Activists send message to Key: “Make the banks pay!”

Bad Banks media release
13 May 2010

Prominent New Zealand activists and unionists are among the 53 public signatories to a letter to prime minister John Key calling for action to curb banking power and protect grassroots people. The full list of public signatories is included below.

The letter, written on behalf of grassroots people in New Zealand, reads:

Dear Mr Key,

Why are you wanting to raise GST? Food and everything else will be more expensive. It's already hard to make ends meet. Why don't you tax the banks and other fat cats that have been ripping us off? We want justice Mr Key, make them pay.

Signed,

Grassroots people of NZ

Bad banks — New Zealand’s black sheep

By Paola Harvey
from Green Left Weekly, Australia
30 January 2010

Although New Zealand, like Australia, has not been as badly affected by the global economic crisis as the US or Europe, workers are facing hardship.

Bronwen Beechey, an activist from Socialist Worker New Zealand (SWNZ), told Green Left Weekly: “There’ have been a lot of redundancies, places have been closed down.”

Beechey and SWNZ activist Peter Hughes were in Sydney to attend the January 3-6 Socialist Alliance national conference. They spoke to GLW about the SWNZ’s “bad banks” campaign, which takes aim at the cause of the global financial crisis — neoliberal capitalism.

“For people on low incomes life’s just been getting tougher because [they are] losing their jobs and food prices and rents and all of it have not come down substantially”, Beechey said.

“All the indicators, the social services, people asking for assistance, for food parcels, people losing their homes — they’ve all skyrocketed.”

Hughes said employers have used the crisis to justify attacking workers’ wages and conditions. “In the last 12 months, there have been no less than eight lockouts of workers.

“One of the most shameful examples was a service provider for the elderly that insisted that if the workers in that field did not accept the minimum wage [NZ$12.50 per hour] they’d be locked out.

“That’s quite a serious indication of how they [the bosses] see the crisis being resolved to their advantage and workers’ disadvantage.”

The New Zealand government’s response has been the same as capitalist governments around the world — bail out the banks and the big capitalists, and make the workers pay.

But they are not getting it all their own way. The government’s attempt to impose an unofficial wage freeze in the public service was recently challenged. Support staff in the education sector won a small wage rise.

That win will set the tone for the upcoming nurses’ and general education unions’ wage negotiations. “No less than that, will be the call, I’m sure”, said Hughes. “So that’s a good sign.

“I heard at the [Socialist Alliance] conference, that [Australian Prime Minister Kevin Rudd] said that the recovery’s going to be worse than the recession.

“I’m quite sure that’s their intention for us in New Zealand as well, working people will be made to pay for the recovery — if there’s going to be one.

“But our assessment is that there can be no real recovery in the current market economy, not in the foreseeable future. That’s going to lead to all sorts of crises for them, which they will try to push on us.

“We have to organise people to resist that.”

The discussion about neoliberalism at the NZ Council of Trade Unions’ 2009 conference has opened up more space on the left to fight back against these future crises.

At the conference, union activists talked about workers’ cooperatives, building and strengthening the union movement and not accepting the neoliberal capitalist model as the only option.

Beechey said: “It also talk[ed] about climate change and the need for an alternative economic strategy which is an implicit criticism of neoliberal capitalism.”

Hughes added: “While it’s not a policy position as such, it’s a discussion that’s been opened up within the trade union movement.

“It’s not an accepted policy, it could be watered down significantly and it’ll come down to how different unions interpret that for building a broader perspective in the membership.

“[But] when you think about how closely linked the trade union movement has been to the Labour Party … this is a departure.

“The fact that they’re daring to criticise publicly this position opens up a space on the left for us to work with trade union activists in a much more healthy and progressive way.”

Many people in New Zealand continue to struggle with little indication of their situation improving in the near future.

There has been an increase in the number of houses sold due to people defaulting on their home loans. A large proportion of these have been people with one home — not property speculators.

Hughes said the defaulters “simply cannot pay because they’ve lost their job, they’ve been made redundant and they have reduced incomes”.

“That’s pretty devastating for families and has shown no sign of abating at all.”

The actions of the banks have been completely shameful. Before the crisis, banks were advertising loans for 100% of the price of a house.

But after the crisis, their ruthless approach to lending has meant many people who were lured into the property market by these loans have had their home repossessed.

“Our campaign around ‘bad banks’ is trying to make them pay really”, said Hughes. “Because they’re the ones that have played a big role [in the crisis] and they’re plundering the profits of working people.”

The bad banks campaign is focusing on demystifying what the banks actually do and how they caused the financial crisis. It is also calling for a financial transaction tax, as opposed to a goods and services tax.

A GST is a regressive tax, that is it affects the poorest the most, because the poor are taxed the same as the rich for goods despite having less ability to pay.

A financial transaction tax, on the other hand, would be a progressive tax. It would affect banks, corporations and the wealthy the most, because they account for the vast majority of financial transactions.

“We see the bad banks campaign as striking right to the heart of neo-liberalism”, Hughes said. “These banks have got their fingers in the lives of every working class person, whether it’s controlling their mortgage, their credit card, or their bank charges.

“They’re bloody pillaging basically. Their pockets are huge, they’re not paying their taxes.

“They’re not very popular with workers at the moment.”

