Sub-Primes on Late­Line

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ABC Late­Line is doing an item on the sub-prime mort­gage cri­sis in the USA tonight (Wednes­day March 14th); I was one of those inter­viewed for the story. Please tune in! Late­Line goes to air at 10.35pm.

About Steve Keen

I am Professor of Economics and Head of Economics, History and Politics at Kingston University London, and a long time critic of conventional economic thought. As well as attacking mainstream thought in Debunking Economics, I am also developing an alternative dynamic approach to economic modelling. The key issue I am tackling here is the prospect for a debt-deflation on the back of the enormous private debts accumulated globally, and our very low rate of inflation.
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  • cray

    Steve, good to see that you are get­ting some ‘air-play’.

    I note the new loan prod­uct of 20% equity by oth­ers and Wiz­ards 100% loan and con­sider that these sorts of prod­ucts mir­ror the US ‘sub-prime’ loans — in their efforts to squeeze the last drops of credit from the least finan­cially secure bor­row­ers.

    Is Aus­tralia bet­ter pro­tected from the types of prob­lems seen in the US by our finan­cial sys­tems or could we be headed for the same fate?

    (This may have been asked in the ‘Late Line’ report as I have not seen the tran­script yet.)

  • They’re not quite sub-primes, in that that do require accu­rate dis­clo­sure of income (i.e., they’re not “low docs”), but I believe their impact will be to help drive asset prices still higher. A main sell­ing point they put on their web page (http://www.efm.info/) is “Buy up to a 25% more valu­able home”.

    I’m writ­ing a com­ment on this prod­uct which I’ll post on the blog in a few days.

    As for where we’re headed, I was aston­ished when I graphed the two country’s house­hold debt to DGP ratios–ours has risen at per­haps twice the rate that the USA’s has! And we now have a higher house­hold debt to GDP ratio than they do. So while we might be bet­ter pro­tected (in the sense of hav­ing a bet­ter reg­u­la­tory regime–maybe), we’re exposed to the same dis­ease.

    I’ll try to post that graphic to the blog now.

  • foun­da­tion

    “Buy up to a 25% more valu­able home”

    Yep, that works out real nicely:
    http://img405.imageshack.us/img405/3474/crazyro8.jpg

    Divide all the big num­bers by 10 and you’ve got the same com­par­i­son between a $180k house and a $230k house. Shock­ing really!

  • Your num­bers work out very well foundation–I hadn’t yet fin­ished putting my analy­sis together, but that was my expec­ta­tion: that while it makes it eas­ier for some­one to buy a more expen­sive house now, it also wipes out the attrac­tion of cap­i­tal gains for the buyer!

    In a funny way this is a “pos­i­tive” about this devel­op­ment: while mak­ing it eas­ier to inflate hous­ing prices now, it also removes one of the main attrac­tions of inflated prices to buy­ers. How­ever I doubt that many of those tak­ing up the prod­uct will do the analy­sis as deeply as you have done–which wor­ries me, because they will be the ones left with neg­a­tive equity at the sharp end of the loan.

  • foun­da­tion

    Meh… turns out I’d sub­tracted the ‘equity loan’ twice. Here it is again, cor­rected, with an extra line show­ing ‘profit’ for those who suf­fer from a par­tic­u­larly com­mon form of money illu­sion. The one where a dol­lar at sale is a dol­lar ‘profit’ — even if it cost them a dol­lar-twenty in inter­est…

    http://img59.imageshack.us/img59/9914/crazy2nm6.jpg

  • Mis­takes like that are easy to make with spread­sheets foundation–I made a sim­i­lar stuff up when first doing the num­bers too (divid­ing by 52 for a weekly repay­ment but then using cal­cu­la­tions else­where for a monthly).

    I’m being inter­viewed tonight for a New Zealand cur­rent affairs pro­gram on this topic, and if I can in the mean­time, I’ll do a more gen­eral analy­sis of these loans using my favourite ana­lytic pro­gram, Math­cad.

    How­ever I have to do a court appear­ance as an expert wit­ness on debt in the mean­time! No rest for the pre­scient, to coin a phrase…