[huggabubbamumma]

The actual repossion rate of houses is only 2% this was quoted today. So whilst it is higher it really isn't that bad. And in reality they are being repossed because people could never have afforded them anyway. The amount of borrowing going on is way to high and this was bound to happen.

[Aloysius]

I think the big worry is if the US goes down the pan, China may struggle, as they hold a lot of US treasury bonds. If China falters, then Australia may struggle, because of our high export rate.

The other thing about the US situation, is that although the bail out is supposed to help the financial institutions, what is done to stem the cause of it? That is all those houses, that has been repossessed because of the occupants not being able to pay the mortgages? There is no money flowing in that direction, is there? They're just empty houses. That debt has to be on somebody's books.

I honestly don't know what to think of it. It's very confusing.

[miriams]

Bloody Commies!

Seriously, they preach market capitalism for the common man but when it comes to their own skins, they go running to the government (aka taxpayer) and ask them to save their skins.

America has been ruled by charlatans for a long time now and it's pretty much all coming to light. I think we can safely assume that much of what is fed to us about historical events (esp WW2) is now just out and utter BS used to silence people with some sense. They're all in cahoots. Very frustrating. We're just the cattle to be slaughtered when things get too hot to handle.

[*LucyE*]

'Our entire economy is in danger' WDYT?

I think as most well informed people think, that we are headed towards a global economic downturn. Who knows how bad it will get, but even if it doesn't get to the 'Great Depression' level, an 'ordinary' recession would still have huge ramificiations on the lives of ordinary people.

I agree with JRA that many people don't remember the last recession we had in Australia and I fear that many people are unprepared for what may occur.

What does it mean?? I was talking to DH and we would be in strife if interest rates reached something like 50% but will that happen?? What about inflation?? Will bread suddenly cost $20?? KWIM? IF it all goes bad, what will that mean for most Australians?

I think fishyfish has already addressed this somewhat. In a recession, interest rates will actually fall to try and encourage people to take out loans and spend money to stimulate the economy. The problem will be that unemployment will rise and it's very difficult to pay a mortgage, even with a low interest rate if there is no income.

Inflation is a separate issue. Generally, the assumption here has been that inflation is caused by people buying/spending too much which can be curbed by increasing the 'cost' of money (ie raise interest rates) to reduce demand or by people losing their jobs and therefore not having any money to spend.

What isn't being factored is that in the Australian economy, the problem is that we have been too successful and that we have/are reaching maximum capacity eg. we had basically zero unemployment so businesses weren't able to expand due to staff shortages. To help alleviate the labour shortage, we 'import' labour via immigration. These people need to find somewhere to live and also use public services such as hospitals, roads etc. This puts pressure on the housing market which is already in short supply so will mean that the demand for housing is still there and that those prices are unlikely to drop significantly (vs 'correct' themselves due to speculation). This is just one simplistic example.

Will it affect people who are in essential services, people who are not in retail or restaurants, people who have mortgages with the big lenders?

So really, this is all speculation? It seems doubtful and highly unlikely that the big lenders here in Oz will ask people to pay up or get out? I mean really? How likely is that?

As a PP (I think JRA) has said, during a recession, the definition of 'essential services' will change. There was a thread here a while ago about 'recession proof' jobs and I found it interesting how many people thought their job would be safe.

Re mortgages with any bank - it's probably not likely that people will suddenly be asked to pay or get out (I mean, the banks earn more money by having your honour your loan agreement than fire sale-ing the house) but if mortgagees are consistently late making repayments due to financial hardships, maybe skip a repayment or two, are strapped with other loans (car loan, credit cards) etc, then the banks will naturally get a bit worried about the client's ability to repay and want to get their money back.

Another thing that will be (already has been) majorly affected is superannuation, most of the money is invested into the stockmarket and when that crashes your super is gone.

I understand that if the stock-market crashes (again, how likely is that?) we lose all our super in there but it will recover and the super will increase again. It can't crash and remain down for 30-40yrs, right?

Yes, the stockmarket has historically had a long term upward trend even looking back at say the 80's crash, it did eventually go back up. But for those who are relying on their investments in the near future, they have lost a whole heap of capital. So, someone about to retire and use their super to buy a caravan to tour around the country after a lifetime of work, will no longer be able to do so. If you have time to wait 10 years (or whatever for the market to recover), then there isn't too much to worry about but for those who don't have the time to wait or who invested in companies that have gone bust, they would have lost a lot.

Well the worst predictions so far for Australia have been unemployment rising to about 12%.

