It’s a credit crunch, stupid

My God our media is backward. I mean it. It has no idea what is going on beyond a press release shoved in its face. It’s baffling.

The weekend reaction to the banks’ Friday rate hikes was dominated by a schoolyard binary construction of the problem: the banks versus the government. Some took the side of the government, that the banks are a greedy bunch of so and sos. Most took the side of the banks, that the government has no right to interfere in private business decisions. Laudable sentiments if the banks are private. Which they are not. But let that pass. I’ve already written that what’s really at stake here is the political economy of banking and the government’s failure to openly address that is now coming back to haunt it.

No, that’s not my point today. I want to make a much simpler point: Australia is caught in a credit crunch and the banks just made it worse, not better.

How so? To understand you have to have a handle on the basic tenets of banking. Like all businesses, banks have a balance sheet. There are two halves to the balance sheet: assets and liabilities. For banks it’s a little confusing because outgoing loans – for houses, cars etc. –  are in fact assets. They are the stuff from which banks draw an income. The bank’s liabilities are also loans, but those taken from others, like deposits or bonds. The difference between these two is the bank’s equity or capital base. The ratio between the amount of capital and total assets is called the leverage. It’s the number of times against which the bank’s capital has been multiplied in its outgoing lending book.

That’s it, not so hard.

There are two ways in which a bank can find itself in trouble. The first and most common is when its assets – the loans it has given to its clients – deteriorate in quality. This happens when the folks who borrowed the money struggle to repay it. They might have lost their job, or the asset they offered as collateral against the loan – say, a house – may have lost value and their own balance sheet is under pressure. If they sell, they can’t repay the whole loan amount. You can see how this process can feed upon itself as distressed sales leads to more falling prices. At a certain stage the banks themselves get into trouble as enough assets are impaired and their capital begins to decline. They must then restrict lending and the problem gets worse again. This is called a credit crunch.

This is what happened in the US. Australia is also in the early stages of such a process with falling house prices, rising unemployment and rising impaired loans at the banks. It’s difficult to judge how far into this we are and whether it can be reversed. The jobs generated by the mining boom offer the hope that it is possible to arrest the decline and instead of a credit crunch we get a stall in housing and a redistribution of capital elsewhere. The primary protection against the process getting out of control is monetary policy, or interest rates, which can be lowered to alleviate the borrower stress at the heart of the problem.

The second way in which a bank can find itself in trouble is on the other side of the balance sheet: the liabilities. This happens when the people lending money to the bank – depositors or investors – get nervous and want a higher interest rate to give the bank their money. In the past this was not much of a problem for Australian banks as they relied upon steady deposits. However, after the millennium, the banks went a bit nuts borrowing less stable money from investors here and abroad and loaned that money largely to punters betting on houses. Now, through a combination of the troubles in Europe, the fact that the process of deteriorating assets is under way, and through their own incompetence in the mishandling of covered bonds, investors want much higher interest rates to lend our banks money. So yes, they need to raise interest rates to extract more money from the other side of the balance sheet to compensate. If they don’t then they’ll not be able to lend money on unprofitable loans and the credit crunch still transpires as the banks limit the supply of credit.

In short, whichever way the banks turn right now, whether they pass on their borrowing costs to mortgagors and put downward pressure on their assets, or they absorb the higher funding costs and stop making unprofitable loans, we edge further into a credit crunch. And indeed, as you can see, the two halves of the balance sheet aren’t at all separate. As risk builds in one then it has a deleterious effect on the other and so another feedback loop threatens. This is systemic stress and is exactly where we are now, whether you want to blame the government or the banks (or, in my case, the politico-housing complex).

As long as the banks cost of funds remains elevated, the question that matters most is can the RBA arrest this developing feedback loop by cutting interest rates? To my mind it is now clear that the central bank, which handled its actions flawlessly last year, erred dramatically last week in staying on hold. By pushing the banks to hike unilaterally, the first time in history, the banks have shaken the foundation of the one commonly (and sensibly enough) held truth in Australian asset markets, that when asset prices decline, unemployment or other economic adversity threatens, the RBA will save us by cutting interest rates. The insurance is still there but a nasty crack now runs through its base and I can only see this making asset markets worse.

We’re into a credit crunch all right.

Houses and Holes


  1. HnH cant the govt guarantee that money again? In doing that wouldnt the investors or loan companies drop their rates because the govt has guaranteed it? I am not for this but more a question. Isnt there some guarantees coming up soon where the govt isnt doing that anymore for a certain amount?

