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blue skies

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  1. We are still in the eye of the GFC storm: Gottliebsen

    Wednesday, 30 June 2010 09:31

    Robert Gottliebsen

    Despite a late US Dow index rally, last night was among the more serious sharemarket falls we have experienced since global financial crisis plunged markets in 2009.

    We are well above the dismally low levels witnessed on equities markets during the crisis, but last night you could see fear in almost every corner of the world. The forces that are behind each of the fears are probably manageable, but when they occur together, as what happened last night, they triggered waves of selling, including a savaging of the Australian dollar.

    And of course Gillard's mining tax dithering is rekindling global doubts about the sovereign risk of this country which threatens to put Australia and our high house prices in the eye of the storm.

    And for most Australians, the global wave of selling will be reflected in our share prices levels at June 30, which means that the value of superannuation funds will be hit on balance day. Many retirees will have their income reduced for the year ahead.

    Let's look at some of the fears that are plaguing the markets. This sell-off started yesterday in China, and initially the analysts claimed that it was merely the institutions raising money for the $US20 billion Agricultural Bank of China initial public offering. It may have been partly that, but the fall in China's sharemarkets also reflected the fact that China's Conference Board corrected its growth index for China from a rise of 1.7% to just 0.3%.

    Clearly China is slowing much more rapidly than expected, and as a result the bad property loans that are in its banking portfolios will weigh down future growth.

    In the past China has always managed these issues and I think it will do it again, but the markets fear there will be much more pain than had been anticipated.

    Meanwhile, in Europe the big banks have been playing the stupid game of borrowing from depositors and then investing in the sovereign debts of European countries that can't pay.

    Tomorrow the banks are supposed to repay €442 billion in emergency loans but they almost certainly will have to be bailed out again. Fears of bank collapses are rife. On top of this dire outlook, Europe's austerity measures will bring on recessions in countries ranging from Greece to the UK which will make it even harder for the banks. And the strikes in Greece will be repeated in many countries, which could make the spending cuts impossible to deliver.

    In the US they are helped because in a crisis money flows to the world currency, so the US dollar rises. Nevertheless, there are still chronic housing problems so consumer confidence is depressed and the US economy is still living on the old stimulus packages. Accordingly Wall Street's earnings estimates look too optimistic.

    And finally the falls in the markets are triggering selling from chart-based investors which multiplies the fear and concern.

    Allaying all of these fears will require a lot of work on the behalf of Europe, China and the US.

    And of course when it comes to Australia, we must face the fact that our enormous level of overseas bank borrowing is going to be difficult to sustain at current interest rates. As I keep pointing out, Australian debt, including bank debt, is in a similar range to Italy and not far behind Spain when related to GDP.

    If Gillard bungles the mining tax issue in this global environment then, the blow to Australia's sharemarket and the impact on the cost of Australian bank overseas borrowing will be severe. In turn, this will hit house prices.

    Let's hope someone on cabinet looks at what is happening in the rest of the world. The latest opinion poll from Morgan shows voters are wary of Julia Gillard and clearly fear she will not understand the danger the mining tax poses to our global sovereign risk rating and our house prices given the current fear in the world.

  2. New home sales slump, prices stagnate

    By online business reporter Michael Janda

    There has been a fall in value of homes outside major cities.

    There has been a fall in value of homes outside major cities. (ABC News: Giulio Saggin, file photo)

    Two sets of private sector data show the Australian housing market is continuing to cool, both for new dwellings and existing properties.

    The widely watched RP Data - Rismark Home Value Index showed a rise in city home prices of just 0.5 per cent (seasonally adjusted) in May.

    While national city house prices were still up 12.1 per cent over the past 12 months, the rate of growth has slowed dramatically over the past three months with the index rising a modest 1.9 per cent.

    Rismark's managing director Christopher Joye says weak home price growth is likely to continue for the rest of the year.

    "With disposable household incomes forecast to increase by only around 5 per cent in 2010, we have long predicted subdued dwelling price performance for this year," he noted in the report.

    Homes outside the major cities actually recorded a fall in value, dipping 0.2 per cent, and are up a much more modest 5.8 per cent over the past year.

