dd @ 19 – reports are that some of banks are no longer offering products like zero deposit loans. IMO a good thing, but its a sign they are removing the riskier products they offer.

Fozzy @ 15 – that may be true, but it would also mean making the banks take higher risks than they otherwise would, increasing the chances that one of them would fall over. In the case of the CBA if it was fully government owned that would mean the tax payers would be up to cover all the losses like has happened in the past with failed government owned state banks. Probably would happen to a certain extent with private banks too with deposit guarantees.

(you don’t need to loudly tell everybody that our banks are better off than other banks if in fact they are)

You do if you want to reduce the impact of an unnecessary run on the bank.

the crisis has saved the RBA from embarrassment at how dumb their policies were in the last two years.

I don’t think their policies were dumb at all. In a time where credit was being recklessly handed out to anyone and everyone, they moved to reduce this flow and limit the damage it was going to cause the Australian economy. Can you imagine how much higher housing prices would be, and how much bigger the bubble to burst, if interest rates had stayed as low as they are going to be?

I reckon getting a new loan out of them in the next year will be tough.

The key however is market expectations. Despite what the majority of posters here would liketo think, the market is king. If the RBA strays too far from what the market expects then the unintended consequences can be severe. That said, acting outside of market expectations is also the best way to achieve some desired outcomes, occaisonally.

There is no “cookie-cutter” solution.

Andrew’s right – the crisis has saved the RBA from embarrassment at how dumb their policies were in the last two years. All the high interest rates did was suck in hot money through the carry trade, which of course has promptly fled (causing maximum disruption to our own money markets) as overseas’ investors fear overtook their greed.

And I really can’t understand why the RBA is dropping rates in tranches like this. They must know that rates will have to be way, way down next year, so why not do it right now in one hit and get any stimulatory effect out there as soon as possible?

Those who have a high mortgage get bailed out with a interest rate so low it looks like free money. As joe2 said, its with a transfer of money from those who played it sensible and saved cash to those who played fast and loose.

When a dirt-based economy busts, it busts big. It should be noted though, that the crash in the AUD means the price we get for our dirt in AUD terms hasn’t fallen near as fast. Mind you, the AUD seems to have bottomed now, and I reckon commodities have a lot further to fall.

The other relevant factor is that a lot of commodities we sell (iron ore is one example) are not priced by the world price at the point of delivery but set by contract well in advance. We’re still being cushioned by the fact that a lot of those contracts were negotiated last year. It’s highly likely that the Japanese and the Chinese will take us to the cleaners in contract negotiations on price for 2009, if that hasn’t already occurred.

It was jacking up rates because of high inflation driven by petrol and food. The economy seemed to be going well – but that was only because WA and Qld were powering ahead on the resource boom. Food and petrol inflation cannot be controlled by interest rates – one was a product of the drought, and the other a product of global oil prices.

So the RBA kept stamping on the brake – just before the world economy crashed. In fact – the credit crisis has probably saved it from severe embarassment. It can now claim the looming recession is not their fault!

In fact a tranfer of wealth from those with funds invested in term deposits etc to those with a mortgage and the banks, creaming, no matter which way the wind blows.

Many self and part-funded retirees have already been hit hard by the stock market crash. With that and the interest rate fall there will be many forced to claim full pensions and thus more strain on taxpayers, generally.

Carbonsink: Japan’s malaise was exaggerated…

Er, I didn’t say anything about Japan that was Spriros.

I just banged on about how fantastic Kohler’s piece on CDOs is and how EVERYONE SHOULD READ IT. BTW, subscription to Biz Spectator is free, and no, I don’t work for them.

Not least because many banks only revise automatic payments on an annual basis, as I just found out. I had to explicitly request that our payments be reduced to match the new interest rate – otherwise it wouldn’t have been done until May next year. Of course, what that means is that we’re now paying down less principal, so the loan will take longer to pay off, but at this point it seemed a sensible decision.

This doesn’t make Reserve Bank officials incompetent. In normal times they are extremely competent. But what has happened in the past 18 months has not happened before in their life times, if ever.

What’s going to happen when they cut interest rates to zero and the economy is still in a hole? That’s the story of Japan for most of the past 20 years. If it can happen to them, it can happen to us.

None of this is to discount the risks that Australia faces because of reduced prices for our dirt.

When a dirt-based economy busts, it busts big. It should be noted though, that the crash in the AUD means the price we get for our dirt in AUD terms hasn’t fallen near as fast. Mind you, the AUD seems to have bottomed now, and I reckon commodities have a lot further to fall.

Can I put in another plug for this fantastic piece from Kohler today. Its required reading for everyone I reckon: A tsunami of hope or terror?. Please read it!