Why we need to battle the banks

by Vaughan Gunson The recession is taking grip in New Zealand. People are losing their jobs. In some grassroots communities unemployment is already turning into a social crisis. 138,000 people are officially unemployed. Thousands more will be desperately looking for work. And the situation is going to get grimmer as the economy slumps further. Job losses and income cuts are putting many homeowners in a terrible situation. They can’t meet their mortgage payments. The banks are knocking at the door. And with property values falling some people are left owing more money to the banks than their home is worth. They face financial ruin. For grassroots people, this is all very frightening and unfair. Grassroots mood against the banks Jobs and homes are gut issues for people. Rising concern about these gut issues is intersecting with a mass mood against the banks. Last year, RAM activists took a survey out on to the streets, which questioned people about the operations of the banks in this country. Over 90% of people thought the banks were doing no good. That sentiment has probably hardened. It can be picked up in everyday conversations. It’s reflected in the stories being carried in the media. You know there’s a mass mood on an issue in New Zealand when two things happen. The first is when it becomes a storyline on Shortland Street. Scotty and Shanti are in trouble with the bank, owing more than their house is worth. The second indicator of a mass mood is when you start hearing calls for a public enquiry. This is what the Green, Labour and Progressive parties have been voicing. They want an independent public enquiry into the banks. They’ve sensed the mood and the political opportunities that it presents. Not right In the eyes of grassroots people it’s not right that in these times of increasing hardship the banks are continuing their profit run. The Big Four Australian-owned banks, ANZ National Bank, BNZ, Westpac and ASB, control 90% of the banking industry in New Zealand, putting them in a near-monopoly position. With so much market control, there’s no pressure to lower interest rates. In 2008, the income the Big Four banks received from loan interest went up a whopping $4.6 million. As a result the profits of these Aussie-owned banks totalled over $3 billion in 2008, up 3.7% on the year before. To add fuel to the fire, the Big Four are trying to avoid paying a tax bill of $2.25 billion. BNZ has been convicted by the High Court and told to pay up. Undaunted, the banks are using their extreme wealth to hire teams of lawyers to fight the ruling. The feelings people have towards the banks has been heading South for sometime. This was before the banks started turfing people out of their homes. To maintain their own equity position the banks are getting tough and forcing mortgage sales in rapidly increasing numbers. In April this year, there were 250 foreclosures. The numbers are only going to escalate as mortgage pressures worsen with further waves of job losses. The banks are the bad guys. They could become public enemy number one. A Bad Banks campaign In isolation grassroots people have no power against the banks and the laws written to protect the money men. But mass feelings are strong. It is the job of mass Marxists to tap into those mass feelings. That’s why Socialist Worker is launching a “Bad Banks” campaign. We believe the Aussie banks are vulnerable to a broad and inclusive campaign that connects with the anger ordinary people feel towards these mega-rich interest gougers. A campaign to expose and shame the banks must be out on the streets. We’ll produce mass leaflets and posters. There will be street stalls. We can build towards publicity pickets outside targeted banks. We will organise public meetings. Send out media releases, write submissions. We will liaise with others on the left about organising jointly hosted campaign conventions. The campaign will have a web presence http://www.badbanks.co.nz/. A Bad Banks Facebook group is up and running (log into Facebook and search for “Bad Banks”). We will pursue multiple publicity strands that aim to connect with masses of grassroots people. The first stage of the campaign will be educative. We’ll tell people what the banks are up to. We’ll even explain in popular language “fractional reserve lending”, the credit creation mechanism which literally allows the banks to make money out of thin air. Our leaflets and other publicity will connect the operations of the banks to the Great Implosion. Explaining what’s happening globally and pointing the finger at who’s responsible. Knowledge, as they say, is the first step to empowerment. As the Bad Banks campaign evolves we begin to put forward concrete demands and campaign goals. These will emerge through dialogue with other leftists and through listening to grassroots people themselves. Broad left cooperation A multi-headed campaign against the banks has the potential to bring networks of indebted homeowners, political parties, unions, community groups and grassroots activists together. The campaign on the streets should work in tandem with the good initiative of the Green, Labour and Progressive parties to set up their own independent public enquiry into the banks. Parliamentary and street campaigning can both work to build a movement. Linking these two essential political arenas will get the best out of each. The Bad Banks campaign (or some other campaign name that emerges through discussions with others) could become an invigorating example of broad left political cooperation in practice. This would be extremely positive. Joint work, sharing of ideas and on-the-ground collective organisation around this “flashpoint” political issue will hopefully encourage a further coming together of broad left forces. Such political cooperation is needed if the left is to rise to the challenge of the biggest economic meltdown since the Great Depression of the 1930s. Banks and the “bubble economy” The role the banks and international money men have played in the Great Implosion needs to be widely exposed. The banks are at the centre of the “bubble economy” built on trillions of dollars of debt and speculation. The floundering of the real economy since the 1970s has seen workers, business and the state increasingly reliant on the extension of credit. Over the last four decades debt has ballooned. This has allowed the banks and other money lenders, facilitated by governments, to assume a dynamic role within late capitalism. So entwined are industry giants, big banks and governments, that when the credit crunch hit last year, following the bursting of the worldwide housing bubble, the leaders of the world’s big economies raced to save the banks. In January this year, Oxfam calculated that $8.424 trillion had so far been raised by governments to bailout the banks and other financial institutions. That’s a vast sum, one which could easily put an end to world poverty. And the bailouts haven’t stopped. In the US alone, the Obama administration’s bailout commitments could reach as high as $23.7 trillion, according to an official independent report. However, the bailouts have not prevented the economy from nose-diving, far from it. There’s a global pandemic of job losses and other social miseries. Smaller banks and other financial institutions continue to go under. Yet some of the big banks, like Goldman Sachs, one of the main players behind the housing bubble, are now posting record profits. With trillions and trillions of government money floating around, these experts at financial manipulation are creaming it. Helped by government insiders the really big banks are now set on dominating like never before the creation of credit, the fragile base upon which the world economy rests. The banks left standing are profiting out of lending to cash-strapped governments at high interest rates. They’re speculating again in financial markets. It’s “win-win” for them and “lose-lose” for the rest of us. Given all the social and environmental problems besetting the world the bailout of bankers is a crime against humanity of obscene proportions. Debating the nature of capitalism A system that can divert trillions of dollars to a mega-rich minority and let the majority fend for themselves in an increasingly scary world is an unjust one. Without a doubt the global economic crisis, and the response by governments, is eroding the legitimacy of the market. And it’s happening in the so called “first world” economies of Northern America and Europe. That’s significant. A broad campaign against the banks in this country will, if successful, begin to expose the structures of power within monopoly finance capitalism that locks in place gross inequalities globally. A mass-based campaign against Bad Banks has the potential to stimulate a nationwide debate about the nature of capitalism and the need for a human centred economy. Socialists and leftists from a number of political traditions will want to see this happen. Lots to learn, lots to get excited about The Bad Banks campaign that Socialist Worker is initiating will be a long term one. We will be trying things out as we search, hopefully alongside other activists, for a connection with a mass audience. There’s lots to learn about the operations of the banks in this country and internationally, and how to connect their operations to a system in crisis. It’s going to be a big learning curve for everyone involved. While the Bad Banks campaign is only just hitting the streets, it’s yet to be fully tested in practice, we do know there’s great resentment towards the banks amongst ordinary Kiwis. We should have confidence that this path will bear fruit for the left in this country. That prospect should be an exciting one. Vaughan Gunson is the publicity coordinator for the Bad Banks campaign. To contact him with feedback or offers to help, email socialist-worker(at)pl.net or ph/txt 021-0415 082.