    Christopher Joye says this is a result of supply and demand factors.

    "The demand for homes is stronger in the major conurbations whereas the supply of new dwellings has been weak," he added.

    "In comparison, the smaller metro and regional markets have relatively less demand combined with much more elastic housing supply."

    The Canberra home value index increased the most over the past three months, rising 3.7 per cent, while the Perth index slipped 2.1 per cent.

    New home sales slump

    The weakness in real estate has not been limited to existing dwellings, with new home sales slumping by 6.4 per cent in May.

    The Housing Industry Association's report is based on a survey of Australia's major residential builders, and its chief economist Harley Dales says higher interest rates are having an impact.

    "There is no sustained upward momentum in new home sales in 2010 because higher interest rates and concerns over the threat of further rate hikes are dampening demand," he noted in the report.

    "Meanwhile, supply side obstacles, including a lack of affordable land and tight credit availability for residential development, are weighing down considerably on the new home building sector."

    Detached home sales increased 13.6 per cent in New South Wales and 2.1 per cent in South Australia, but fell 8.5 per cent in Victoria, 12.3 per cent in Queensland and 10.7 per cent in Western Australia.

    All aboard the property gains express,

    Next stop by Chrismass -10%

    The train may be delayed (for the next 10 years) but purchase your tickets now!

  3. Get a load of the following ,

    Want a bubble to worry about? According to Macquarie Bank interest rate strategist Rory Robertson, forget Australian house prices and US Treasuries, it's gold that looks due for a pop.

    Fresh from winning his bet on Australian housing prices, Robertson is taking on a much more rabid bunch in the gold bug faithful - a broad church that ranges from the inflation-fearful to the Armageddon brigade forecasting the end of civilisation as we know it.

    But Robertson argues that most people now betting on gold going up are doing so just because gold has gone up - the very stuff of bubbles. Rather than worrying about US Treasuries or Australian house prices (he doesn't see a bubble in either of those assets for fundamental reasons), punters should be sceptical of gold around US$1,250 per ounce, almost quintuple its early 2001 price of US$260.

    ''It is the very nature of bubbles that drives prices well beyond what most observers see as reasonable. Accordingly, the price of gold over time could jump to multiples of its current elevated price, before reversing,'' Robertson admits in a ''Bubble Watch'' report to clients.

    See nothing to worry about down under "we are different!"

    As if!

  4. "The position he once held as breadwinner has been taken over by taxpayers. If they ever dare think about it, they are entering into an abyss of a life on benefit, trying to make ends meet with petty crime and drug dealing."

    Hmmmmmmmm just were does a lot of tax come from ? Smokes,Grog and gambling.

    All the money workers save gets taken back through taxation.

    Talk about double standards.

    Give up all hope and you will feel better.

  5. There is no GFC…

    Published in June 27th, 2010

    Posted by Steve Keen in Debtwatch


    One of the unexpected things I’ve learnt in Boston is that the Global Financial Crisis is not called the Global Financial Crisis in America–and therefore the TLA of the GFC has no meaning here.

    Instead, in America this might be The Crisis That Has No Name (TCTHNN), because they don’t call it anything at all: it’s just how the economy is right now.

    Australians, it seems, are the ones who invented the moniker GFC as a way of describing what they think they don’t have to understand. Over here, where it is actually happening, it is just the day to day reality that must be contended with.

    Even more peculiar is news from some finance sector insiders here who have been in touch with Australia’s RBA and Treasury, that they describe it as not the GFC, but the “North Atlantic Financial Crisis” (“NAFC”)–arguing once again by a label that this crisis is peculiar to the US and Europe.

    Apparently when asked what Australia has learnt from the crisis, the answer was often “Nothing, because it didn’t happen here”. The Lucky Country, it seems, is seen as immune to the crisis by its economic managers.

    I know that I’m more likely to be spoken to by Bears in Boston than Bulls, but even the Bulls find this Australian complacency–even smugness–about the crisis bemusing. One insider I spoke to–admittedly a Bear–commented that he found it so annoying on his last visit to Australia that he’s sworn never to return.

