The alternative to commercial loans is no loans.

http://www.theaustralian.news.com.au/story/0,25197,23039395-5015025,00.html

The subprime crisis was just the detonator for a series of much larger explosions that haven’t happened yet.

The US real estate market has declined further and quicker than at any time since the onset of the Great Depression.

There is now at least a year’s overhang of surplus housing stock. In other words, the entire construction industry can take a year’s holiday.

The day before yesterday in California more than 5,000 houses were auctioned at foreclosure auctions around the state. This was by far the biggest offering of its kind in California’s history. Virtually none of them sold.

US households have indebted themselves on the collateral of their homes to an unprecedented extent. Now they have negative equity in the properties and the banks, hungry for liquidity, are about to come knocking with a margin call.

Credit card debt and car loan delinquencies are rising rapidly.

This will be much worse than the S&L scandal.

However, there are many ways in which you may profit from your optimistic forecast. And there are plenty of pessimists out there for you to profit from. At the moment it’s a seller’s market for optimism.

Just in the Age today we have headlines of doom and gloom while Tim Colebatch states that interests rates may need to raise. In 1992, Australia had 25 unemployed for every job vacancy. Today this ratio is edging down towards 2.5 unemployed for every job offering — increasing pressure on wages and interest rates………

One reason why employers have problems in filling vacant jobs is that Australia invests very little in retraining its unemployed with new skills. Organisation for Economic Co-operation and Development figures show Australia is near the bottom of the rich world in spending on training for the unemployed.

So there you go. The previous Liberal government inaction may cause lots of headeches for the Labor government.

Don’t those unemployment stats suggest that we’re just short on people to do the work, rather than a shortage of people skilled to do the work? After all there is no qualification in those statistics about having people capable of doing the work.

http://blogs.news.com.au/news/blogocracy/index.php/news/comments/banks_and_account_portability#26069

Aren’t the banks doing the work of the Reserve Bank here?

If they raise the rates themselves, wouldn’t this apply the same monetary policy on the economy as a general rate raise from the Reserve Bank?

Yes, but they are doing it for different reasons.

Commercial banks are attempting to maximise return on investment and they are attempting maximise market share. A moment’s reflection will indicate that these two ambitions, while not contradictory, set opposite priorities. Thus, if a bank vastly increases the interest it charges on old loan and new loans, their market share will walk out the door.

Central banks have priorities of

1. providing an environment for the orderly transaction of finance
2. handling the financial requirements of government
3. preventing either too much inflation or too much deflation.

Central banks don’t aim to make a profit for themselves. (However, it should be noted that the RBA has in the last several years been a nice little earner for the Treasury by virtue of some quite canny open market operations in foreign currencies.)

Often the priorities of the commercials and the central banks are at odds.

Commercial banks see opportunities for profits but the Central Bank ups official interest rates, suppressing expansion.

And today’s solvency crisis is another case in point. Central banks have flooded the markets with liquidity in order to facilitate the revivification of capital markets. But the big banks are so suspicious of each other because they suspect that their competitors may actually go belly up that they are reluctant to lend money to each other. So these banks are hoarding Central Bank-created credit against the possibility (I’d say likelihood) that their assets are going to be severely written down in value.

Those write-downs will signify the next big stage in the unravelling of the asset bubble that began in the early 1980s.

If they raise the rates themselves, wouldn’t this apply the same monetary policy on the economy as a general rate raise from the Reserve Bank?

As someone who was looking forward to the end of the Howard government all this doom and gloom does worry me. It would be a cruel twist of history if the Rudd Labor Government gets blamed for a worse Australian economy basically for events outside its control. I guess many voters just reacts to their own situation and Howard did govern in a very auspicious world economic situation. He took the credit (but then which government wouldn’t).

Just in the Age today we have headlines of doom and gloom while Tim Colebatch states that interests rates may need to raise. In 1992, Australia had 25 unemployed for every job vacancy. Today this ratio is edging down towards 2.5 unemployed for every job offering — increasing pressure on wages and interest rates………

One reason why employers have problems in filling vacant jobs is that Australia invests very little in retraining its unemployed with new skills. Organisation for Economic Co-operation and Development figures show Australia is near the bottom of the rich world in spending on training for the unemployed.

So there you go. The previous Liberal government inaction may cause lots of headeches for the Labor government.

That is true only while the commentariat regards the headline rate(s) as somehow under the control of the government. The more we see of these non-lockstep moves the less that is likely to be the case.

I agree, Andrew, but it’s how the public perceives it that’s just as important. Note that the Libs are already blaming the government for what the banks are doing.

I’d be interested in an expansion of your point about stopping targeting rates… how would they then influence an inflation target or would it be something that would be supposed to be indicative for other actors?

However, it is also possible to be quite conservative and risk averse in the futures market as well, but that takes a little more knowledge than a vanilla call option.

The option strategy is tailor-made to hedge against interest rate risk. It is less risky than mortgage insurance.

How would they do that accurately anyway – given that tax cuts come from the government and superannuation payments are made by the employer. Wouldn’t we end up with rather strange percentage rates of superannuation contributions which are dependent on your income?

Well, yes “how?” is a very good question. Perhaps that’s why governments haven’t done it before. They do make co-contributions already, based on the employee’s contributions. They also fiddled with super tax-rates according to income thresholds, so they might well have most of the information they need to administer such a scheme.

I know the super industry was very unhappy about the cost impost of introducing said tax. I doubt they’d howl about any additional ones if they knew great wads of cash were heading their way.

How? Steal an idea from New Zealand called and increase everybody’s default superannuation contribution. If people want to keep their superannuation contribution as it is, they have to go to the effort of filling out a form to say so, otherwise it gets increased.

Most people won’t bother to fill out the form; hence, their superannuation contributions will go up and the money from tax cuts doesn’t go into fuelling consumption. Everybody’s happy.