    • Another question couldnt the govt threaten the banks with hey we are not going to guarantee anymore money unless you stop raising rates on your own?

    • I think it’s fair to say that a renewed government guarantee at this stage is politically impossible. Which actually poses an interesting question to the ratings agencies. They downgraded the US on political gridlock. They’ve given the majors a two 2 notch upgrade for government support (including the guarantee). Maybe it’s time they looked at political risk.

      Besides the guarantee is an emergency measure. We certainly aren’t there yet.

      • If the revenue from a Govt guarantee is the only way Swan can deliver his 2012-13 surplus, you may see the “political impossibility” pushed to one side.

      • HnH Mate,

        does this mean we should be putting our value into that Au metal?

        I am now genuinely concerned about the Banks imploding after reading this.

        Hypothetically speaking what could be a good hypothetical move?


    • You also need to consider that since the GFC, the rating agencies have travelled a long way on the road to Damascus.
      They have downgraded USA and France. If the government offers the guarantee again, will it retain its sovereign AAA rating?

      • there comes a point were all creditors need to consider the implicit and explicit debts of those they lend to

    • That would then shift the private sectors liabilities on to the public sector that that is what brought Ireland and Spain down. Do you want that here?

  2. all of which is why the RBA is on crack if it believes its GDP forecasts.

    credit crunch, falling house prices, contracting retail, government contraction to try and move closer to surplus …it all spells recession within 12 months.

  3. This might seem a stupid question to most of you guys but…

    If the RBA dropped rates by 25 basis points and the banks didn’t pass on the cut, then the banks are better off as they increase their margins, but is anyone worse off ie. would this situation do anything but make the banks more profitable?

    • I’m not sure that is correct. If funding was sourced domestically, then you could argue a rate cut would increase bank margins, but I was of the belief that the majority of bank funding is foreign sourced, therefore not related to local rate settings. This means that banks will set rates according to the price they pay for the bulk of their funds…..but then again I could be wrong

    • redgoat,

      I think savers would lose out because the banks would pass on the rate cute to their deposit accounts even if they did not pass on the rate cut to borrowers.

  4. “…..the RBA will save us by cutting interest rates…..”

    Cutting interest rates will make little difference unless it stimulates credit growth and that stimulates asset prices and that re- stimulates the types of economic activity we have relied on during the credit boom.

    Assuming that it is even a disable objective it is doubtful that it will work now a decent chunk of the population are suspicious of the low interest rate, debt driven asset ponzi technique – they may not drink the Kool-aid.

    Policy directed to encouraging a shift away from the old model is a better idea than begging the RBA to try flogging the horse again.

    Interest rates at 4.5% are at rock bottom already if anyone is serious about encouraging rational investment decision making.

    • Sadly I think you are overestimating the average Australian population. Most people I know (particularly the young) are very susceptible to the standard emotions of novice traders – i.e they buy high sell low. The higher the price goes the more keen they are to get in. The fact that is it more unobtainable for them means they are more desperate for a house and for most people will enforce the viewpoint that you can’t lose with a house.

      A drop in interest rates will encourage the next lot to jump in. Don’t underestimate Australians and their love for mortgage debt – after all per capita we have one the highest mortgage debts in the world if not the largest.

      • As a Gen-Y male, I can assure you that I do NOT fit within this standardised realm of young Australian’s.

        I’m with, and echo the comments of those on this blog.

  5. Absoloodle poid.
    H&H if this is a systemic problem how can a simple few word announcement by the RBA fix it?
    I repeat most of an earlier post just for the sake of the argument.

    February 12, 2012 at 11:05 am

    Let’s suppose the the RBA goes for the big WOW factor and drops rates 50 points. Let’s suppose the WOW is successful (????) what would happen? Savings go into rapid decline, borrowing takes off, The RE market and retail pick up. Bewdy ripper mate…problem solved!
    Fair dinkum when did the world finally go off its axis?
    In this scenario we have less deposits and more spending. CAD rises and the banks have to borrow a much greater proportion of their funds from external sources. Rates go even more out of kilter with RBA attempts. Back to square one.

    The situation is intractable. The answers lie back in time. We are now witnessing the outcome of 50 years of nil saving consumption/debt over-indulgence by the western world. Growing prosperity and power in the ‘developing’ (LMAO what a concept)world is just going to tighten the vice.