    Good riddance might be the attitude of some; who needs the negativity? Well, we might, if the causes of the crisis are not in fact peculiar to the North Atlantic.

    For though the GFC might have had very little bite in Australia to date (and I admit that the mildness of the downturn to date in Australia did surprise me) we can only kiss it goodbye if it was really just a Northern Hemisphere Black Swan. If instead its causes are more general, then as the US now starts to fear a DDR (Double Dip Recession), Australia might find that it’s not so Lucky after all.

    Here there is one indicator that I think explains why Australia has not suffered as badly as its North Atlantic counterparts, but also why there will be no easy recovery: the contribution that rising debt makes to aggregate demand. Though I am a critic of the extent to which our economies have become debt-dependent, there’s one unmistakeable fact about our post-1970 recoveries: they have all involved a rising level of private debt compared to GDP.

    I’ve recently done a comparison of how the US today compares to the US in the 1930s on this front, and the results–published in an earlier post–were intriguing.

    The US was actually suffering a more severe private sector deleveraging this time than in the 1930s: in 1928, rising debt was adding about 8% to the level of aggregate demand. That is, demand was 8% higher than it would have been had debt been constant. By the depths of the Great Depression, falling debt was making aggregate demand about 25% lower than it would have been had debt been constant.

    The story for today is more extreme: at the end of 2007, rising debt made aggregate demand 22% higher than it would have been had debt been constant–so rising debt today was almost three times as important in our pre-GFC boom as it was in the 1920s. Two and a half years later, falling private sector debt was reducing demand by almost 15%. This was not as bad as the worst levels of the Great Depression, but worse than in 1931, which was the comparable time from the beginning of the downturn in private debt.

    The positive difference between then and now in the USA turned out to be the contribution to demand made by rising Government debt. The government-financed proportion of demand in the Great Depression was trivial two years into the crisis, and only became substantial–at about 7.5% of aggregate demand–three years in. In contrast, government spending is making aggregate demand almost 13 percent higher now. But even then, the USA is still deleveraging.

    That’s the comparison the the USA today with itself 80 years ago; what about the comparison of the USA today with Australia today? The chart below provides it.

    Firstly, Australia is running a couple of months behind the USA in the crisis. But that’s minor compared to the difference in scale. Private debt added slightly less to demand in Australia during the boom times–a maximum of 18.75% of aggregate demand was financed by private debt, compared to over 22% for the USA. But deleveraging hasn’t even begun here: the private-debt-financed contribution to demand flirted with zero in late 2009, but has been positive throughout. Rising private sector debt today is adding about 2% to aggregate demand. Rising government debt is adding about another 2 percent on top of that.

    So Australia hasn’t yet delevered–in contrast to the USA. Does that mean we have a “get out of the GFC Free” card? That depends on whether we’ve avoided what caused the GFC in the first place–a runup of excessive private debt during a speculative bubble.

    There the answer is equivocal. While we have substantially less debt than the USA (though some correspondents have argued that the RBA figures I use understate the level of finance sector debt here), our debt to GDP ratio is 90% higher than it was back in the Great Depression.

    So we have less deleveraging potential than the USA, and we haven’t even begun to do it yet–which is why the GFC has appeared to be a North Atlantic phenomenon. And if we can prevent deleveraging, then we won’t see the depths of the downturn that the North Atlantic has seen either.

    But there is a downside to no deleveraging. We have a household sector that is even more indebted than its US counterpart. The odds are that this sector will be debt-constrained in its spending, and the recovery will be stalled as a result. So the GFC is not entirely a NAFC.

  6. The Big Picture, Part II: Following the Worst Crisis Since the Great Depression

    by Bryan Rich 06-26-10

    Bryan Rich

    Last week, I laid out some important historical context for establishing a solid perspective on the big picture — a broad view of where the global economy stands and what we should expect going forward.

    Today, I’d like to continue with the second part of my analysis.

    As I said last week, history shows us that financial crises tend to be followed by sovereign debt crises. History also shows us that sovereign debt crises tend to lead to currency crises.

