Saturday, March 30, 2024

ALTERNATIVE VIEW: Politicians, bankers avoid crash

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The state of the New Zealand economy worries me. 
Reading Time: 3 minutes

The dollar is too high compared with the United States and Australian dollars and house prices are still going gangbusters.

That general situation and the housing bubble, in particular, reminded me of the story of The Big Short written by Michael Lewis. It has since been made into a movie.

The Big Short details the events leading up to the 2007 global financial crisis (GFC) and goes into great detail about what happened and could happen again.

It’s all about American housing loans and details the arrogance, greed and stupidity of the American financial system.

Simply, borrowers were encouraged into housing loans by a low interest rate for two to three years.

After that time the interest would go up to a much higher rate and the borrowers, surprise, surprise, couldn’t afford to pay their mortgages.

In the US, if that happens, a borrower can just walk away from the property and leave it to the organisation holding the mortgage.

The mortgage business was huge with half a trillion dollars in new loans every year.

Some of those loans were on mobile homes or caravans that would decrease in value.

The book quotes the case of a Mexican strawberry picker who spoke no English and had an annual income of US$14,000. He was given US$724,000 to buy a house.

To be creditworthy a person could borrow $50,000 today and pay it back tomorrow. That indicated they were a good credit risk.

The fact is that the entire system was corrupt but, as with Auckland house prices, values kept increasing and everyone was happy.

Bankers were issuing loans to people who were unable to repay them.

They then packaged those loans and on-sold them, often to pension funds.

Those ordinary workers who supported those funds put their savings on highly credit rated but worthless products.

The superannuation funds were required to invest only in AAA credit rated products and, believe it or not, that’s what the mortgage bonds were.

The actions of agencies Standard and Poor’s and Moody’s were described as being between incompetence and fraud.

Enter the short which is an inexpensive way of betting a commodity will reduce in price without actually owning it and profiting when it does reduce.

A few smart investment people figured the mortgage bond market was unsustainable and shorted it.

In some cases they made hundreds of millions of dollars from an original investment of just a few million.

Some financial institutions even shorted the loans they’d on- sold to unsuspecting investors.

Shorting was inexpensive to do because of the AAA rating.

So, the financial sector was out of control, the ratings agencies were totally out of their depth and America was enjoying a massive real estate boom.

The inevitable crash happened and became the GFC.

The American government bailed out the financial sector to the immediate tune of US$700 billion.

No banks went under, no banker went to jail.

According to the book that US$700b was equal to the combined annual budgets of agriculture, education, energy, homeland security, housing, urban development and transport.

The money wasn’t even an investment. It was a gift to the financial sector from the American government meaning the American people – those who had been screwed by the banks.

Further, the government ensured no-one could sue the rating agencies.

The end result was that US$5 trillion disappeared, 8m people lost their jobs and 6m lost their homes.

That happened because of a cavalier financial sector and incompetent rating agencies.

It was the average person who had to pay, as they always do.

That could happen in NZ but not as dramatically and for different reasons.

The Government wants to see immigration craziness continue because it is the only factor in our GDP growth and wealthy Auckland house owners inevitably vote National.

The issue is that many pensioners are moving to the provinces because they can’t afford to stay living in Auckland.

Many highly skilled workers don’t want to move to Auckland because, even with their high wages, living there is too expensive.

We read that a number of skilled Auckland workers have moved to Wellington because of the cheaper properties there.

In addition, with technology, many companies don’t have to stay Auckland based.

I’d add that there’s no use building a lot more houses there as the infrastructure can’t handle the current population.

With air fares reducing commuting to Auckland from New Plymouth, Palmerston North or Napier has become a lot cheaper.

So, I believe Auckland property prices will drop and when they do it will be your average punter who will pay.

The banks, as always, will be laughing and politicians, like Nero, will continue their fiddling.

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