Big capital wants profits guaranteed, or they'll pull plug on NZ economy

by Peter de Waal The fact that the NZ Reserve Bank is being forced to cut it's interest rates from 7.5% to 6.5% shows the folly of years of wage-growth restraint and it's destruction of the savings potential of New Zealand's workforce. The Reserve Bank has kept interest rates high to attract foreign "hot capital", just to keep the lights on. This has had a punitive effect on business investment and has lowered productivity. Home owners also pay through the nose for the privilege of mortgage borrowing. In 1987 the rich were able to soak the workers through user-pays as most families owned a home. This time most families under the age of 50 rent – despite the cooked figures the government likes to advance showing around 60% home ownership – there is no spare cash to be mopped up (a reminder to Maurice Williamson, National’s road-toll extraordinaire). Once people are laid off in droves and defaults on mortgages begin in earnest (likely to be shortly after the election) it will start a free-fall in prices, particularly housing, as the money to lend out dries up and mortgages come up for renewal. The fall in returns for farm products and the end of tourism will severely limit the ability of NZ to offer high interest rates to foreign lenders. Hence the call from the right for government guarantees of inter-bank lending. Without guaranteed profits the world’s big banks may just pull the plug on the NZ economy. [Like National, Labour has announced it will guarantee inter-bank lending (see Banks: We will help struggling borrowers, NZ Herald 3 Oct 2008). The Australian owned banks have in turn made some weaselly promises about supporting mortgage borrowers in trouble as a result of the floundering economy. These same banks have made billions of dollars in profits in recent years. Will the banks look to maintain their high profit margins by putting a slow squeeze on New Zealanders mortgaged to the hilt? - UNITYblog editor]

A Futile Bailout As Darkness Falls On America

by Paul Craig Roberts from Counterpunch 8 October 2008 America has become a pretty discouraging place. Americans, for the most part, will never know what happened to them, because they no longer have a free and responsible press. They have Big Brother’s press. For example, on September 28, 2008, a New York Times editorial blamed the current financial crisis on “antiregulation disciples of the Reagan Revolution.”

Continue

The 2008 banking crisis

The 2008 banking crisis: Why the housing bubble? Why the crash? by Peter de Waal Over the last three decades the economies of the western world have been driven by an expansion of credit rather than wage growth. And suddenly access to credit is now being switched off overnight as fear grips the rich over the US sub-prime mortgage losses. The house price boom was a global phenomenon coinciding with the low interest rate policies of the central banks of big economies, particularly the US, after the dotcom bust and 11 September 2001. However, a report published by the OECD in 2006 warned that the boom was out of step with economic fundamentals. (See http://www.olis.oecd.org/olis/2006doc.nsf/linkto/ECO-WKP(2006)3 Figure 4 shows how the price to income and price to rent ratios have shot past the trend line since 2001.) As with most other countries you can see that the NZ rents and income curves follow each other closely. So if house prices are rising it does not follow that rents will increase if incomes are static or falling (a fact apparently lost to many amateur property investors).