    • Agreed, flawse.

      hate to sound all pessimistic, but the answer really IS back in time.

      It’s just a matter of how much else of the economy/society we are going to “Ponzi up” in order to try and save the bits we’re focused on…and inevitably fail anyway.

      I/we probably “should be shot” (some would say) for the “back in time –> no answer”, but there really is something in it: just stop thinking we can “save it”, and get about turning away from the way we were going/living ASAP, wear the pain, minimise the height of the inevitable fall, and be somewhat better off for it…..but just do it NOW, not blathering on about what tweaks and fixes can be done (generational wealth transfer issues aside…..oh goodness…)

      My 2c

    • I think you’re wildly overstating the nil saving time frame – 15 years or so is probably consensus, and we’re returning now to savings rates not seen since the 70s. The difference is that business models rely on spending patterns from 5 years ago, and these will need to adjust to the new reality. In the mean time, there will be pain.

      • karan we have been running CAD’s for 50 years. As an economy and a nation that means nil to insufficient savings for that whole period.
        Note also from my other posts at other times. The CAD is much higher than has been stated officially. Much of foreign earnings in the country over those years was re-invested and not repatriated.

      • Sorry Karan…remember the external account has been totally ignored through this whole period, Nobody has thought about it and what it means for what is happening WITHIN our country.

        • Karan my essential point behind all this is that we have lived off cheaper and cheaper goods out of Asia for 50 years. We didn’t worry about CAD’s. We just dismantled our economy assuming that CAD’s and Foreign Debt were unlimited and free sources of funds. We didn’t need to save.
          That scenario is currently being sharply reversed with the rising prosperity and awful demographics in China.

          We’re too late!

          • Yes AB. I have worries about that period. Keating’s remarks heralded his demise.
            After that one burst he never talked about it again.

            When Rudd took over all he had to do to destroy the Howard economic credentials was to point to the real situation of the external account.
            He didn’t! Why not?

            Both these events scare the hell out of me.
            (Adjusts tin foil hat!)

          • Keatings superannuation reforms ie get 95% of population into super was an attempt to fix this ie get our savings running aka similar to the Japanese who rebuilt their country after WW2 with compulsory saving introduced by Douglas Macarthur.
            I still cant work out why this didn’t work, oh yeah, the constant medling with the system, RBL, surcharge, fees etc

          • Good quote from Wikipedia’s page on CADs.

            “A current account deficit is not always a problem. The Pitchford thesis states that a current account deficit does not matter if it is driven by the private sector.

            A Current Account Deficit largely consists of repayments of public and private debt, and that debt consists of many individual transactions. Pitchford asserts that since each of these transactions were individually considered financially sound when they were made, their aggregate effect (the Current Account Deficit) is also sound.

            Some feel that this theory has held true for the Australian economy, which has had a persistent current account deficit, yet has experienced economic growth for the past 18 years (1991–2009).”


            Now let me think for a second. The level of private debt in the US, Spain, Ireland, etc. doesn’t matter since each of those transactions were individually consider financially sound when they were made.

            The Pitchford thesis is a load of crap. And I suspect that we are about to find that out in a major way over the next few years.

  6. It’s a real credit crunch, and the government has been spinning boom for so long they don’t know how to adjust to reality. For quite a while Swan has been playing down any linkage with foreign wholesale funding and the RBA base rate, and I suspect he can see himself being found out. The Libs are just as hopeless.

    This is early stages IMO, and if a few more EU states look like defaulting then it’s going to get nasty.

    On top of all of this we have to pay back the GFC stimulus in a world of rising rates.

  7. This top work should be read in conjunction with yesterday’s exquisite house porn:

    A blip? A minor correction? Temporary?

    No chance. This RE market is rotting from the head.

    There are no stops until house price fundamentals are restored: prices three times incomes and rents = repayments + costs + a 20% deposit.

    The banks are paying a hefty premium for that o/s borrowing and need to pay it back fast. Faster than the current hefty savings rate. The gap between these two are H&H’s credit squeeze.

    With all the authority, dignitas and credibility bestowed by my possession of an accredited fishing license, I shout from the rooftops: Don’t Buy Now!