    I discussed the stages of a developing sovereign debt crisis — and how it’s playing out. And using history as our guide, it’s reasonable to expect a currency crisis will follow.

    There were three memorable currency crises in the 1990s, all of which included a fixed exchange rate system that was under attack. But regardless of the type of currency policy (fixed or free-floating or a monetary union), a currency crisis is broadly defined as a loss of confidence in a country’s currency. Something we’ve seen very clearly in recent months with the euro.

    For a reference point on how these trends unfold, there’s a good academic study from MIT on historical currency crises that lays their progression out like this …

    Three Stages of a Currency Crisis

    Stage #1: Loss of Confidence

    The number one cause of a currency crisis is when investors flee a currency because they expect it to be devalued.

    Here’s the current situation …

    When the euro zone stepped in and threatened to cough up $1 trillion dollars in an attempt to save the euro monetary union, it was a conscious decision to devalue the euro.

    Why did they do it?

    The euro zone has committed to do whatever it takes to keep its members afloat.

    The euro zone has committed to do whatever it takes to keep its members afloat.

    They had no choice!

    The European banking system was, and still is, too exposed to the sovereign debt of the euro zone’s weak spots. An imminent default of a euro member country would have meant a crushing blow to European banks and likely another wave of global financial crisis — this time worse.

    Here’s why: Last year the European Central Bank was flooding the banking system with unlimited loans for a paltry 1 percent. What did the banks do with the money? They bought government debt — specifically, debt from the PIGS (Portugal, Ireland, Greece, Spain).

    In all, European banks own $1.5 trillion worth of debt from the fiscally challenged countries of the euro zone. As a result, politicians in Europe felt they had their backs against the wall and their response was one of “all-in.”

    All countries involved in the monetary union went headlong into the crisis because they had no choice. The strategy: Buy time and devalue the euro.

    Stage #2: Herding

    When it’s thought that investors are moving out of a currency, others follow. This is typical “herding” psychology.

    Here’s the current situation …

    Short positions in the euro hit an all-time high.

    Short positions in the euro hit an all-time high.

    Every week the Commodity Futures Trading Commission releases its Commitments of Traders (COT) report, which tracks the positioning of market participants. While it’s just an indication of how the general market is positioned, it’s a great reference point.

    The recent reports provide an excellent example of this herding mentality that tends to be associated with currency crises. I’m talking specifically about the euro.

    In fact, the uncertain outlook has triggered a massive wave of short positions in the euro — the largest in the currency’s 11-year history.

    When the market is heavily positioned one way — and the fundamentals support it and an intentional devaluation appears underway — big institutions have to react. Put simply, they have too much to lose by getting caught the wrong way.

    Given the euro is the second most widely held currency in the world, there is a lot of unloading that could take place …

    For example, Iran’s central bank has announced they will be diversifying euro exposure — trading into gold and U.S. dollars. And China and the UK have shown a significant increased interest in owning U.S. dollars as opposed to euros.

    Stage #3: Contagion

    The next step is contagion. And contagion is a phenomenon in which a currency crisis in one country triggers crisis in other countries with similar weaknesses.

    Here’s the current situation …

    Dubai's debt problems were just the beginning of the global sovereign debt crisis.

    Dubai’s debt problems were just the beginning of the global sovereign debt crisis.

    The catalyst for sovereign debt crises: Bloated debt and deficits. And as I’ve said, sovereign debt crises tend to lead to currency crises.

    You don’t have to look far to find countries that carry bloated debt loads and deficit burdens.

    Over 40 percent of the world’s GDP comes from countries running deficits in excess of 10 percent of GDP — a level proven to be dangerous territory.

    We’ve already seen the sovereign debt contagion. A crisis that started in Dubai now confronts Greece, Spain, Portugal … and will likely spread to the UK, Japan and even the U.S.

    It’s clear there are a number of reasons why global investors could lose confidence in currencies in this global economic environment. So a contagion of currency crisis is a reasonable expectation.

    The bottom line: The day-to-day ebb and flow of economic data and news can be distracting. That’s why it’s important, especially with all that is going on, to keep the big picture in perspective.