Typically though, falling rental yields have been masked by asset appreciation. Many landlords who have moved into “property investment” in the last five years have only been breaking even, many have been losing money from day one on the basis that capital appreciation will see them right. However, once the asset class price starts stagnating or falling (e.g. studio apartments in Auckland) the illusion of capital gain can no longer mask the cash drain. Yesterday’s cheery “can’t go wrong with property” speculator is today’s stressed seller, buying food for his family on his credit card because all his income is sucked up by an empty property he can’t let at a rate that covers the mortgage on it...

Continue

A Futile Bailout As Darkness Falls On America

by Paul Craig Roberts from Counterpunch 8 October 2008 America has become a pretty discouraging place. Americans, for the most part, will never know what happened to them, because they no longer have a free and responsible press. They have Big Brother’s press. For example, on September 28, 2008, a New York Times editorial blamed the current financial crisis on “antiregulation disciples of the Reagan Revolution.” What utter nonsense. Every example of deregulation that the New York Times editorial provides is located in the Clinton Administration and the George W. Bush administration. I was a member of the Reagan administration. We most certainly did not deregulate the financial system. The repeal of the Glass-Steagall Act, which separated commercial from investment banking, was the achievement of the Democratic Clinton Administration. It happened in 1999, over a decade after Reagan left office. It was in 2000 that derivatives and credit default swaps were excluded from regulation. The greatest mistake was made in 2004, the year that Reagan died. That year the current Secretary of the Treasury, Henry M. Paulson Jr, was head of the investment bank Goldman Sachs. In the spring of 2004, the investment banks, led by Paulson, met with the Securities and Exchange Commission. At this meeting with the New Deal regulatory agency tasked with regulating the US financial system, Paulson convinced the SEC Commissioners to exempt the investment banks from maintaining reserves to cover losses on investments. The exemption granted by the SEC allowed the investment banks to leverage financial instruments beyond any bounds of prudence. In place of time-proven standards of prudence, computer models engineered by hot shots determined acceptable risk. As one result Bear Stearns, for example, pushed its leverage ratio to 33 to 1. For every one dollar in equity, the investment bank had $33 of debt! It was computer models that led to the failure of Long-Term Capital Management in 1998, the first systemic threat to the financial system. Why the SEC went along with Paulson and set aside capital requirements after the scare of Long-Term Capital Management is inexplicable. The blame is headed toward SEC chairman Christopher Cox. This is more of Big Brother’s disinformation. Cox, like so many others, was a victim of a free market ideology, itself a reaction to over-regulation, that was boosted by academic economic opinion, rewarded with Nobel prizes, that the market “always knows best.” The 20th century proves that the market is likely to know better than a central planning bureau. It was Soviet Communism that collapsed, not American capitalism. However, the market has to be protected from greed. It was greed, not the market, that was unleashed by deregulation during the Clinton and George W. Bush regimes. I remember when the deregulation of the financial sector began. One of the first inroads was the legislation, written by bankers, to permit national branch banking. George Champion, former chairman of Chase Manhattan Bank, testified against it. In columns I argued that national branch banking would focus banks away from local business needs. The deregulation of the financial sector was achieved by the Democratic Clinton Administration and by the current Secretary of the Treasury, Henry Paulson, with the acquiescence of the Securities and Exchange Commission. The Paulson bailout saves his firm, Goldman Sachs. The Paulson bailout transfers the troubled financial instruments that the financial sector created from the books of the financial sector to the books of the taxpayers at the US Treasury. This is all the bailout does. It rescues the guilty. The Paulson bailout does not address the problem, which is the defaulting home mortgages. The defaults will continue, because the economy is sinking into recession. Homeowners are losing their jobs, and homeowners are being hit with rising mortgage payments resulting from adjustable rate mortgages and escalator interest rate clauses in their mortgages that make homeowners unable to service their debt. Shifting the troubled assets from the financial sectors’ books to the taxpayers’ books absolves the people who caused the problem from responsibility. As the economy declines and mortgage default rates rise, the US Treasury and the American taxpayers could end up with a $700 billion loss. Initially, the House, but not the Senate, resisted the bailout of the financial institutions,whose executives had received millions of dollars in bonuses for wrecking the US financial system. However, the people’s representatives could not withstand the specter of martial law and Great Depression with which Paulson and the Bush administration threatened them. The people’s representatives succumbed as they did during the New Deal. The impotence of Congress traces to the Great Depression. As Theodore Lowi in his classic book, The End of Liberalism, makes clear, the New Deal stripped Congress of its law-making power and gave it to the executive agencies. Prior to the New Deal, Congress wrote the laws. After the New Deal a bill is merely an authorization for executive agencies to create the law through regulations. The Paulson bailout has further diminished the legislative branch’s power. Since Paulson’s bailout of his firm and his financial friends does nothing to lessen the default rate on mortgages, how will the bailout play out? If the $700 billion bailout is based on an estimate of the current amount of bad mortgages, as