“Cash for trash” : Paulson plan attacked

Imagine this.

A man from the government arrives on your doorstep with a bill somewhere above the $US2,000 mark for every member of your family.

Yourself. Your wife.  Your kids.

Even grandpa.

And what’s it for?

To bail out lenders who made a  lot of money, recklessly selling home loans to people who could not afford them.

Our American friends don’t have to imagine this situation.

It’s what is happening to them, right now.

That $US2,000 figure, by the way, came from a speech the Australian Treasurer, Wayne Swan, has just given to parliament.

He was speaking about the $US700 billion the US Treasury is preparing to send, to buy what Mr Swan delicately called “infected mortgage related assets from US financial institutions.

American tax payers are a little more blunt about this operation.

They are calling it a “cash for trash” plan.

With some justice.

Many of the reckless lenders escaped, with big payouts for their efforts.

The plan is being heavily promoted by the US Treasury Secretary, Hank Paulson.

But will it work?

US economist Paul Krugman doubts it.

He says rescue efforts should aim to inject more capital into financial institutions, giving them money to lend again, in better ways, this time.

But he says this should not be done by purchasing bad mortgages.
He describes the Paulson plan as “an unacceptable proposal.” (www.nyt.com)and urges the US Congress to “rework” it.

“Don’t be railroaded,” Krugman says.

“If this plan goes through in anything like its present form, we’ll all be very sorry in the not too distant future.”

Related stories:

1. Bush presses plan to bolster US mortgage giants
2. Angry wheat farmers plan protest

Wall Street’s triple cave-in

Nick Sherry got it right.

“By the end of the day,” he said, “Lehman Brothers may no longer exist.”

The Superannuation Minister was speaking at question time in the Senate.

And just a few hours later, this once proud US investment bank has applied for bankruptcy protection.

The big brokerage firm, Merrill Lynch, was  also sold to the Bank of America yesterday.

And a third iconic  US giant, the American Insurance Group, had announced that it is seeking a $US40 billion loan from Federal authorities.

World share prices could tank, as a result of these dramatic developments.

A re-run of 1931 cannot be ruled out.

And Senator Sherry has a particularly big stake in that.

Australian superannuation funds have already suffered sharp reverses, over the past year, as share markets plunged as a result of  the US credit crunch.

They would be in for even more distress, if global share markets do go into free-fall now.

The knock-on effects would be much wider.

A glance at any good account of the Great Depression would show  just how bad things can get.

But they shouldn’t.

The chairman of the US Federal Reserve, Ben Bernanke, is an acknowledged expert on the Great Depression.

So he, more than just about any-one else, should know what is necessary, to avoid a re-run.

How, though, does the Treasurer, Wayne Swan, rate Australia’s chances in all this?

Mr Swan described the weekend’s developments in the US, succinctly, as “substantial.”

But he said Australia is better placed than most countries to “weather the storm.”

He said Australia’s banks are “well regulated” and “well capitalised.”

But he added “our economy is not immune from these developments.”

He, too, is right about that.

Related stories:

1. Government fails the triple jump
2. Wall Street down despite oil price plunge

US markets teeter

So it has come to this.

The US Treasury Secretary, Hank Paulson, is begging other banks to buy the big, once-proud,  US investment bank, Lehman Brothers.

The British Bank, Barclays, is looking at doing so, at a bargain basement price.

We must all hope that it, or some-one else, does make that purchase.

Because stability, of some kind, is now desperately needed, in US – and global – financial markets.

That will take nothing less than a stiff injection of capital, from somewhere.

US government officials and Wall Street executives have been meeting over the weekend, to assess the risks that US markets now face, and the steps that might be taken, to settle the situation.So far, though, no clear plan has emerged.

Even though the authorities know, only too well,  that worries are rising over other icons of the US financial system, like the insurance giant the American International Group and the nation’s biggest brokerage firm, Merrill Lynch.

A new floor, under the market, is now desparately needed.
One analyst, quoted by the New York Times, James L Melcher,   put it all very forcefully.

“You have to think of this like there is an epidemic going on,” he said.
“An epidemic of capital destruction.”

And it’s all quite personal.

It is now possible, for example, to buy a four bedroom home in Louisville, for less than $US30,000.

That figure is enough to make any hard-pressed Australian home-owner, struggling to meet stiff monthly mortgage payments, dream of emigrating to the US.

But it takes very little imagination to realise how much distress has hit the American family, that once lived in that home.

The basic building blocks of the US economy are still crumbling.

Home prices there are still falling. Defaults are rising, along with unemployment. And consumer spending is sputtering.

This is a situation of clear and present danger, not just for the US, but for the entire world.

Related stories:

1. Australian markets to open without a strong lead
2. US and European markets weaker

Retail slump to deepen

Australia’s shopkeepers are already suffering.

And their situation is not likely to get much better, any time soon.
The best Access Economics has to offer, is the prospect of some recovery, sometime next year.

The respected forecaster is quite blunt about that.

“All up, we expect real retail sales growth to swing from feast to famine,” it says.

“From 4 per cent in 2007-08 to 0.8 per cent in 2008-09.

“Before lifting to 3 per cent in 2009-10. thanks to relief on rates and an emerging housing upswing,” the forecaster adds.

There will, of course, be significant regional differences.

But Access said retail spending is “pretty subdued” in most parts of Australia.