    History shows us that a global recession when combined with a financial crisis tends to stifle economic activity longer than normal recessions. History also shows us that financial crises tend to lead to sovereign debt crises, which tend to lead to currency crises.

    So with that in mind, it’s fair to say that a V-shaped economic recovery has always been very unlikely. What’s more likely is that we’ll see more shocks to the global economy, more challenges and more investors fleeing risky investments in favor of safe havens.



  7. Banks should help on home loans

    By Niamh Hennessy

    Saturday, June 26, 2010

    IF the Government and banks do nothing to help the 30,000 house owners who are having serious difficulties paying their mortgage it could cost more in the long run.

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    This is according to brokers and support groups who yesterday urged the Government to listen to the advice of the International Monetary Fund (IMF) and put a scheme in place to assist homeowners in arrears.

    In a review of Ireland, the IMF, which oversees the global financial system, said now that the banks have more capital they could absorb the initial costs of some form of assistance for those who are finding it difficult to pay their mortgage.

    Director general of the Free Legal Advice Centre (FLAC), Noeline Blackwell, said a lot of people can’t manage their mortgage payments and they are not getting the support they need.

    She said very little has been done to help the 30,000 people in "serious arrears" with their mortgages.

    "It is people who are unfortunate enough to be in real trouble because they bought homes at the height of the property boom when they were told it wasn’t the height.

    "The fact that personal debt is at a very serious level in Ireland has not yet been addressed by the state and it’s not enough to have good intentions about that, real efforts have to be put in place to do that now," she said.

    Karl Deeter, of Irish Mortgage Brokers, said that every scheme has a cost and doing nothing for homeowners in trouble could end up costing more in the longer term.

    "There is a problem and we need to deal with it," he said.

    "What the IMF are doing is pointing out something that we have known for quite a while now," he added.

    Some of the proposals that Mr Deeter said the Government or banks could consider would be a sale and rent buy-back scheme or negative equity loans.

    This week the IMF said the transfer of loans to NAMA and the revised capital ratios imposed by the Financial Regulator had moved the banks towards normalcy, adding that a scheme to assist homeowners in difficulty is overdue.

    It said "narrowly targeted support measures for vulnerable homeowners would limit the economic and social fallout of the crisis".

    The IMF said that "with their bolstered capital, banks could absorb the initial costs, perhaps basing themselves on the welfare system to identify eligible beneficiaries".

    Read more: http://www.examiner.ie/business/banks-should-help-on-home-loans-123463.html#ixzz0rxI0hCq9

  8. Australia on the verge of property bubble crisis

    Dennis Pots Jun 23rd, 2010 Featured News, Finance, Photo Gallery. RSS 2.0.

    For the past 60 years, real estate prices in Australia have inflated drastically in comparison to other well-developed countries. The rise has been quite obvious from 1997 until 2004 but there has been a resurgence of property bubble from 2008 until 2010 where prices of real estate have already reached to unaffordable levels when compared to the average income of the general population. While the rest of the global piece have adjusted fairly to the current economic recession through the reduction of housing costs, Australia’ s real property investments have since doubled.

    Even the Australian government, through the House Price Index data released by the Australian Bureau of Statistics, admitted that prices in real estate properties at the country’s capital cities have risen to 20% in just 12 months. In Canberra for instance, average houses cost around 495,000 Australian dollars to date while prices in Melbourne have leaped 21% marking at $549,980 and increase of $116,917 from the previous year.

    Property bubble initially affects the local economy with an artificial rise of investments and spending in relation of real estate. But sooner or later, once the bubble reaches to its peak, Australia may soon suffer what several states in the United States have experienced particularly California and Los Angeles. When the United States’s housing sector bubbled way back five years ago (reaching its peak after four years) adjustable rate mortgages have adjusted in unprecedented levels as well. Borrowers have been convinced that they can eventually refinance their investments more favorably. This happened as loan packages, sales incentives and marketing benefits especially easy initial payment schemes have been introduced to the general market. But after a number of years when the bubble reaches its peak, prices of real properties begin to fall significantly and default payments and property closures rocked the volatile real estate economy. Easy credit condition pushed borrowers to access housing units drastically but when interests start to beset the average and low-earning population as other economic factors are beginning to affect them as well, repayment or real estate refinancing have become more difficult as they expect.