the recession deepens and Americans lose their jobs, the default rate will rise. The $700 billion might not suffice. The Treasury will have to go hat in hand to its foreign creditors for more loans. As the US Treasury has not got $7, much less $700 billion, it must borrow the bailout money from foreign creditors, already overloaded with US paper. At what point do America’s foreign bankers decide that the additions to US debt exceed what can be repaid? This question was ignored by the bailout. There were no hearings. No one consulted China, America’s principal banker, or the Japanese, or the OPEC sovereign wealth funds, or Europe. Does the world have a blank check for America’s mistakes? This is the same world that is faced with American demands that countries support with money and lives America’s quest for world hegemony. Europeans are dying in Afghanistan for American hegemony. Do Europeans want their banks, which hold US dollars as their reserves, to fail so that Paulson can bail out his company and his friends? The US dollar is the world’s reserve currency. It comprises the reserves of foreign central banks. Bush’s wars and economic policies are destroying the basis of the US dollar as reserve currency. The day the dollar loses its reserve currency role, the US government cannot pay its bills in its own currency. The result will be a dramatic reduction in US living standards. Currently Treasuries are boosted by the habitual “flight to quality,” but as Treasury debt deepens, will investors still see quality? At what point do America’s foreign creditors cease to lend? That is the point at which American power ends. It might be close at hand. The Paulson bailout is predicated on cleaning up financial institutions’ balance sheets and restoring the flow of credit. The assumption is that once lending resumes, the economy will pick up. This assumption is problematic. The expansion of consumer debt, which kept the economy going in the 21st century, has reached its limit. There are no more credit cards to max out, and no more home equity to refinance and spend. The Paulson bailout might restore trust among financial institutions and enable them to lend to one another, but it doesn’t provide a jolt to consumer demand. Moreover, there may be more shoes to drop. Credit card debt could be the next to threaten balance sheets of financial institutions. Apparently, credit card debt has been securitized and sold as well, and not all of the debt is good. In addition, the leasing programs of the car manufacturers have turned sour. As a result of high gasoline prices and absence of growth in take-home pay, the residual values of big trucks and SUVs are less than the leasing programs estimated them to be, thus creating more financial problems. Car manufacturers are canceling their leasing programs, and this will further cut into sales. According to statistician John Williams [http://www.shadowstats.com/section/commentaries] who measures inflation, unemployment, and GDP according to the methodology used prior to the Clinton regime’s corruption of these measures, the US unemployment rate is currently at 14.7 per cent and the inflation rate is 13.2 per cent. Consequently, real US GDP growth in the 21st century has been negative. This is not a picture of an economy that a bailout of financial institution balance sheets will revive. As the Paulson bailout does not address the mortgage problem per se, defaults and foreclosures are likely to rise, thus undermining the Treasury’s estimate that 90 per cent of the mortgages backing the troubled instruments are good. Moreover, one consequence of the ongoing financial crisis is financial concentration. It is not inconceivable that the US will end up with four giant banks: J.P. Morgan Chase, Citicorp, Bank of America, and Wachovia Wells Fargo. If defaulting credit card debt then assaults these banks’ balance sheets, who is there to take them over? Would the Treasury be able to borrow the money for another Paulson bailout? During the Great Depression of the 1930s, the Home Owners’ Loan Corporation refinanced one million home mortgages in order to prevent foreclosures. The refinancing apparently succeeded, and HOLC returned a profit. The problem then, as now, was not “deadbeats” who wouldn’t pay their mortgages, and the HOLC refinancing did not discourage others from paying their mortgages. Market purists who claim the only solution is for housing prices to fall to prior levels overlook that rising inventories can push prices below prior levels, thus causing more distress. They also overlook the role of interest rates. If a worsening credit crisis dries up mortgage lending and pushes mortgage interest rates higher, the rise in interest rates could offset the fall in home prices, and mortgages would remain unaffordable even in a falling housing market. Some commentators are blaming the current mortgage problem on the pressure that the US government put on banks to lend to unqualified borrowers. However, whatever breaches of prudence there may have been only affected the earnings of individual institutions. They did not threaten the financial system. The current crisis required more than bad loans. It required securitization and its leverage. It required Fed chairman Alan Greenspan’s inappropriate low interest rates, which created a real estate boom. Rapidly rising real estate prices quickly created home equity to justify 100 percent mortgages. Wall Street analysts pushed financial companies to improve their bottom lines, which they did by extreme leveraging. An alternative to refinancing troubled mortgages would be to attempt to separate the bad mortgages from the good ones and revalue the mortgage-backed securities accordingly. If there are no further defaults, this approach would not require massive write-offs that threaten the solvency of financial institutions. However, if defaults continue, write-downs would be an ongoing enterprise. Clearly, all Secretary Paulson thought about was getting troubled assets off the books of financial institutions. The same reckless leadership that gave us expensive wars based on false premises has now concocted an expensive bailout that does not address the problem, which will fester and become worse.