I'm not sure if you mean this to be a not so bad outcome...12% is a huge amount of people being out of work. I'm not sure of the exact numbers but it would be hundreds of thousands of families thoughout the country being affected.

The econonmy will slow and so will the resources boom. As China is already slowing. This will impact spending on non essential items such as cars, tourism, retail etc.

I think the big worry is if the US goes down the pan, China may struggle, as they hold a lot of US treasury bonds. If China falters, then Australia may struggle, because of our high export rate.

There's a common misconception that the Australian economy is heavily reliant on China. China and the US are very important in the global context and what happens to them will affect the rest of the world from their flow on effects but Japan is actually one of our greatest trading partners. The previous government actually had to negotiate an anti dumping agreement with China because they are competitors to our steel producers (and other items, this is just one example) on the world market. There is an argument that Australia's natural resource exporters will benefit if their Chinese competitors dropped out. As for figures about China's economy slowing is questionable in its interpretation. They have had huge growth over recent times so it is natural that they need to slow it down so as not to overheat the economy (similar to what needed to happen in Australia with slow interest rate rises). They also not only hold a lot of US Treasury bonds but they hold A LOT of US cash reserves. The IMF and other international organizations have been in regular dialogues with China because they had the capacity to cripple the US economy many times over in the last few years by flooding the market.

The actual repossion rate of houses is only 2% this was quoted today. So whilst it is higher it really isn't that bad. And in reality they are being repossed because people could never have afforded them anyway. The amount of borrowing going on is way to high and this was bound to happen.

To me, 2% doesn't mean anything because I don't have any other figures to compare it to. For example (I'm making this up), if the repossession rate has historically been 0.2% than 2% is a huge increase. Banks don't want to repossess houses because they make more money by having people pay interest on a loan rather than having to sell (at this time, very likely devalued) asset. Repossessions are bad for our society with people losing their homes and for banks as a business, likely to be losing money. The "amount of borrowing going on" isn't necessarily a bad thing because lending and investing can be a good way to make money for everyone but it is who they are borrowing money to that needs to be looked at. Australia's financial rules are pretty good regarding this but when it goes bad is the current US example.

The other thing about the US situation, is that although the bail out is supposed to help the financial institutions, what is done to stem the cause of it? That is all those houses, that has been repossessed because of the occupants not being able to pay the mortgages? There is no money flowing in that direction, is there? They're just empty houses. That debt has to be on somebody's books.

The houses will be offered for sale. Normally the banks just want to get enough to cover the money they are owed but in dire situations, they will accept whatever they can get and write the rest off as bad debts.



The main winners during a recession are the cashed up people who can afford to buy good assets at bargain prices. I remember being told by someone who had spoken to a bigwig of a big 4 bank (not giving specifics which could be identifying) a few months ago, that their advice was to try and start building cash reserves to be in a position to take advantage of what they predicted would be an upcoming recession. A memorable example would be Kerry Packer who sat back quietly for months after selling Channel 9 to Bond and then have all the cash he needed to come in later and buy some great assets for a fraction of the cost.

[dippinsniffer]

Things are much clearer now but I still say that all this will affect some, it won't affect others. I do not believe those who say "it will affect every family" - after reading all the posts it looks like it will not affect every family in a negative way.

I do feel sorry for those who were going to retire now or in a year or two as their super would have reduced.

[hooverdamsel]

Thank you LucyE on a really comprehensive post. I really learnt alot.

Any comments on this 'Calling in a loan'. Could that happen en masse, even if you have been faithfully paying off you loan?

I wonder also what will happen to the US if this bailout doesn't work out?

[JRA]

If you believe a depression wont affect most people you continue to believe that. I agree all will not be BADLY affected, in the great depression some of the really wealthy survived well, but everyone else was affected. The nurses, the doctors, the teachers, all were affected.

[dippinsniffer]

I wonder also what will happen to the US if this bailout doesn't work out?

I too wonder ...? The deadline is tonight?

[Mariamsmum]

I also wanted to say thanks to LucyE for a comprehensive, well-written post, it explained a lot for me

[Melissa4444]

That was a great post, LucyE. Thank you for taking the time to lay it all out that way.

What are your thoughts on Section 8 of Paulson's plan? Does it make you nervous? Or do you think the concern is a beat up? I have to confess that it freaks me out. Handing that kind of power to the Executive Branch like that, with no real oversight seems like an incredibly foolish thing to do. Writing the outgoing administration a blank cheque to play with in their final months in office seems absurd.

Edit for typo

This post has been edited by Melissa4444: 28/09/2008, 09:59 AM