    • +100
      With all the authority, dignitas and credibility bestowed by my possession of an accredited fishing license, I shout from the rooftops: Don’t Buy Now!
      LOL 🙂

    • “HOUSE prices in some blue chip suburbs have crashed by almost 40 per cent from their peak.”

      40 per cent! The magic number is here! 😛

      • Mining BoganMEMBER


        Anyone knows that a person with a professional fishing license is a criminal. It’s like owning greyhounds.

        One has to be colourful.

        Only an amateur would say don’t buy. A pro would say “mate, got a deal over here. Mad if you don’t have a squizz. Caught them yesterday. Won’t get a better deal. Yeah, ‘course I caught them today. Look fresh eh? Whataryatryintosay?”.

  8. HnH,
    I think it’s important to try and figure out why the RBA really didn’t lower rates last week. I mean does it know something about the Banks precarious capital position or the Government’s need to raise and/or rollover their debt by attracting overseas capital? Also is this why the PM has publicly stated that she think a high AUD is a good thing despite its adverse affects on much of our industries. Surely that’s sending a message to overseas capital about Australia?

      • Yes, they are worried about mining. However I can’t figure out why they seem to not only be ignoring the high AUD’s affect on our industry but further seem to be wanting it? Surely if they are so worried about the mining boom wouldn’t a lower dollar help? It seems to me that they would try to lower the dollar if they could but at the momment they do not want to for some reason that I can not get my head around. And interest rates policy is tied in with all this.

    • Ace, I tend to be with you a bit. The RBA knowing the action the banks would take, held. Banks apply a small rise to interest rates. Next month (dependent on data) RBA lowers. Banks hold (or lower negligibly). Buffer provided. Margin/cost of funds issue alleviated. Banks fall loosely back into line with RBA (until they don’t) and life goes on.

      As for the PM stating the high dollar is a good thing – of course it is. No government wants millions in the electorate furious at petrol at $1.70+, overseas holidays unaffordable and flatscreens/computers increasing by a third, almost overnight. Nope. The high AUD is a good thing in a politicians eye.

      ps. The pollies know manufacturing has been on the decline for years (after all many in Labor were union officials who oversaw the rise of offshoring, generally without question). That some sectors of Australian business need assistance is nothing new!

      • And the high AUD provides a buffer of its own to most people, making much of household consumption more affordable – we ‘feel’ richer, even if we’re not. (Unless you are in a trade exposed sector.)

      • 3d1k,

        Thanks I like your comments and have taken them on board. From your way of thinking, do you see any relationship between interest rates, high AUD and a possible credit crunch (or need for overseas capital to our Banks or Governement)?

      • If that’s what they thought then it’s clearly pretty dumb given the damage it does to sentiment. But I don’t think so. It looks to me like the RBA is waiting for proof of job losses – the end.

        • +1 The RBA assumed the banks didn’t have the balls to go through with it — hence the need to provide an ‘explanation’ via David Uren. I think they’re still believers in the China story — although maybe just starting to develop a few doubts.

          • My gut feel is that the RBA absolutely knew the banks would act, as signalled weeks’s back by ANZs announcement that it would independently assess rates.

            RBA knows the banks are facing pressures and is satisfied to accommodate them.

            Alternately, employment may be about to surge…

          • My thoughts are yes, a bit of a psychological play. If RBA had decreased rates stating ongoing softness in the economy, domestic and global, etc (therefore a rate reduction in order) and the banks not passed the cut on, or only partially passed it on, the PR would have been dreadful. “Tough times and your bank has just made it tougher” type of stuff. This way, banks increase rate and the only person really upset is Swan! The meme effectively out there that this very modest (cup of coffee) increase was entirely necessary if we are to maintain a robust financial sector which has seen cost of funds increase (all the fault of the Eurozone). Yeah, we get that. OK, not as good as a cut, but will barely notice it. OK.

            A little buffer built in at a time when the RBA was still in a position to withhold the ammo.

            How this little game plays out over time will be interesting to watch. RBA has done it’s bit, will the bank’s do theirs?

          • Again, you have it upside down in my view. The RBA has had its decisions piggy backed many times. Nothing new there.

            We’ve never seen a unilateral rise by the banks and magnitude is irrelevant. It’s smells of paradigm shift.

          • It may well be a paradigm shift. I am very open to that.

            This is me getting my head around what has just happened. Do you think the RBA did not for a moment think the banks would act independently? I am sure they did know and hence speculation as to why they held (apart from the data).