The 2008 banking crisis: Why the housing bubble? Why the crash?

by Peter de Waal Over the last three decades the economies of the western world have been driven by an expansion of credit rather than wage growth. And suddenly access to credit is now being switched off overnight as fear grips the rich over the US sub-prime mortgage losses. The house price boom was a global phenomenon coinciding with the low interest rate policies of the central banks of big economies, particularly the US, after the dotcom bust and 11 September 2001. However, a report published by the OECD in 2006 warned that the boom was out of step with economic fundamentals. (See http://www.olis.oecd.org/olis/2006doc.nsf/linkto/ECO-WKP(2006)3) Figure 4 shows how the price to income and price to rent ratios have shot past the trend line since 2001.) As with most other countries you can see that the NZ rents and income curves follow each other closely. So if house prices are rising it does not follow that rents will increase if incomes are static or falling (a fact apparently lost to many amateur property investors). Typically though, falling rental yields have been masked by asset appreciation. Many landlords who have moved into “property investment” in the last five years have only been breaking even, many have been losing money from day one on the basis that capital appreciation will see them right. However, once the asset class price starts stagnating or falling (e.g. studio apartments in Auckland) the illusion of capital gain can no longer mask the cash drain. Yesterday’s cheery “can’t go wrong with property” speculator is today’s stressed seller, buying food for his family on his credit card because all his income is sucked up by an empty property he can’t let at a rate that covers the mortgage on it. NZ Housing Severely Over-Valued The New Zealand economy has been sustained by two things: farming income from primary produce sales and attracting successive waves of cashed-up migrants to hold up the inflated values of the local housing stock. Why should a house in Auckland be worth as much as a house in London or Sydney when the local economy is many times smaller? Global warming is bringing increased instability to the farming sector, as this years’ exceptional drought has shown, and migration is tending to zero as the world economy slows. Historically the long term value of housing in New Zealand (and UK, USA, Canada) is around 3-4 times the average wage. This would make the average New Zealand house worth $120,000 to $160,000. Now that so many home owners have been hooked into “betting the farm” on speculative investment in unliveable apartment space in central Auckland, it must flow on to the assets securing these loans: the suburban 3-4 bedroom house market. (See ‘Mortgagee auctions put valuations in spotlight’, Sunday Star Times, 24 February 2008, http://www.stuff.co.nz/4413930a13.html) A few months ago NZ economists were talking of a two year correction in the housing market. A recent article gives five years as a likely correction period. (See ‘Snapshot of a slump, Auctions fail to fire, 10% drop predicted’, Sunday Star Times, 2 March 2008, http://www.stuff.co.nz/sundaystartimes/4422356a6005.html). So will the housing market come down with a thump, or will it remain stagnant for 5-10 years as wages catch up with inflated values? Given that wages would have to at least triple to restore the long-term price to income and price to rent ratios, which is unlikely, I suggest that a grinding collapse will happen in stages. NZ Home Values A nasty correction is looming. A fall from an average value of $400,000 to $160,000 could see many people thrown out of their homes as they move into negative equity. This situation is no accident. According to local investment expert Brian Gaynor: Aggressive lending by the trading banks has played a major role in the housing boom. Between January 2002 and this January bank mortgage lending surged by 115.2 per cent, from $68.6 billion to $147.6 billion. This has been encouraged by bank capital adequacy rules that allow banks to lend twice as much on residential property for any given amount of capital compared with most other types of loans. For example, banks have been able to lend $200 million on residential mortgages for every $8 million of capital but only $100 million to businesses for the same amount of capital. This has encouraged the Australian-owned banks to focus on housing loans in NZ because it minimizes the amount of capital they have had to commit to this country. The housing market has a huge impact on the New Zealand economy because in terms of the total housing values/share market capitalisation ratio and total housing values/GDP ratio we are far more dependent on residential property than any other western country. There has been a great deal of comment and analysis about the wealth effect of sharemarket falls on the United States economy but we should be much more concerned about the wealth impact of a decline in house prices on retail spending and the New Zealand economy. (‘Falling house prices start ripple effect’, NZ Herald, 15 March, 2008, http://www.nzherald.co.nz/section/3/story.cfm?c_id=3&objectid=10498271&pnum) The government’s capital-adequacy rules were a cornerstone of this particular south seas housing bubble – a state-sponsored housing Ponzi-scam! (See http://en.wikipedia.org/wiki/Ponzi_scam) What a gift to the banks! NZ Savings + Re-Financing Loans New Zealand has an abysmal savings record, mainly brought about by the pitiful wages paid here and the very high real cost of living. So NZ bankers have turned to the lucrative Japanese Yen-NZ Dollar carry trade to provide funds to inflate house prices (and their profits) to their current astronomical levels. However this convenient trade is collapsing: The yen “carry trade” - borrowing cheap in Tokyo to chase yields from New Zealand, to Brazil, Iceland, and above all Britain - has juiced the global asset boom this decade by $1,000bn. It is perhaps the biggest liquidity pump of them all, yet it stopped pumping in August. Indeed, it is sucking the money back out again. The yen is soaring. (‘Japan is the next sub-prime flashpoint’, Telegraph, 13 February 2008, http://www.telegraph.co.uk/money/main.jhtml?view=DETAILS&grid=&xml=/money/2008/02/10/ccjapan110.xml) And, The currency has appreciated by 19pc against the (US) dollar to yen103 since July as Japanese investors retreat from global markets. Foreign hedge funds that borrowed at near zero-rates in Tokyo to chase higher yields abroad are scrambling to unwind ‘carry trade’ positions, estimated at $1.4 trillion in its varied forms. Fukoku Life, the giant life assurance company, said it planned to ‘pull out’ of US bonds in preference for Japanese debt, a move underway across the