    Prices of housing units in the United States such as those in California at present have deflated to a median 40%. Coupled with other issues like unemployment, several of these borrowers have already been burdened with sky-rocketing debts that they can no longer pay.

    When the property bubble bursts, national economy will slump deep. For as long the bubble continues it will develop an artificial cloak to a volatile economy. In fact real property investments will increase figures in the domestic spending trends. But soon, investors in the Australian real property sector will suffer what their counterparts in past US property bubble–era have endured. For the promised superficial returns in the sector did not realize. And because real estate bubble have nowhere to go but to break apart, Australian economy will plunge deep into severe crisis that no monetary floatation can save.

    Average Australian population can no longer afford the current housing prices. No wonder why twelve out of the twenty unaffordable real estate markets in the world are in Australia with the remaining are located in parts of Ireland, Canada, United Kingdom and New Zealand. In Sydney, properties now cost more than nine times the average annual income of families. In Newcastle, Adelaide and the remote Darwin, homes will cost around 700% of the current average household income a year. Banks and other market players in the real estate have now been spreading a borrowing euphoria with mortgage terms citizens can never pay during their life’s term. In brief, Australian is now entering an era which the United States have now been on the tip of. What Americans have experienced in urban and peri-urban Los Angeles Australians will sooner embrace.

    But the fact that the prices of housing units in Australia are currently at unaffordable levels do not actually affect the real estate demand. The government, too, have pushed the button for artificial rise in real estate demand as incentives await those few early patrons. So expect investments in the sector will pull-in further. With mortgage conditions now available for low and average income earners to avail even if that will mean their lifelong term, many Australians are still persuaded to buying properties. They are caught in the belief that sooner their acquired properties will eventually increase in value and they can sell them at prices much higher than their mortgage payments- a belief that American history has already proven a sham. Sooner, what has become of Los Angeles and California will happen in Australia when the property bubble finally breaks out.

  9. The Biggest Shock of All

    by Martin D. Weiss, Ph.D. 06-07-10

    martin weiss The Biggest Shock of All

    Why did the specter of collapse in far-away Hungary help sink the Dow by 323 points on Friday?

    And why did similar scenarios in Greece, Spain, and Portugal trigger the Dow’s 1,000-point Flash Crash one month earlier?

    Is it because those countries are so important to the future of America’s blue-chip corporations?

    Not quite!

    It’s because investors around the world are finally waking up to some shocking realities:

    Shock #1 is that these countries are canaries in the coal mine — the first of many that could suffer the wrath of investors fed up with runaway deficits.

    Shock #2 is that, in the UK and the US, federal deficits and total debts, as a percent of GDP, are similar to — or even larger than —those of Greece, Spain, Portugal, or Hungary.

    Shock #3 is the recurring revelations of official deceptions. Investors suddenly discover that unemployed were counted as employed … that government debts were disguised as capital … that far bigger federal deficits were camouflaged. And it is these revelations that trigger the biggest selling panics, that are the final nail in the coffin for companies and entire countries.

    But Shock #4 is the biggest and most dangerous of all — not just random deceptions by a few companies or a few countries, but a global deception in the credit ratings that investors rely on for nearly ALL companies and countries!

    With gathering momentum right now, investors are beginning to realize they can’t trust the ratings issued by established agencies like Moody’s, Standard and Poor’s, and Fitch.

    But this is not merely bad news for the agencies themselves. It’s also a powerful force that can drive global stock and bond markets into a nosedive.

    When companies are downgraded, their share and bond prices automatically fall.

    So think about what it means when the grading system itself, encompassing thousands of ratings on trillions of dollars in securities, crumbles!

    It implies, in effect, a collective downgrade of nearly ALL the securities in the world — every rated corporate bond, municipal bond, and even government bond in existence!

    Needless to say, this transformation is too massive to happen overnight; it will progress in three phases.

