Posted on 23-8-2003
Banks
Riding You For Fall
by Alan Marston
New Zealand Banks,... sorry, there are no significant NZ banks,
I mean Australian banks in New Zealand were they to be open,
honest and showing due diligence of the NZ and `global economy'
would be issuing a stark warning to debt-burdened kiwis that
their long-running borrowing spree is unsustainable.
Instead banks are encouraging homeowners (by far the most profitable
market in NZ is home real estate) to shrug off fears of a downturn
in the housing market and continue on a borrowing spree-fueled
speculation frenzy of unprecedented proportions. In the UK by
contrast, though ignored by the banks themselves there too,
the minutes of this month's meeting of the UK Bank's monetary
policy committee cautioned that the acceleration in lending
"could not be sustained indefinitely". Shades of ass-covering
not dissimilar to that of the Chairman of the US Reserve's Alan
Greenspan three years ago warning of an impending collapse in
the .com markets.
The UK's MPC said it feared consumers could be basing their
borrowing splurge on over-optimistic projections of their future
income, warning of "a risk that households were extrapolating
forward the unusually high rates of growth of real disposable
income of recent years". The committee was also concerned
that consumers "might not have fully appreciated that inflation
would not reduce the real burden of debt as quickly as it had
in the past". This is thinly disguised code for the looming
financial crisis of deflation, the exact opposite of inflation
and much worse, not so nicely put deflation means depression.
Like the UK debt levels in NZ have become so high that when,
not if, the NZ Reserve Bank is forced to raise interest rates
then a fiscal avalanche starts to roll downhill. An avalanche
which is built to critical mass by ever-growing indebtedness
causing the domestic economy's vulnerability to deflation.
In a deflationary economy prices go down and the value of money
goes up, ie. its very bad to have debts (money) secured against
assets (goods) because the value of debt is going up and the
value of assets down. Sooner rather than later many debtors
(mortgage holders) have more debt (bigger mortgage) than equity
(house value). Very bad, especially when deflation hits businesses
and many mortgage holders find themselves unemployed.
Mortgage lenders should be strongly cautioning their customers
against overstretching themselves. However the blue mist of
greed (on all parties, not just the banks) gets in the way of
vision, and sanity. The housing market remains stronger than
it should be according to reason and people should bear in mind
that the current "buoyant" situation will not go on
forever. The risks of a `correction' have not gone away, and
borrowers should remain wary of over-committing themselves.
Are we hearing that from banks, from politicians? Nope.
The real estate industry, not one to ruled by reason, is in
the middle of a gold rush, which like the rushes of yor is being
taken advantage of by banks in a period of impending deflation
and low interest rates designed by governments to insulate an
economy from the global downturn. In short, governments force
down interest rates as a crude attempt to export deflation,
to export economic depression. Consequently interest rates may
go lower, but for a house-owner or any other citizen to see
this as an opportunity to borrow big and cash in on the housing
price boom, would be in my opinion a grave error. Interest rates
would eventually have to go up as an economy recover. There
we have it, the rock and the hard place. If the economy goes
into deflation, bad for borrower. If the economy is `corrected'
and interest rates start to go up, bad for borrower. Rock and
hard place I'm afraid.
However banks, real estate agents et al will respond that the
odds on an interest rate rise are still long. Your call punter.
As for me, the day I listen to a banker or a real-estate agent
is the day I sell-up and run for the hills. Come to think of
it, I'm already living in the hills, where they call me Casandra.
But whaddatheyknow.
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