Japanese corporate sector as the US yield advantage vanishes. ‘People are reconsidering the risks (in the US), and see the subprime problems as not being solved at all,’ said Yuuki Sakurai, the group’s finance chief. (‘Japan may cap yen to stave off slump’, Telegraph, 5 March 2008, http://www.telegraph.co.uk/money/main.jhtml?view=DETAILS&grid=&xml=/money/2008/03/04/ccjapan104.xml) The question for all those New Zealand mortgage holders, many of whom will be refinancing this year, is where will the money come from? Now that the capital is being drawn back to the “saving” economies (Japan, Russia, the Middle East oil states and China) following the huge losses on US sub-prime loans, the Australian and local banks are going to have a hard time finding money to lend to NZ homeowners. So brace yourself for painful rises in interest rates as money becomes much harder to borrow. Although it will be a world-wide deflationary crisis, interest rates will rise sharply in New Zealand. NZ Landlords Response: Fleece the poor The NZ Herald describes the reaction of one landlord to the fall in house prices and rising interest rates: Withers, who has been investing in property since his university days, said rental property owners should look at improving their properties and reviewing their rents. He estimates some properties in Auckland have rents that are up to 15 years out of date. All the landlord is doing is subsidising someone else’s living costs. (‘Expert advice: Hold on tight for the housing crisis sales’, NZ Herald, 9 March 2008, http://www.nzherald.co.nz/section/1/story.cfm?c_id=1&objectid=10497016&pnum) Perhaps Mr. Withers should also note that most workers’ wages in NZ are 24 years out of date! House prices rose into the stratosphere while real wages are a fraction of what they were. That’s why there is a ‘correction’ taking place! Negative Equity The problem for the average worker will be if the value of the house they “own” falls below the amount the bank has mortgaged over the property. Banks are then entitled to ask for cash to restore their equity in the mortgage. In past slumps (UK early 1990s) they typically gave 30 days for such money to be produced before resorting to mortgagee sales. In the UK in the early 1990s there were 3000 such sales every week. Whether the banks resort to such practices again depends on how panicked they become. Much of banking practice seems to be a matter of whim, for example widespread lending with no reference to borrowers’ ability to pay, mortgages for 95%, 100% or more of the value of the property. Last year, another Sunday Star Times article stated that such essentially unsecured lending accounted for over 40% of the New Zealand mortgage market: Wellington-based Mike Pero broker Tony Sule estimates that about 40% of first-time homebuyers are opting for 100% loans as they are desperate to get into the market in case it becomes even less affordable. Adam Parore, founder of Adam Parore Mortgages, agreed saying buyers with cash deposits were becoming rarer. “I suspect another 50% are at 5% deposit, 10% at 10% deposit and almost none with a bigger deposit than that. The number of first home buyers with the standard 20% is basically zero you get one every now and then, but they are like hen's teeth.” The rise of the 100% mortgage, now available from all major banks, began in late 2005. They have become increasingly popular as house affordability drops a recent Massey University report found it had declined 70% in the past five years. New Zealand’s mortgage market is worth about $148 billion, of which about 40% matures each year and must be re-fixed. It is not known how much of that is 100% mortgages. (‘100% loans new norm for buyers’, Sunday Star Times, 7 October 2007, http://www.stuff.co.nz/stuff/sundaystartimes/4228640a6442.html) The availability of such mortgages allows the cheapest houses to be “bided up” by buyers who previously would not have been able to enter the market. Low or no deposit mortgages further raise the profits of the estate agents and the banks. Liquidity Crisis The sub-prime housing crisis has been characterised as a glut of mortgage lending to people who couldn't afford it. The US housing market has fallen 9.1% on a year-to-year basis, and 18% in the last quarter. (See ‘Ninja loans explode on sub-prime frontline’, Telegraph, 4 March 2008, http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/03/03/ccsubprime103.xml) In the UK building societies and banks are raising the minimum deposit for a new mortgages to at least 10% and as high as 25%. This will further collapse the market. (See ‘Buyers who do not have 10% deposits are left out in the cold’, The Times Online, 29 February 2008, http://business.timesonline.co.uk/tol/business/money/property_and_mortgages/article3456174.ece) Many other people in NZ with substantial amounts paid off their mortgages are also at risk, should the banks decide that with a collapsed lending market and falling house prices the banks’ equity is under threat. If negative equity becomes widespread expect a letter asking for the difference between what you bought the house for and what it is now worth, payable in 30 days! Failure of the Stock Market & the Flight to Commodities The failure of stocks, bonds and housing as investment vehicles has caused a speculative flight to commodities: It is taken for granted that China will continue gobbling up the world's resources with a limitless appetite, the world faces an inflationary fire and that the dollar will slide further. However, these assumptions are less certain than they look. “The strength of base metals is absolutely bewildering given that the US is falling into recession,” said Stephen Briggs, a metals analyst at Société Générale. “America matters. There is economic contagion in Europe and it is spreading to emerging markets as well, yet people don’t seem to care. They are taking no notice of the economic fundamentals, or they’re betting that supply will continue to fall short even if demand slows. This is dangerous. Base metals are highly cyclical. Sentiment can change overnight,” he said. Is China really big enough to offset construction slumps now engulfing the US, UK, Japan and much of the Eurozone? One cannot ignore 60pc of the world's economy. (‘Fears of a commodity crash grow’, Telegraph, 4 March 2008, http://www.telegraph.co.uk/money/main.jhtml?view=DETAILS&grid=A1YourView&xml=/money/2008/03/04/cccomms104.xml) Will today’s high commodity prices be transformed into tomorrow’s collapse as demand slumps? It appears that the deflationary crisis is gathering speed. Calls to slash Federal Reserve interest rates to 1% as a massive decline in demand across the whole US economy driven by the sub-prime housing crunch is eerily similar to what happened in Japan 20 years