It says high interest rates have been biting deeply into retail spending throughout Australia.

But South Australian shopkeepers have been doing better, because debt levels in their State are generally lower than in other parts of Australia.

West Australians and Queenslanders have been suffering from high interest rates, though.

But Access noted that incomes, in these resource rich States, had been growing faster than those in other parts of Australia.

That has set shop tills ringing a little more merrily, in those States.

Related stories:

1. Late slump kills two day rally on Wall Street
2. Job growth surges despite slump in confidence

George W’s biggest – financial – gamble

Wayne Swan’s hope – last week – that the “worst of the financial turbulence is behind us” was – at best – a few days premature.

At worst, we are facing financial disaster.

US authorities stepped in overnight – Australian time – and took over two of the world’s biggest financial institutions, the housing giants, Freddie Mac and Fannie Mae.

This was a huge gamble – which flies in the face of the Republicans’ most basic premise – that the market should rule.

If it succeeds, the worst of the sub-prime crisis will, indeed, be behind us.

If not, there will, inevitably, be much more, much worse,  trouble to come.

At this stage, it could go either way.

And, whatever happens, Australia, like every other country in the Western world, will be profoundly affected.

The US administration made the announcement.

Treasury Secretary Henry Paulson said the government had acted because the two institutions were “so large and so interwoven in our financial system that a failure of either of them would cause great turmoil in our financial markets here at home and around the globe.”

What Paulson did not say, although it is equally true, is that a check of the two giants’ books, disclosed good reason to suspect that both had, effectively, been overstating their reserves.

The executives of both were sacked and both institutions were placed in “conservatorship.”

What happens to shareholders, in either of the two institutions, has still to be worked out.

That is a likely source of trouble.

What happens to US taxpayers, though,  is already clear.

This gamble will cost them $US tens of billions.

Related stories:

1. The big gamble, the player in the shadows
2. Financial advisers stung

The big gamble, the player in the shadows

Remember Phil Gramm.

John McCain once regarded Phil as the man best qualified to be US President.

Gramm is a civil libertarian.

He was a driving force behind the policies that led to the sub-prime crisis.

No more restraint. No more regulation.

That’s his creed.

Gramm was in line to take Henry Paulson’s place, as Treasury Secretary, in a McCain administration, until he made a politically recklesss remark, a short time ago.

Gramm dismissed the current US economic troubles as “a mental recession.”

And he said the US, itself, had become “a nation of whiners.”

Yet the US president, George W. Bush, has now sanctioned the biggest financial rescue package in US history.

A direct market intervention, that will cost US taxpayers billions of dollars.

Why?

Because he had no choice.

This is just about the worst possible look, for the Republicans, just weeks away from a Presidential election.

They could still win it.

Nobody does political spin as well as the Republicans.

But Karl Rove would have to work overtime.

Related stories:

1. Bush presses plan to bolster US mortgage giants

Joe Mainstreet:his place in it all

Some temptations are so great, as they say, that it is actually sinful to resist them.

And some of those are financial.

Take Joe Mainstreet, a thirty something accountant, of Centerville, USA.

He’s on a good salary package and has  a pretty wife, Mary.

Then baby Casper arrives.  Joe and Mary need a new home.

So they go to the Centreville Bank, which makes a generous offer.

“Sure, we’ll give you the housing loan you need,” the bank manager says.

“But, with your new responsibilities, you will need to be well set up.”

“Why not get a new car, as well, financed on a reverse mortgage, with a very attractive interest rate?”

This kind of adventurous personal financing advanced much further in the US, before the crash, than it has in Australia.

But how is Joe situated now.

Not all that well, actually.

When the crash came, the value of his home in Centreville plummeted.

Then Joe lost his job, as the economy dived.

Joe became just one more nameless number, as US unemployment climbed to a five year high of 6.1 per cent in August.
And with all the extra financial press, Joe and Mary’s marriage broke up.

Joe’s thin savings soon ran out.

And he became just one of the 9 per cent of US home buyers, who are behind with their mortgage repayments.

The bank is preparing repossession papers.

And when those are presented, Joe will be out on the street.

That’s particularly tough, as it is now Fall.

And winter’s not far away.

Joe has heard that the government is rescuing Fannnie Mae and Freddie Mac.

But no-one is doing anything for him, Joe Mainstreet.

Related stories:

1. What is the most expensive item at your place?

The economy:How low can it go?

Just how much has the economy slowed?

We will find out, at 11.30 am today, when the Australian Bureau of Statistics releases its June quarter national accounts.

The news is not likely to be good.

After 17 years of largely uninterrupted strong growth, Australians have grown used to seeing annual growth figures close to the 4 per cent mark.

That’s the figure that keeps unemployment low.  It also means that there will, probably, be jobs for each batch of school-leavers.

But the combined effect of 12 interest rate rises – and the flow on effects of the US credit crunch  – have  put figures of that order out of reach for Australia.

The nation now has a two speed economy.  The resources boom is not only strong, but gathering strength.

But the broader economy has slowed, substantially.

Even the Reserve Bank Governor, Glenn Stevens,now admits that Australian shoppers are likely to “remain subdued.”

That, combined with high fuel prices and – let’s face it – still high interest rates and tight credit – means that Australia’s domestic economy will just limp along for some time yet.

Related stories:

1. Has the Reserve Bank killed the economy?
2. Australia’s two speed economy sighted