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Financial meltdown questions... and views

Discussion in 'The Pub' at netrider.net.au started by robsalvv, Oct 7, 2008.

  1. The main question I have about the collapsing smoke and mirrors financial "house of cards" that inflated book valuation based debt has wrought upon us, is why does a collapsing share market indicate a recession??

    If the capital value of your share holding has shrunk, which let's be honest, is somewhat based on perceived value, then why does that dry up people's income's? How does that stop business being able to produce / manufacture wealth??

    And another one, why are banks collapsing purely on the basis of the shrinking book value of their assets that were securing their debts???? If every bank is in the same straights, all they'd need to do is not call in each others loans and banks could get on with the job of paying off principal in the short/medium/long term and geting themselves on a better footing - surely?

    Am I making this way too simple? ??

    While I have your eyeballs, I'd like to give all the economic rationalist "the market is right" mofo's a big feck you very much for the biggest crash since the great depression. <insert highly expletive emoticons here>

    When I went for my house loan, my credit union would only lend me the equivalent of what 40% of my after tax income as a monthly repayment over 30yrs comes up to at 2% HIGHER than the current interest rate... that's quite a few levels of conservatism. It made sure that they and myself (while I was gainfully employed) never ended up in serious financial straits. Plus they also wanted 15% minimum security as well.

    The likes of the big four were willing to lend me about 5 times what my conservative credit union was willing to lend me... and they were throwing all kinds of debt structures at me to help buy something that I couldn't truly afford.

    If more financial institutions took the same line as my credit union, we'd have lower house prices and there'd be far fewer defaults.

    :applause: Way to go Gordon Gecko. :roll:

    /soap box off.
  2. Rob, some I understand, the other stuff I think is yet more smoke and mirrors to justify the bail out.

    Stuff I understand.
    Credit is largely now financed through the markets. The credit market is scared and wary of lending to banks as they no longer trust that the bank (or financial institution) is not exposed to bad debt.

    Most financial institutions refinance on short dates, they continually go back to market to finance their debt. The problem with that is that they might have lent $1b to their customers, but refinance on a monthly basis. They can only get finance by either paying the higher rate or calling in the debt.

    Small companies run a revolving line of credit. They can no longer borrow money from the finance companies as the finance companies are also facing credit shortages. If you can't pay staff, you lay them off. And so the cycle continues.

    As for the rest..well, wealth is never 'lost'. Someone, somewhere still has that money!
  3. theres a heap of reasons why this is happening and particularly to the USA. The USA have been shifting major money issues around for decades and the poblem is finally biting (there's only so many ways/time you can hide a f*uck up).

    Theres heaps on info on this in Robert Kiyosaki's books and other financial titles that dicuss the USA's ever increasingh printing of money (which increasing dilutes its worth), untiying of US currency against gold standard, shity laws to do with superannuation etc etc.

    Stuart moore also has 2 books on financial cycles and looks at some of the issues that are currently happening.

    It also then becomes a bit of a domino's effect.

    cejay outlines some of the issues re the 'credit crunch' or more accuratly the 'debt crunch'. The same issue applies to large companies, becuase as their share values drop (there are a lot of overinflated values out there), their asset worth decreases and thus so does their ratio/ability to repay debt and ability to borrow. thus your worth being less etc drives operating issues. y9ou then get into a whole heap of financial mangement issues which im not even going to begin to speak about.
  4. Debt drives our society, every bridge built requires a loan. Banks lend us the money, they borrow from other banks and when other banks get scared to lend other banks money, well it all goes pear shaped!

    Keating got it right in Australia when he deregulated banks, well he did not remove regulation he just changed some of the rules. He always ensured that OZ Banks were not overexposed with too much debt vs equity.

    When you lend 100% finance to trailer trash you will get bad loans! FFS that is why lenders of last resort charge a fortune.
  5. We're going to be analysing this period of time for the next 100yrs.

    Thanks for some insight fellers.