    Phase 1 Widespread Loss of Confidence in The Leading Rating Agencies

    In the first phase, regulators, analysts, and investors begin to raise serious questions about the validity of ratings:

    Is a bond really triple-A? Or is the rating agency just maintaining the high grade because it wants to protect a good client that’s paying fat fees for its ratings?

    Beyond triple-As, what about the hundreds of thousands of corporate, municipal, and sovereign bonds that currently boast other “investment grade” ratings? How many are really speculative grade — junk — in disguise?

    Right now, Congress is asking these questions daily, attacking the rating agencies and getting ready to take action against them as part of the upcoming regulatory reform.

    And the assaults on the rating agencies by independent commentators are even more strident …

    In “Answers on Credit Ratings Long Overdue,” Andrew Sorkin of the New York Times puts it this way:

    “Raise your hand if you can explain why anyone still believes in credit ratings. … How could century-old institutions like Moody’s Investor Service give their triple-A blessings to subprime junk? … How can we prevent these institutions and their sometimes cockamamie judgments from endangering our financial system again?”

    image1 The Biggest Shock of All

    In his testimony before Congress on Wednesday, Warren Buffett (a major shareholder in Moody’s) said the agencies ought to be forgiven for their sins — particularly for giving junk mortgages triple-A ratings.

    But that same evening, on a Kudlow Report segment, “The Future of the Credit Rating ‘Cartel‘,” both the CNBC host and commentator said flatly that …

    The ratings issued by Moody’s and S&P are “garbage.”

    CNBC commentator Don Luskin added:

    “Shame, shame, shame on Warren Buffett for saying the rating agencies are to be forgiven. … We’ve got the Obama administration talking about bringing criminal charges against BP. Why don’t we bring criminal charges against the rating agencies …?”

    On the same CNBC segment, I was asked for my solution, which I’ll get to in a moment. But first, let me tell you my forecast regarding the next phase …

    Phase 2 Massive Investor Selling

    Here’s what I see happening …

    * Until and unless the rating agencies abandon their conflicted business model, extreme doubts about credit ratings will spread like wild fire.

    * Investors will scramble to reassess the risk in the trillions of dollars of rated securities they own.

    * They will decide, independently, what the true ratings should be, effectively issuing their own downgrades on thousands of securities.

    * And, they will SELL.

    This forecast takes no particular foresight. As illustrated by the recent barrage of attacks on the rating agencies, the global risk reassessment has already begun. And as illustrated by recent sharp price declines — in sovereign bonds, corporate bonds, derivatives, and common stocks — the selling has also already begun.

    Phase 3 Capitulation by the Rating Agencies

    My next forecast, however, does require looking further ahead:

    The day will come when, due to overwhelming pressure from regulators, investors, and even some debt issuers themselves, the leading rating agencies will have no choice but to cave in.

    Moody’s, S&P and Fitch will announce downgrades for hundreds of major debt issuers in one fell swoop. Or they will seek to wipe the slate clean by revamping their rating scales, effectively downgrading nearly ALL of the bonds they rate.

    I have no doubt this will happen. The only major uncertainty is: when?

    * Will it be before millions of investors each make up their own minds about what every rating should be?

    * Or will it be after investors make up their own minds — when there is such a sorry state of confusion and panic that the rating agencies are FORCED to act to restore a semblance of credibility for themselves and the companies they rate?

    Either way, we can now see the makings of an all-out selling panic — first in corporate bonds, then in the most vulnerable common stocks. It is the natural outcome of the global downgrading of ratings and rating agencies themselves. It’s coming very soon. And it’s going to hit hard.

  10. Banks buried by bonds

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    Gottliebsen: Gillard's road to election victory

    Shares of the large US and European bank were dragged lower overnight, as investors began to focus on the two potential disruptions to financial sector stability that loom next week.

    The first threat will be triggered at the end of the month – next Wednesday – when some of the global bond indices will be re-jigged. Importantly, the move by the ratings agencies to slash Greece’s credit rating to near-junk bond status will see Greek bonds removed from many of the major global bond indices.

