Wednesday, 8 October 2008


This Aussie woman writes wise words

This is a sample of Janet Albrechtsen's very well read column in The Australian

THE Prime Minister is back in the business of building up myths to justify policy intervention. In 2006 he was peddling the myth of “brutopia” under John Howard. It was a flagrant falsehood but it won Kevin Rudd the election.

Now Rudd is using the financial meltdown in the US to flog a nightmare on Wall Street. It’s all the fault of “excessive capitalism” and unregulated markets, home to the 21st-century children of Gordon Gekko, he says.

Rudd’s myth-making is dangerous if it presages an era of misconceived regulation. Alas, listening to and reading some of the local reaction to the $US700 billion ($973 billion) bailout in the US is to step into an uninformed parallel universe.

On ABC radio last Thursday afternoon, Jennifer Byrne offered her take on the crisis. She was furious about the bailout, given that chief executives had pocketed millions of dollars. Sensing an opportunity to push their anti-market ideology, the uninformed have a simple and alluring solution: rein in unregulated greed to build a more socially progressive world.

But here’s the rub. Socially progressive regulation caused much of the mess that has enveloped the US. In pursuit of the perceived social benefits of home ownership, the mortgage dice has been ridiculously loaded in favour of American borrowers. The American dream of home ownership for all is a fraud. Not everyone can own a home. But politicians pimped this dream, creating an unsustainable mortgage industry whose collapse is surprising only because it didn’t happen sooner.

The US mortgage industry will not recover, or deserve to recover, unless someone somewhere is prepared to challenge that politically unpalatable reality. Eager law-makers in Washington are as much to blame for the financial crisis as the unregulated suits on Wall Street.

Wrong regulation, rather than deregulation, is the problem.

Those genuinely interested in understanding the causes of the meltdown could start by comparing the US mortgage industry with Australia’s. The stark differences explain why our central banker, Glenn Stevens, said a few weeks back that Australian banks were “light years away from what’s happening in other banking systems around the world”.

And why Australia’s four leading banks sit among the 20 AA-rated banks across the globe. And why the most recent International Monetary Fund country report concluded that Australia’s banking sector was sound, with stable profits, high capitalisation and few non-performing loans.

Unlike the situation in Australia, the American dream was founded on a house of legislative cards that deserved to topple. Take non-recourse mortgage loans. When Australians borrow money to buy a house, they know that if they default and the mortgaged property doesn’t cover the debt, they will be responsible for the shortfall and the lender will chase them for it.

It’s a neat way of reminding Australians to borrow responsibly.

In the US, where populist post-Depression laws in many states have mandated loans be non-recourse, the opposite is true. Americans can take out a mortgage loan more or less as a one-way bet.

If you can’t afford the repayments and can’t refinance, you just send the keys back to the bank. The banks collect the jingle mail. Borrowers wipe their hands of liability. So, naturally, an American in financial strife will pay off debts that carry personal liability, such as credit cards, before they pay off their mortgage.

The rest of this very good summary of the financial ills of America is here

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