          • 3d1k,

            Interesting thinking. However what about this idea? If the RBA cut rates by 0.25 I believe the Banks would have cut going by what the Banks have done in the last week, they would have dropped their lending rates (ANZ by 0.19 (ie: 0.25 – 0.06 the amount they increased by on Friday) and WBC by 0.15 (ie: 0.25 – 0.10). I hope I have made myself clear.

          • I tend to agree with 3d1k. I think the RBA suspected that the Banks are in a bit of a tight position and wanted to see what they would do by holding.

          • Ace, Yes I think something like that would have happened – hence my psychological ploy idea! I think the RBA holding makes it easier for one more independent move by the banks (ie, not passing on in full next rate cut, assuming it is a cut) but again to be seen as moving in synch with the RBA.

            Then RBA appears to have regained control over monetary policy and banks acting in accordance – but the buffer remains. And no-one feels the banks have been too excessive.

          • 3d1k,

            You could have a point there. We have to wait to see what happens.Question: a paradigm shift was mentioned. A paradigm shift to where? What do you mean?

          • HnH,

            you say that the RBA just erred. Could be that but what would your alternative diagnosis be if you took that out of the equation? If the RBA was second guessing the Banks this might imply that they are thinking about a credit crunch, crisis or simply the difficulty in attracting capital ect?

          • A paradigm shift: the banks acting independently of the RBA on rate movements thus quashing the influence of RBA and monetary policy.

            HnH may have a different or more expansive view.

        • Sentiment is mutable, ephemeral. Any ‘damage’ forgotten in hours, days.

          Meanwhile, the banks have been accommodated. SoMP appeared to give some latitude to the banks in this regard. The RBA still left with room to move, when needed – hopefully the banks to generally follow RBA lead in future (possibly not next month). Not an implausible scenario.

          • I think you guys have it the other way around. I think the RBA tried to bluff the banks and the banks called it.

            With banks acting independiently now, to the general public there is really no reason for an RBA, this threatens their pay packs and authority.

            If the RBA cut they knew banks wouldn’t follow giving off the impression that the RBA isn’t in control, holding steady seemed like a good move because the RBA thought the banks didnt have the balls to raise.

            I geuss this theory will be confirmed if at the next meeting the RBA drops rates at 50 basis points and puts the pressue on the banks to fall in line with their decisions as not passing on the majority of this cut will see mass hysteria from masses.

            Its all about showing the public who is in control.

          • dumb_non_economist

            3d1k & HnH,
            If the banks margins are being squeezed and the rate hike is 0.6% and the figure I recall being quoted that it’s worth 20M pm to the banks, so 120m pa with annual profits of 4Bil+. If the increase is to protect their profits surely more rate rises must be coming unless their funding costs drop in the medium term?

          • d_n_e,

            I suppose it depends upon whether the RBA drops rates. Also we don’t really know what the Banks would have done if the RBA droped last week.

  9. Inflation targeting and its ‘band’ are mentioned a lot in the MSM as well. I’ve heard it a few times as an excuse for the RBA’s lack of action.

    Do we really care if inflation hits 5%, especially if all the signs point to a long term deflationary ( or disinflationary) environment?

    • Yes I agree with you. The RBA and others give such reasons but I don’t know if I really believe them because inflation shouldn’t be a problem in recession (ie a delationary enviroment). So what’s really behind the RBA’s decision of last week?

      • “inflation shouldn’t be a problem in recession ”

        The problem is that infaltion IS a problem. Domestic inflation is running at 5 to 6%. The negative impact to inflation from imports is a temporary factor in the long term.

        Another problem we have is that even if they raise rates to cover domestic inflation it probably would not do much to curb inflation as most of the inflation we do have is being caused by out of control government.
        Note that is not an argument for not raising interest rates. It’s just an observation on the current situation.

        • Flawse Never a truer sentence ‘the inflation we do have is being caused by out of control government’. Within this is inflation caused by out of control councils and the flow on from crazy regulation and expansion of government enterprises way beyoond the growth in the GDP. For instance the huge head count growth within the ACCC. One has to ask where will it end. As a business we have not been able to raise prices for about 10 years and in fact have decreased them but the government costs have escalated dramatically. And what about the out of control health budget and the out of control social welfare budget? Where will it end?

          • Yes Douglas…my ‘government’ was a fairly broad brush.
            Don’t start me on the usefulness???of the ACCC!!!

