Have Things Turned the Corner for Funding Aussie Mortgage Growth?


It ought to be fairly quiet this week. The markets are open this week but everyone’s in transit to 2010. The airport here in Melbourne is full of people going home for the holidays, including your editor. But just because something ought to be so doesn’t make it so.

For example, oil ought to be heading lower – or at least not higher – as the U.S. dollar rallies. But news reports out of Iraq this weekend showed that some Iranians had taken control of an Iraqi oil field. It didn’t look like anything serious, to be honest. But it shows you what a hair trigger there is for oil.

On a totally domestic note, Bloomberg is reporting that Westpac raised $2 billion selling residential mortgage backed securities last week. It’s notable because it’s the first time one of the big four has managed to sell a batch of RMBS since the financial model of the world began to fail in 2007. So have things finally turned the corner for funding Aussie mortgage growth through securitization?

It’s probably too early to say. The Australian Office of Financial Management continues to support the market for non-bank lenders. Non-bank lenders have to fund new loans via securtisation. Without the AOFM’s backing, you have to wonder how many first home buyers would have been able to find housing finance.

Of course, when you take a closer look at the institutions which sold RMBS to the AOFM, you find that some of them are simply off-balance sheet vehicles for the Big Four. These used to be called Special Investment Vehicles before they got a bad name. They allowed backs to make high-risk loans without doing it on the balance sheet of the parent company.

Same day. Different mortgage bubble.

Gold reversed its big slide earlier in the week and closed higher along with the greenback. February gold futures on Comex closed up $4.50 to $1,111.50. That’s neither here nor there. But it does tend to confuse the popular press, who like to report that gold rises when the dollar falls and falls when the dollar rises.

That used to be true a few years ago. But since then, gold seems to have “decoupled” from the dollar on the downside. That is, there are enough different sources of gold demand that it doesn’t automatically fall when the dollar rises. Not that it matters too much, mind you. The dollar IS generally going to get weaker, and gold stronger. Lots of noise in the interim though.

The wires are reporting that 60 U.S. Senators have now lined up behind a health care bill. It’s not the same bill that passed the house. Those two bills have to be “reconciled” in a conference between both bodies before final legislation can be voted on by each house and sent to President Obama for approval.

In other words, there’s a long way to go yet. But it will be worth watching to see how the market reacts. The U.S. government is adding to its long-term liabilities just when it ought to be reducing them. And absurdly, Obama is presenting the health care plan as a way to reduce the country’s long-term deficits.

How you reduce deficits by adding more coverage, which will push up costs, is beyond us. It’s beyond most people, in fact. That’s why the healthcare bill is polling badly lately. But what will the market think of the Feds making more promises which must be kept by borrowing more money?

Stay tuned!

We quoted comments from Chinese central banker Zhu Min last week about how the current situation isn’t stable. Zhu was at it again this week. “The United States cannot force foreign governments to increase their holdings of Treasuries,” Zhu said, according to the Shanghai Daily.

U.S. officials are hoping they can keep piling up the bills and selling debt to foreign governments and bond buyers who will simply increase their holdings of US debt. Zhu says not! “Double the holdings? It is definitely impossible.”

“The US current account deficit is falling as residents’ savings increase, so its trade turnover is falling, which means the US is supplying fewer dollars to the rest of the world… The world does not have so much money to buy more US Treasuries.”

The Fed can always make more money. But the secret is out on this little trick of quantitative easing. The thing is, central banks in the Western world (including Japan) may have to resort to even more QE to pay the bills in the coming years. This will provoke what we’ve been talking about: a sovereign debt crisis.

But you wouldn’t guess any of that from the Christmas spirit here at the airport. Paper money from all over the world is changing hands like it’s actually worth something. And it is. It’s just less and less by the moment. We’ll report back from sunny Colorado when we get there in about 18 hours. Until then!

Dan Denning
for The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.


  1. Perhaps Dan D might put his nose back into the accounting rules imbroglio?

    AU of coarse is “opinion leading” on behalf of our bankers and against the mainstream (as we do on everything these days) in our nasty little antipodean liberal fascist state that is subject to autocratic rule by public service thugs that occasionally crossdress as politicians or just plain ignore them and do whatever they want with policy.


    And in relation to Dan D’s DR article above the RMBS situation is a mess in historical terms, 5 min before end of year they get one securitisation away but they are nowhere near their replacement funding needs. And they cherry picked the best of what they had to securitise which means all the crap is on their balance sheet and our taxpayer guarantee. Forget AU housing they haven’t got the readies to lend to hold their credit supply side made bubble asset values.


  2. I’ve checked out the AOFM website and none of the issues they have bought into were originated by Big 4 banks:


    While the big 4 continue to provide warehouse facilities to the smaller ADIs and non-ADIs, excluding those deals from government support would be counterproductive wouldn’t it?

    Or are you suggesting something more sinister is going on?

    Abe Frellman
    December 21, 2009
  3. Retail sales are down by more than 10% from last year and sales has started before boxing day which will kill the margins of retailers hot of the press from a friend who is a ceo for a big retail group. People do not have cash left to spend 2010 is going to be a disaster.Let the people be warned.Housing will not be far behind with higher interest rates.

