Building the mortgage revolution

Most Australian households take home less than $50K a year. That’s not average wages, that’s average income per household. There are plenty of households, and people, that don’t pull a wage. See ABS stats if you’re curious.

Despite this, the vast majority of those households manage to acquit themselves financially. It’s called surviving, and the alternative is homelessness.

This is in stark contrast to the recent track record of the well-rewarded employees of some of the world’s largest banks during the global financial crisis.

I don’t capitalize the global financial crisis, because logic is hardly a proper noun.

It’s a banking crisis. It started when a whole bunch of people, a lot of them coked to the eyeballs, played pass-the-parcel with a whole lot of other people’s debt. They bundled these debts up and sold them as a bet – that the debts would be paid off.

Some very large banks bought into the bet and did their dough big time.

Corporate culture is wholly set against bad news. Bad news meant the sack, or at best, a transfer to somewhere harmless, and less lucrative. At the very least you were risking your bonus, which, as IPO shares picked up in contra deals with institutional investors – our superannuation, were almost certainly going to be a cashable asset, at a profit; certainly worth more than $50K a year.

So we leave a bunch of overpaid junkies in charge of this section and they all smile and nod and rake in the cash – then it all goes to shit.

The commodity was fundamentally flawed. It came from a drive to raise a whole pile of debt, and pass it on. It was a scam; a Ponzi Scheme (now there’s a proper noun!); a screw-up, and most certainly a poorly researched asset.

It came off the back of an explosion in credit for people previously considered a marginal security proposition, which morphed from easily available credit cards to mortgages on marginal housing acquisition; marginal in the sense that it relied on a housing bubble for people to make money and repay their mortgages. Joe Bageant was writing about it 2005. It was hardly a secret.

So the US housing bubble bursts and a chunk of assets are worthless. The debtors walk away from the wreckage and move to a trainer park outside Toledo. The banks stop giving each other money to get people into debt to make money to get people into dept to make money..,

As Kurt Vonnegut Jr. was wont to say: and so it goes.

In Australia we have four main banks. Outside of them there are a range of outfits from credit unions (some of which have aggregated over the last decade), community banks (which are more than Jimmy Stewart in It's A Wonderful Life telling everyone that their money was invested in their lives), to payday lenders and swarthy chaps in dark cars in supermarket car parks.

When the money dried up internationally the Rudd Government moved quickly to shore up the four main banks, the spine of Australia’s financial system. Our money.

Some people thought we would hit the wall hard, Steve Keen the most celebrated example. Australia was a country that has slashed employment in traditional primary industries, let its manufacturing industry roam free across Southeast Asia and kicked on with digging up rocks and a service economy which relies on the money churning around.

The Australia’s big four banks injected a lot of money into the Australian economy by borrowing quick money, and lots of it, and lending it to people. That was where the American banks came in. Problem was the American Banks had run out of dosh. Unless the Australian banks got money, and got it fast, the whole joint was going to end up like a Steinbeck novel.

The Rudd Government, or more accurately Treasury, put together a plan that was equal parts devious and genius.

The Rudd government couldn’t give the banks cash, because this was a free-market economy and the banks were at the epicenter of free-enterprise through offering credit. At the very least they were creating money that people needed to pay the bills and make Gerry Norman richer, etc.

The government gave the banks a AAA credit rating, underwriting them and making them a safe haven for what money was still in circulation internationally, which was still substantial despite its epicenter, Wall street, watching its assets diminish daily.

And they gave a lot of money, something around the size of the entire NSW budget, to households.

Ken Henry said go big, and go households. And they did, and why wouldn’t they, politicians love to spend money, but for the last thirty years they’ve been no good at raising it.

Most Australian households earn less than $50K a year after tax. They get along by running a continuing line of credit with financial institutions. In recent years it has ballooned to over 100 per cent of disposable income. So the households gave it to the banks.

We are a service economy. A lot of people run around in white vans with ladders, and utes, while a whole pile of invisible others cram into trains and buses from 6am onwards in our capital cities. It has been pretty much business-as-usual for this part of the economy. The concerns they had in 2007 are pretty much the same concerns they have now.

The Rudd government decided to call this Keynesian act of largesse to the major banks names like The Building the Education Revolution, and the Home Insulation Scheme, and so forth. There’s probably a pile of others – all with the same object, getting people who have mortgages paying their mortgage. By a good old-fashioned bit of pump priming, jobs for blokes with utes and ladders popped up like mushrooms.

Even those that don’t have mortgages have helped by creating a jobs boom at our retail oligopolies. And those people with the name badge at K mart certainly have a mortgage, or want one. You must really need money if you’re prepared to work retail for it.

This explains why the Rudd government has seemed distracted about the detail of the implementation side of all this spending, because its not about the project – it’s about making sure the money go round continues, with the bottom sink, or sump, being the banks.

It’s the reverse trickle down effect and it has worked a treat. It’s objective was to shore up the financial sector, and its done that in spades.

Meanwhile, the structural problems – infrastructure bottlenecks, skills shortages, overpriced housing, bubble merrily along as if nothing has happened.

And for people on $50K a year and less, nothing has.