ago. Land/house prices have not recovered in Japan to this day. What started as a crisis in one particular sphere of the market has extended to all others. A general crisis of capitalism is in the offing. For example the entire US mortgage market has entered a negative-equity crisis: The Fed is becoming increasingly concerned about the “wealth effective” as plummeting house prices and losses on the stock market combine to crimp spending. Its “Flow of Funds” report this week showed that household assets had dropped 1pc to $57.72 trillion in the final quarter of 2007, the first fall in six years. Mortgage debt is now greater than home equity for first time since records began. (‘US Fed pins economic hopes on $200bn liquidity boost’, Telegraph, 9 March, 2008 http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/03/08/cnusfed108.xml This is spinning off into the larger US economy with devastating results. Workers are being hit hard as the US ruling class attempt to avoid ruin: Grim jobs data released by the Labour Department showed that employers had cut the workforce by 63,000 in February, the sharpest drop since the dotcom bust. (‘US Fed pins economic hopes on $200bn liquidity boost’, Telegraph, 9 March, 2008 http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/03/08/cnusfed108.xml Decoupling Theory Some economists have been pushing the idea that the economies of the emerging “third world” countries have become self-sustaining: the so-called “decoupling theory”. They asserted that they would be able to ride out the financial storm in the West. OECD reports of declines in India and China show this is not true: Japan’s machine orders dropped 2.8 per cent in November and a further 3.2 per cent in December. January housing starts fell to the lowest in 40 years, down 18 per cent on the year. Tokyo property was off 22 per cent. Can this still be blamed purely on a change in building rules? “Recession is a clear and present danger in Japan,” said Tetsufumi Yamakawa, chief Japan economist for Goldman Sachs. “The leading indicators are deteriorating very sharply. Inventory is piling up at a rapid pace. There are clear signs of deceleration in exports of steel and semi-conductors to China,” he said. Yes, China. It turns out that the intra-Asia trade that was supposed to immunise the region against a slump is a disguised supply-chain ending up in the US market. American shoppers still make 30 per cent of global demand, just as it did a decade ago. Nothing has really changed. (Telegraph, 13 February 2008, http://www.telegraph.co.uk/money/main.jhtml?view=DETAILS&grid=&xml=/money/2008/02/10/ccjapan110.xml A Generalised Crisis The UK banks are struggling to borrow money, despite having a strong well diversified economy: Bear Stearns is perhaps the most severely exposed American bank to the sub-prime mortgage crisis sweeping the world's biggest economy. Peter Spencer, economic adviser to the Ernst & Young Item Club said: “I'm afraid this is now tending towards the apocalyptic scale. This is really the second stage in the credit crisis. This will have a definite impact on British households. The point is that mortgage lenders here were until recently raising around a quarter of their funds from international markets. These are now frozen, as we can see from what happened to Bear Stearns. And if the international banks aren’t lending to anybody that money’s not coming back. I'm afraid this is now tending towards the apocalyptic scale.” (‘Bear Stearns crisis sparks UK recession fears’, Telegraph, 14 March 2008, http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/03/14/nbearsplash114.xml) This does not bode well for the safety of the New Zealand banking system. In a remarkably candid comment the Herald noted: Arguably, the prospect of further bank failures overseas and by extension here in New Zealand - where more than 90 per cent of the banking system is owned by foreigners - is more likely than it has been for years. New Zealand and Australia remain the only two OECD countries that do not have some form of insurance to protect depositors' cash should their bank go belly up. (Adam Bennett, ‘Are our banks safe?’, NZ Herald, 15 March 2008, http://www.nzherald.co.nz/section/3/story.cfm?c_id=3&objectid=10498295&pnum=0) Given all of the above you would have to say that no bank is safe in this environment, particularly not a New Zealand one, relying heavily on the goodwill of foreign lenders. What to Do Although capitalism achieved a massive reduction in real wages in the 1980s and '90s, that victory now poses a grave danger to the system. In the previous crash of 1987 residual levels of savings and mass home ownership meant that the working class had both the means to survive the crisis and could also be tapped for more money to prop the system up. This was done by the ruthless imposition of “user pays” schemes and the reduction of the social wage, such as the ending of free education, attacks on the right to public housing, the rationing of medical care, attacks on unemployed and the harassment and punitive case management of the injured by the Accident Compensation Corporation. Today most families survive on two, three or more jobs and credit cards. Earlier this year we saw the collapse of many finance companies. These organisations are in effect private banks with draconian terms and usurious rates of interest. Like the money that flowed to third world investments internationally, these companies were a local means of recycling the surplus cash piling up in the bank accounts of the rich. It should have been obvious to any economist that paying people less than they need to survive and then forcing them to borrow those stolen wages back at high interest had to be an unstable situation. The necessity of this “compensatory borrowing” of consumer credit had a useful spin-off for the system: it sustained mass consumption in the face of stagnant or falling wages. But there is also a political bonus – it reduces pressure for higher wages by allowing workers to buy goods they couldn’t otherwise afford. Having a large monthly credit card or finance company bill is a great conservatising force, making strikes and other forms of rebellion less attractive. The sub-prime housing crisis is tearing the world economy apart and will hit New Zealand very shortly. It is more than likely that many of thousands of homeowners could face eviction when massive interest rate rises and falling property values force them into negative equity. There must be a political response to this crisis from the left, calling for a moratorium on mass foreclosures. Ordinary people who worked hard and played by the rules imposed on them should not be made to pay for the criminal greed of the slick conmen and finance sharks, or their apologists in government.