and defence spending, called a “sequester”, takes effect, cutting about $100 billion from government spending next year.

Why You Can't Ignore The Fiscal Cliff

In addition to the economic slowdown, the continued housing crisis, the endless turmoil in Europe and the deceleration in China and India, we are moving closer to the period where the so-called 'fiscal cliff' will become more of a threat to the market.  The fiscal cliff refers to the near-simultaneous January 2013 expiration of the Bush tax cuts, the payroll tax cuts, emergency unemployment benefits and the sequester established in last summer's debt limit agreement.  Various estimates have indicated that the hit to GDP could be as high as 4%. 

Various members of the Federal Reserve Board, including the Chairman, have been concerned enough to make their worries publically known.  Bernanke, at his last press conference, said that the size of the fiscal cliff was so large that "I think there's absolutely no chance that the Federal Reserve could or would have any ability whatsoever to offset the effect on the economy".

Chicago Fed president Charles Evans added that "The cliff at the end of this year is just that writ large.  Whether or not calm heads will prevail and avoid this or do something useful, you know that's as big an uncertainty as I can imagine anybody facing."  Atlanta Fed president Dennis Lockhart stated "Congress and the administration understand that the perception is growing that if a transition isn't engineered that works well, that you're going to end up with a lot of Mojo taken out of the economy in a very brief period of time."

Citi: The Fiscal Cliff Is 'SO RIDICULOUSLY LARGE'

The size of the so-called fiscal cliff at year end, which would unwind a decade’s worth of tax cuts and temporary income supports, is so “ridiculously” large relative to near- term growth prospects that markets may take some comfort in its scale. As Fed Chairman Bernanke warned Congress, the Fed would have “no chance” of offsetting an instantaneous shock so severe and noted he was “hoping” Congress would take action.

Really? Presidential election in November and the new Congress won't take office until January. They'll be hamstrung.