  10. Um, as far as I can tell demand for credit preceded the cost increases – demand has been falling (as have house prices) for almost 16 months now.

    Demand is not falling due to the increased cost of credit, demand is falling due to the increased cost of houses – everyone can see that the prices have peaked, beyond reach for most, and the rest have realised that the price barrier signals a deteriorating return on investment as prices collapse – hence – demand destruction.

    How can there be a credit crunch when there is no credit demand.

    Same as in the US – the housing market did not crash due to credit – it collapsed due t the spike in living costs and unemployment which was precipitated by the 2007 oil price spike which sent oil to almost $150 / per barrel and collapsed vast areas of the world economy – and then fed back into the commodity speculation in the banks, the CDS and subsequently their collateralize debt obligations – the credit crunch occurred because no bank was prepared to lend to each other without seeing their exposure and hence risk and no bank was prepared to show their exposure hence risk – hence we had the charade of the stress tests.

    There is an awful lot more going on in the world economy than simply credit and debt – people need to realise that.

    One of the biggest drivers right now is the collapse in consumer power through living costs spikes, destruction in spending power through unemployment, partial employment, secure employment, the western destruction of domestic labor markets is crippling them – this is the greatest destroyer of credit demand there is – and nothing will correct until this is fixed.

    • “One of the biggest drivers right now is the collapse in consumer power through living costs spikes, destruction in spending power…”


      And Flawse suggests inflation is really 5-6% not ABS’s wet dream of 3%.

      Correct again.

      Investment property action is on a downward trend, and so it leaves onwer occupiers, who can not offset interest cost against rental income, they have to pay the house loan interest with tax paid dollars.

      Which Ari sez are becoming a bit harder to find nowadays.

      To some it’s all about the banks. To me, the banks need bunnies to take on the debt and pay the interest. We need to focus more on who is paying (and increasingly not paying) the nut.

    • Jumping jack flash


      cost of living is everything.

      wages have been virtually stagnant for ordinary Australians since 2008.

      The mining boom has been spent long into the future, on overseas manufactured goods and/or given to the banks to repay debt, and there is nothing left.

  11. Hate to ask a few questions but
    -is there any evidence we are in a credit crunch
    -do you think that the RBA and Treasury with their large teams of exceptionally well qualified and bright economomists aren’t thinking about the prospects of a credit crunch?
    -give me 1 example where monetary policy has not been effective, eventually, in solving liquidity traps/near liquidity traps

    • – yes, early on, as I say. house prices are falling and banks are raising rates
      – yes
      – depends upon your version of success. I can give a many examples overseas where liquidity traps have persisted for many years…

  12. Few questions:
    -Is the high dollar assisting the banks in raising capital? And should the dollar turn, would this be sufficient in causing a credit crunch?
    -Would rate cuts stimulate more demand or just make it easier for ‘working families’ struggling to make repayments to keep their heads above water?

    • Matt,
      I’m thinking that the high dollar is an effect of overseas capital flowing into Australia rather than a cause. So if the dollar turned it would probably mean that capital is flowing out.
      So I think your first question is: is the capital inflow assisting the Banks in any way or is it going to other places. It certainly doesn’t appear to be going into the stock market for example.

  13. One thing I don’t understand, how can other banks around the world offer near zero interest rates, but our banks interest spread is under pressure at around 7%. Where do these other banks around the world raise their money?

    • 3% credit growth is not a credit crunch. It was below 3% for a 3 year period in the early 90’s. Even that wasnt a credit crunch. If you want a credit crunch you have to go back to the 30’s when bank lending fell 10% + in 1937
      Isn’t working elsewhere? Perhaps you should look at loan growth numbers on the Fed database as one indicator that quant easing actually does work

      • I said early into it didn’t I? Moreover, it’s quite clear I’m using the phrase as a way of describing the problem the banks face. Expand margins – hit assets. Don’t expand, hit profits.

        • Yes – agreed it’s premature to call this a credit crunch.

          I’m not seeing anything but a willingness to lend for the usual fit of lending, but anything ‘different” such as a development loan is difficult, not that many developers are wanting finance.

          This is a cyclical adjustment.

    • All the money spent on the car industry should have been directed towards research and development of LNG/LPG powered cars. That has been obvious for decades.
      That’s why it is a worry having Govts pick industries.