    It must be my italian migrant son upbringing... I always pay off my credit card and for the most part I spend money that I can afford to spend... or else go without... given what's happening, just want to give my folks a happy shout out. :)
  6. Good question Rob, who knows?? All i know is that something big must be up for the RBA to drop the rate by 100 points in one go though... :eek:
  7. Spooky! :?
  8. something that has been missed in whats been said is the deeper results subprime problem. It isn't only that the loans are now 'bad' and thus an institution is having its books written down. its that the debt has been divided and repackaged and resold, and nobody knows where it is. so each institution is reluctant to lend money because they don't know who has the risk

    a great example is the german institution that wired $500million to lehman brothers one day before they went under. they are trying to dub it an "account error", but that money has gone.... now nobody is prepared to take that risk. so the money dries up, and as citymorgue2 said.. its a domino effect
  9. But isn't the problem behind this the fact that financial institutions have been treating the stock market like a huge casino, and just betting up with other people's money? Everyone knows the house eventually wins.....
  10. Problem is Paul, that's always been the case.

    We don't complain when our super rises in value. We don't mind sitting in our houses that appreciate in value 30% year on year. But when it turns to poo, we complain about how 'they' are dudding us.

    Russ pretty much summed up the source of the problem, I sort of explained the result.
  11. Try fractional reserve lending.
    Source of all these problems.
  12. Heh, I lost a grand on my (US) shares last night - to follow significant other losses on the markets. Basically started share trading seriously just in time to walk into the biggest meatgrinder in living memory - d'oh!

    Still, this thread gave me the heads up on the 1% interest rate cut - and depending how much of it the bastages at ANZ pass on, that might actually start covering for the share losses...
  13. What???
    Interest rates dropped, again??

    And all this time, the Libs told me that if we made Ruddy the boss, he would automagically make them go up :? :LOL:

    Deal in cash, my dear friends.
  14. Interesting thing is, this is a pretty good example of "economic rationalists" getting it right - the market in the US was structured so that the incentives for home loan vendors to get people to take up sub-prime mortgages was always going to result in bad loans.

    I would imagine that an economic rationalist would argue that because the market wasn't setup right (ie there were externalities) the outcome was not surprising... If the market was setup correctly (no externalities) however, "the market is right".

    They would probably blame the policy makers (government) rather than the market....
  15. I'm with Joel. Cash is king.
  16. tell that to the Zimbabweans...
  17. What!? Johnny was a dishonest **** who only cared about his own interests? WTF, who could have known? :shock: :rofl:
    Wise words. Though the dealer I bought my Peugeot from recently gave the same look most car/bike trader give when I start laying out notes for the purchace. Actually he took it better than most, didn't even swear all that much. :LOL:

    I've never had a credit card or a loan and pay cash for everything. If I don't have the money at the time, I can't afford it and go without. As a result, I'm debt free (and always have been), struggled a lot at times but always worked hard and enjoyed many rewards. :grin: If only banks could be more like me, the fcuktards. :roll:
  18. You're on the right track, Seany.
  19. dspark - I totally disagree. The Econominc rationalists worked to minimise regulation and oversight... and here we are.

    Cash is king, but affordable debt has a high utility too. Affordable is the key.
  20. cash may well be king for liquidity and companies should pay attention to that (I go by that creed when analysing companies performance and viability/health). But utilising loans for working capital loans are one of the easiest sources of $ as Rob points out. It is better to have longer term loans than relying on loans for short term because that generally indictaes that you dont have enough $ in your business to keep you liquid and are vunerable to market changes and rate rises.

    The stick market is a giant casino because most "investors" are not investors, they are gamblers, they know little about how the market works, dont know diddle squat about anaylysing companies financials and go on the herlad sun's "expert" buy/sell recomendation. If you dont know whatthe hell you are doing then its gambling.

    Dont get me started on share brokers or share advisors. Key question to these people - How much is your share portfolio? the answer 9 times out of ten will be that its non exsistent or very small. well if thats the case they obviously know jack themselves and shouldnt be trying to make commission/money off you in an area they dont know about or they know well enough that shares are risky and have their money elsewhere.

    _Joel_ - rates did go up and the Reserve bank is trying to prevent recession. Reserve bank was deregulated/removed from Govt ages ago so it could act independantly of Govt. Ig Govt policy is pushing a move towards recession the Rbank can try and prevent it. Besides if you analyse current inflation, cost of living etc, in a direct comparison to the 80's recession under keating, interest rate are worse now than then (ie our 9% today is actauly worse than their 20% in the 80's.). theres plenty of info on this out there. Although I think ive glossed over the point of saying that Australia was going to be affected by this regardless of who is in govt as we participate in a global market and we will feel some of the effect. The amplitude of that affect can be minimized or increased based oon Govt policy to an extent. Consumers play a big part in it also. But now we are moving into market/labour economics, globalisation etc.