Money as Debt also known as Credit

Following a telephone conversation with a lady who wanted to offer her support, I created this new blog as a way of focussing on our core issues in the UK.

Credit comes from the Latin credere which means believing!

Towards ceding Australian sovereignty?

The comment below resulted from a dialogue around Ellen Bown’s excellent book Web of Debt.

Disclosure: I am not trained in economics or economic theory so my analysis may appear a little puerile to some. I am in fact an Arts graduate with honours, with about 10 years experience in government and lately in a private sector IT consulting firm.

Whatever, the situation in Australia, I think it is obvious that we are not “de-coupled” from the US economy, nor the US Federal Reserve System, as our banking and financial sector was “de-regulated” in 1987 or so, when the $Aussie was floated, allowing private international banks greater access to our credit markets, and putting us at the mercy of the market makers.

So far, our politicians have been lying to us about the imminent serious impact we face in relation to the US sub-prime fiasco, but it is becoming clearer every week that we are facing a severe credit crisis because some of our major private banks are “leveraged” beyond their ability to write down the amount of bad debt they are holding. This may in fact be a manoeuvre by the “shadow world government” to bring Australia’s reserve system into private hands – hence both sides of politics (that is the supposed “left” and “right”) in the last 12 months have been at great pains to point out to the public the “independence of the Reserve Bank”, who they say, is solely responsible for monetary policy, whilst the government looks after fiscal policy. Perhaps the Reserve’s independence would be unequivocally established if it were controlled by a board consisting of private bankers.

Even though the government has been able to pay down its debt, due to high tax receipts, the boom we have experienced is only partly due to our massive resources sector (where we are digging up the country and selling it to China). What also precipitated the boom and the unsustainable growth in the real-estate market was extremely lax fiscal policy (similar to what you in the US call “stimulus checks”, in our case it was “baby bonuses”, “family payments” and the doubling of the first home buyers grant. All of this was in the wake of the last bubble/crash in 2000).

Further, we have seen “credit on demand” resulting in a massive increase in credit card debt, confusion in the roles between the Australian Stock Exchange regulator and operator (the same body, “ASIC”), leading to some very dubious pratices, and a huge promotional campaign by the banking and finance sector to leverage home equity (ie, “apparent equity” based on inflated prices) to invest in the stock market. People were able to buy a house with no money down, and having paid very little back, they could still within a year have $30,000 or $40,000 or more in “equity” for leveraging in a stocks portfolio.

It appears to me that when the financial tsunami hits, Australia will have no choice but to dance to the tune of the international bankers, cede our sovereignty, and join in a regional (or perhaps global, but I think that will be a later step) privately controlled financial system and currency.

Thanks for the link to the Economic Reform Australia Network, and I’ll be watching the UK and Canada with some interest.

Keep fighting the good fight.

Kind regards,
Dean Britton
Western Australia.

The worst market crisis in 60 years

Courtesy of the Economic Reform Australia Information Network:

by George Soros
Published: January 23 2008

The current financial crisis was precipitated by a bubble in the US housing market. In some ways it resembles other crises that have occurred since the end of the second world war at intervals ranging from four to 10 years.

However, there is a profound difference: the current crisis marks the end of an era of credit expansion based on the dollar as the international reserve currency. The periodic crises were part of a larger boom-bust process. The current crisis is the culmination of a super-boom that has lasted for more than 60 years.

Boom-bust processes usually revolve around credit and always involve a bias or misconception. This is usually a failure to recognise a reflexive, circular connection between the willingness to lend and the value of the collateral. Ease of credit generates demand that pushes up the value of property, which in turn increases the amount of credit available. A bubble starts when people buy houses in the expectation that they can refinance their mortgages at a profit. The recent US housing boom is a case in point. The 60-year super-boom is a more complicated case.

Every time the credit expansion ran into trouble the financial authorities intervened, injecting liquidity and finding other ways to stimulate the economy. That created a system of asymmetric incentives also known as moral hazard, which encouraged ever greater credit expansion. The system was so successful that people came to believe in what former US president Ronald Reagan called the magic of the marketplace and I call market fundamentalism. Fundamentalists believe that markets tend towards equilibrium and the common interest is best served by allowing participants to pursue their self-interest. It is an obvious misconception, because it was the intervention of the authorities that prevented financial markets from breaking down, not the markets themselves. Nevertheless, market fundamentalism emerged as the dominant ideology in the 1980s, when financial markets started to become globalised and the US started to run a current account deficit.

Globalisation allowed the US to suck up the savings of the rest of the world and consume more than it produced. The US current account deficit reached 6.2 per cent of gross national product in 2006. The financial markets encouraged consumers to borrow by introducing ever more sophisticated instruments and more generous terms. The authorities aided and abetted the process by intervening whenever the global financial system was at risk. Since 1980, regulations have been progressively relaxed until they have practically disappeared.

The super-boom got out of hand when the new products became so complicated that the authorities could no longer calculate the risks and started relying on the risk management methods of the banks themselves. Similarly, the rating agencies relied on the information provided by the originators of synthetic products. It was a shocking abdication of responsibility.

Everything that could go wrong did. What started with subprime mortgages spread to all collateralised debt obligations, endangered municipal and mortgage insurance and reinsurance companies and threatened to unravel the multi-trillion-dollar credit default swap market. Investment banks’ commitments to leveraged buyouts became liabilities. Market-neutral hedge funds turned out not to be market-neutral and had to be unwound. The asset-backed commercial paper market came to a standstill and the special investment vehicles set up by banks to get mortgages off their balance sheets could no longer get outside financing. The final blow came when interbank lending, which is at the heart of the financial system, was disrupted because banks had to husband their resources and could not trust their counterparties. The central banks had to inject an unprecedented amount of money and extend credit on an unprecedented range of securities to a broader range of institutions than ever before. That made the crisis more severe than any since the second world war.

Credit expansion must now be followed by a period of contraction, because some of the new credit instruments and practices are unsound and unsustainable. The ability of the financial authorities to stimulate the economy is constrained by the unwillingness of the rest of the world to accumulate additional dollar reserves. Until recently, investors were hoping that the US Federal Reserve would do whatever it takes to avoid a recession, because that is what it did on previous occasions. Now they will have to realise that the Fed may no longer be in a position to do so. With oil, food and other commodities firm, and the renminbi appreciating somewhat faster, the Fed also has to worry about inflation. If federal funds were lowered beyond a certain point, the dollar would come under renewed pressure and long-term bonds would actually go up in yield. Where that point is, is impossible to determine. When it is reached, the ability of the Fed to stimulate the economy comes to an end.

Although a recession in the developed world is now more or less inevitable, China, India and some of the oil-producing countries are in a very strong countertrend. So, the current financial crisis is less likely to cause a global recession than a radical realignment of the global economy, with a relative decline of the US and the rise of China and other countries in the developing world.

The danger is that the resulting political tensions, including US protectionism, may disrupt the global economy and plunge the world into recession or worse.

The writer is chairman of Soros Fund Management
Copyright The Financial Times Limited 2008