    Many are fearful that the removal of Greece from the indices will result in an avalanche of tens of billions of dollars worth of Greek bonds hitting the market, as the big pension funds – which are obliged by their mandates to follow the global bond indices – are forced to offload their holdings. Heavy selling of Greek bonds could rattle European credit markets, putting further upward pressure on Spanish and Portuguese bond yields.

    The second threat takes place a day later, when European banks are due to repay the $US540 billion in special one-year loans that they borrowed from the European Central Bank.

    One problem is that a number of European banks used their ECB loans – on which they paid an extremely low 1 per cent interest rate – to buy up the bonds of countries such as Greece, Spain and Portugal, which offered more attractive interest rates.

    Now they have to repay their ECB loans, the banks may decide to offload some of these bonds, which could reignite tensions in European financial markets.

    Some European banks will choose to replace at least a portion of their existing one-year ECB loans with shorter-term three-month loans from the ECB. And a number of banks that boast strong credit ratings will be able to raise funding in the interbank lending market at a lower interest rate than the ECB is charging on its three-months loans.

    As a result, we could see a liquidity crunch and a spike in interbank lending rates if a number of banks decide that they’re better off tapping private debt markets to refinance their ECB loans. What’s more, uncertainty about the size of the likely extra borrowing is likely to push interbank lending rates higher next week, which will flow through to short-term corporate borrowing costs.

    In addition to worries that European credit markets could be about to undergo a period of renewed instability, US investors also fretted overnight that US lawmakers could be close to agreeing new rules for the financial industry that are much more restrictive than expected.

    It now appears likely that differences between separate bills passed by the US House of Representatives, and the Senate, might be reconciled by the end of this week, with US lawmakers agreeing to impose limits on how much of their capital banks are able to invest in risky activities, such as hedge funds or private equity deals.

    The compromise is also likely to give the government the ability to break up failing financial firms. US lawmakers look likely agree to impose a levy on large financial institutions to help cover the cost of winding up failed financial institutions

  11. A scab once said to me what have morrels got to do with making money?

    This borrower is a simpleton.

    In a capitalist system when you can take advantage you do.

    The only victim in this storie are the banks.

    The banks were just too greedy.

    The whole finantual system is going to Hell in a basket.

    Why not put this bloke in charge of the Bank Of England.

    Even stupid people can be right sometimes by accident.

  12. It comes down too this.

    Spend your money so that others will be better off, good for others and eventually you, but bad for you if no one else spends.

    Save your money so that you are better off, bad for others and eventually you. but good for you if every one else has spent.

    That is the problem.

    I will act in my own self interest.

  13. This guy had a job. He earned £25k as a paint sprayer.

    The point was he was spending like no tomorrow and they pointed out, just to service the minimum payments (as well as mortgage and other costs) he'd need a salary of over £120k.

    It is not just him!

    he was only doing what 75% of the population does

  14. You really are an utter utter berk at times. So the risk should all be on the borrower, bring back the debtor's prisons? If you are being ironic, my apologies for not spotting it.

    You know spending or gambling with other peoples money that they have intrusted to you is a criminal offence.

    Using the same thinking as some here. Why are the bankers in prisson right now?

    They new all about the NINJA loans. no income no job

    they played the odds and lost

    I will tell you White collar crime is very rarely punished.

  15. dont you belive it for a minute this red haired commy is all for carbon tax

    Ha ha ha

    Well what I mean is that the right faction of the labour party that got her in will be pulling the strings as much as they dare.

    Carbon tax is out, boat people are unwelcome.

    But the mining tax is above interparty politicts, it will be needed and I think in all probability will be passed as law.

    I allso think she will beat the Mad Monk in a election.

  16. The debt is real - but is not going to be paid back.

    How does this fit with your predictions?

    Money is credit.

    Debt creates money.

    With no money loaned out Deflation results.

    The Debt stays the same but the value of the comodity drops.

    We have reach the top of a Debt bubble it was so big it filled the share market, the propery market and the commodities market as well.

    Who is left to borrow too? Other than beggars and crooks.

    Only when people start to borrow again will the imperfect system of money that we use work again.

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