      • R&D for LNG Cars is not required as it’s already a mainstream fuel and available at the bowser in countries like Argentina. (Same goes for 100% ethanol.)

        “That’s why it is a worry having Govts pick industries.”

        Nope, other Gov’ts in Latin America and India diversified their Automotive fuels decades ago. Good decisions made by competent govt’s who could identify their needs and resources.

        As a crazy coincidence, it was those lazy, inefficient GM engineers in fishermens bend Melbourne who designed and validated the ethanol version of the “Family 2” engine that was exported to Mexico. (Mainly ECU calibration and rubber seal durability tuning) Ford and Melbourne Uni also did the pioneering work on LNG for long haul trucks and buses in the 1980’s.

        Our failure is entirely political, not technological.

        • Steve
          As I understand the situation there is room for development of engines to run better and more efficiently on LPG. Fundamentally our engines have been designed around petrol.
          I’m open to info from engineers who know. I operate from teh best opinions I can get.

          • Vapour and liquid gas injection systems have been around for several years now and performance is indistinguishable from petrol.
            I’ve been converting vehicles to LPG since 1990 and the new systems are brilliant, there’s no comparison to the old BBQ ring sytems and toroidal (donut shaped) tanks make conversions available to smaller vehicles

          • Flawse,
            ASIC (now ATS)are schemes that effectively allow complete reinbursement of Automotive R&D against company tax.

            So once a fuel type, emission limit, safety requirement or consumption target becomes part of the ADR’s (Australian design rules) the industry can take care of the R&D.

            1. There is no profit and no tax to write off against.
            2. The requirements are so “non-commercial” that it’s more economic to just cease production.

            The Camry hybrid money was outside this scheme and was just a gift. That kind of spend better fits your “Govt picking winners” observation. (And very popular everywhere except the showroom.)

            Continuous development is driven by market pressure, new ADR requirements and the natural advance of technology.

            (Apologies to all for going so far outside the thread to flogg my dead horse)

          • Flawse, to answer your question:

            LPG has a higher octane and a natural tendency to cool the A/F charge due to being expanded from storage.

            So if you were making an “LPG only” engine it could have a higher compression ratio (= more efficient) than gasoline.

            Not such a big design difference /compromise now with premium High octane gasolene available.

      • Its even more of a worry when you consider that LPG as a fuel is actually better than petrol when you design your engine to run on it. It burns more efficiently. Hints of that can be seen on the new Falcon with the LPG version having more power than the petrol from what I read. I just bought a new car and remember thinking I wish they put LPG engines into cars that most people actually would like to buy.

        • Wouldn’t It be great if you could buy a corolla sized strait LPG car!
          Are there any small car production lines left in australia?

      • “That’s why it is a worry having Govts pick industries.”

        On a world wide scale it’s actually been the private sector that has been reluctant to change and the governments that have been prodding them to change via things like the gas guzzler and carbon taxes. The private sector is quite happy to drive their 4WDs over the edge of a cliff.

  14. Flawse re LPG
    What’s the difference between the gov picking research in LPG cars and picking some other project? (apart from sense)

    • Hi Matt

      I was presuming we were giving the money to the auto industry anyway.
      The whole LPG story has been running for a long time. It’s been obvious we had plenty of Gas and little oil in this country. From a country stability viewpoint the LPG story always looked a good one to me…elect me dictator!

  15. The research on LPG /CNG was sorted and do-able years ago, you could buy CNG at the bowser in NZ when I visited there 20 years ago, there is no excuse for not having all private and fleet cars running on gas right now.

    But our whole economy and way of life is dependent on diesel be it for mining, farming, food production or distribution networks – and it appears that most of our diesel is imported from countries that are becoming increasingly unstable.

    I’ve been looking into peak oil since stumbling on to 12 years ago but the figures in the link above scared the hell out of me.

    Gotta love the efficiency of JIT systems, any disruption to diesel imports would see our supermarkets empty in three days.

  16. Great article HnH! Systemic, you bet it is. Whether or not it was the right decision by the RBA to keep rates on hold, you have to wonder whether they see problems on the horizon and wanted to keep some powder dry to cut rates rapidly to ‘stimulate’ later this year.

  17. By virtually constantly ignoring its own inflation targets (actual inflation almost double the 2-3% target band), the RBA’s slack attitude has resultated in savers being punished – it therefore is encouraging everyone NOT to save but to chase other every inflating asset classes; hence contributing to the RE bubble AU is in now.

    AU should become more of a savers nation than a credit nation. I’m just back from Germany – is it a coincidence that the EU country doing best at the moment also has an average house price of 1/3 that of AU and always had a low inflation target ?

  18. HnH,

    What’s another way of helping a credit crunch besides a bank increasing its lending rates? It sacking 1000 of its emplyees. (ie: ANZ just anounced).

  19. I think the RBA did the right thing.

    A) We know from overseas experience that asset bubbles are going to fall anyway regardless of your action – Japan, US, Spain etc etc
    B) Therefore debtors are going to be hurt regardless, and creditors have a haircut on the horizon as well.
    C) Lowering interest rates will not necessarily rescue the situation – it either encourages deleveraging, or reinforces negative herd mentality into disleveraging before any tenuous chances of an asset price rebound are likely to occur.
    D) If that is the case, then you are merely punishing the capital forming base in the faint hope of turning around a national though process that has clear contrarian evidence in front of it.
    E) A strong dollar in this case is not a bad thing in a service/consumption economy. Lowering IR and dropping the exchange rate is only going to lower margins for retail and construction industries, forcing lay offs. Spending is already tight, you don’t want imported inflation to exacerbate things.
    F) Otherwise, if the RBA cuts dramatically – this is where the endgame arrives. You cheapen money, you punish pragmatic capitalism, you authorise dramatic risk, the economy and rule of law shift inexorably to those in power, inequality will worsen and you disenfranchise a population. It’s not a nice place.

    That’s the 5 year forecast if we follow the same steps as US, Europe and Japan. Some nations respond to hardship better than others, Japan cf. Greece for example.

    Money must have value – individuals must believe that the amount of labour required to earn it will be stored until needed. Otherwise what is the point of working? Why not gamble, speculate or plain criminal activity.

    • I might add I was at a festival yesterday, looking around and wondering just how well would my generation (X/Y) cope with a recession? Let alone a depression.

      Not well I would imagine.

  20. “when asset prices decline, unemployment or other economic adversity threatens, the RBA will save us by cutting interest rates.”

    Hmm. Didn’t work too well in 1990-91. And they had a lot more room to move then, as well.

    • Didn’t work in 1990-91? I wonder how we got the longest, most stable economic expansion in Australia’s post war history ? Or perhaps the RBA should have left interest rates at 17% for another few years
      More accurately, monetary policy works with sometimes long and unknown lags

      • wonder how we got the longest, most stable economic expansion in Australia’s post war history

        Household debt rising from 25% of GDP to 160% of GDP may have paid for a lot of this expansion perhaps?….

        • the era of credit growth per annum being 3.5 times GDP growth per annum since the mid seventies…is over. it is finished.

      • SMOKESTER, my point is that lowering interest rates (a very long way) did not prevent us going into a substantial recession (11% unemployment). The subsequent recovery and expansion may indeed be partly down to the RBA’s management of interest rates. But this did not stop “the recession we had to have”. Maybe it is time for another of these.

        • Alex…a significant part of the reason the RBA were able to ‘manage’ interest rates through this period has been because of the dramatic arrival of China, with very cheap goods and now good quality cheap goods. Hence inflation appeared to be low.
          Post keating we ignored the CAD as being of any significance so full throttle all the way to the cliff edge.
          Lucky we’ve got the safety net of vast mining assets to sell off.

        • Re “the recession we had to have” – the opening words of Keating’s 1990-91 Budget Speech were “Australia has negotiated a difficult transition over the past 12 months-from an economy where spending and growth were overblown to an economy with lower activity and fewer imports.”

          Does “an economy where spending and growth were overblown” ring any bells?

  21. I would like to see an analysis of the big 4’s books to genuinely examine the impact on this credit crunch and falling housing prices will have… at what point will they need to start raising capital?

  22. It should be dowgraded becuase public sector debt to GDP would be around 60% and not 25% that everyone loves to brag about.

  23. I was working for a bank here in Oz during 2008 and I remember an executive saying to us “The conversation with the customers is not about the rate they will be paying. The conversation is about whether they get a loan at all”.

    it is worth noting that Ireland’s government had low debt, but that changed when they were forced to guarantee the banks’ loans to avert a meltdown.

    You may have noticed the large number of Irish accents in coffee shops in Sydney and Melbourne. a result of people becoming economic refugees from Ireland’s collapsing economy.