  4. If there is any doubt where the problem is let this graph answer it.


    Look beyond the size of the peaks to the ratios of each of the sectors to the others. Compare 1990 with 2000. This shows you how Clinton-Rubin-Summers screwed the world when faced with the public debt burden overhang from Regan and Bush Sr they pulled the merchant banker Harry Houdini out opf the box. And the Anglos swam along with them. Private bank balance sheet chicanery & debt bringing us the financialisation and creation of debt that never had any prospect of being repaid … ever!
    So I make the case that deleveraging is everything, and it must happen in USD, and it must be extreme.

  5. Excellent chart Ross.
    Is there any way (options for Bernanke) in your opinion or Bills (I may have missed something) that a near immediate deleveraging could be transformed into a near immediate inflation/hyperinflation? Obviously Bill sees no merit in helicopter drops :)
    Maybe it was the intention all along to funnel the funny money into markets where it would stay encapsulated and where through now apparent, devious means, those such as GS could use it to repair balance sheets and or secretly build hard assett bases ?
    Maybe the Fed will abandon its multidecade inflation stategy at a near term point in time.
    Is QE2 going to happen and if so will it cause any more inflation than the QE1 did (ie none)
    Cheers Ross

    Lachlan Scanlan
    December 22, 2009
  6. Lachlan,

    I always find it interesting that governments can ‘create’ money.
    You never actually hear of money being ‘destroyed’.
    I know we see bank notes being burned, but, they are always replaced by new bank notes and is just a paper renewal process.
    More money is created daily, and yet, I know of no mechanism (and destroying value via bad investment is not one of them) to actually remove money from the system.
    Isn’t that the very reason why prices will inflate because of QE1. Eventually these extra monies will hit the open market and affect prices.

  7. Lachlan , the way government destroys money is through taxation or through bond sales. Taxation and bond sales drains liquidity from the system the money flows to the government which is then destroyed . Money obtained through bond sales and taxes really do not fund anything or is not used for any expenditure, government do not need these mechanisms when they can spend directly by “printing” money when they are the monopoly issuer of that currency.

  8. Sorry the above post was for Joe

  9. I think some of the QE1 money could be destroyed through assett mark downs in a future deflation event. If it were ever lent out, then through credit destruction in a deleveraging.
    I often wonder what pathway/mechanisms would this QE money take into the real economy.
    Nirvan I think tax revenue would be inflation neutral since its not new money but neither is it destroyed since govs spend it and it then continues its role as money in the economy. On the other hand govs can import capital and use it to expand government etc and this would be inflationary since it is new money. ie it gets paid to gov. employees etc and then to consumption maybe even into term deposits etc and then multiplied into more credit.

    Lachlan Scanlan
    December 24, 2009
  10. Yes Nirvan I suppose the outcome depends on what govs do with the tax money.

    Lachlan Scanlan
    December 24, 2009
  11. No Nirvan, government bonds ARE money, as such they are an integral part of the MONEY MARKET. What do you think the Reserve Bank uses to collateralise its note issue?, apart from nowadays a big pile of worthless bank paper.

  12. Justin , its just ideology , maybe you would like to read up oh this here


  13. key points from that link for people who are put off by its length

    The Federal government, as the monopoly issuer of its own currency is not revenue-constrained. This means it does not have to “finance” its spending unlike a household, which uses the fiat currency.

    Any coincident issuing of government debt (bonds) has nothing to do with “financing” the government spending.

  14. ie I guess a non inflationary outcome for a particular economy (from taxes collected) would be to give aid to another country/economy.

    Lachlan Scanlan
    December 24, 2009
  15. Governments destroy alright! They destroy[the value of] money through printing it like confetti and they destroy wealth by pouring it down the bottomless pit of welfare.
    Krudd, Barrack Hussein Obama and Browned off Gordon are champions at both.

  16. Sorry Nirvan, you’ve got it wrong. Government bonds are issued into the money market thus CREATING money, not destroying it. ‘Money’ as we know it today is in fact debt.

    Central Banks, due to their monopoly on the issuance of ‘money’ can therefore buy government bonds & hold them as collateral against their note ie. dollar issue. In fact, if imprudent a central bank can buy any old crap it likes & hold it as collateral against its note ie. dollar issue.

    This doesn’t help the dollar’s value though. What’s the value of a bounced cheque?

  17. I was talking about government issuing bonds to the market like for example the Chinese buying up USTs or retail investors buying them up.

    Government issues bonds
    The market buys these bonds exchanging money
    Government gets money

    As far as I can see money flows to the government, thus the government has drained physical money which the market would have otherwise used.

    Market demands interest on bonds , government prints and pays interest
    Market demands money on bonds maturity , government prints again.

    Nothing complex here. Government can never default if the debt is nominated in their currency and is sovereign in that currency.

  18. And governments desperately need welfare/wealth redistribution because its the only way people will support their ponzi system.
    So it follows from your post Justin that the US cant default in the technical sense since they can print money (monetise debt) however if those notes represent only little and sharply decreasing value then nobody will want them hence an effective default which is every bit the same.

    Lachlan Scanlan
    December 24, 2009
  19. That’s correct, the Zimbabwean government ‘technically’ did not default on its debt either yet its credit rating was ruined even with its own citizens aka hyperinflation.

  20. Justin what happened in Zimbabwe was supply side mismanagement, if the government prints money without adding productive capacity to the economy to absorb this then this is what you get . Governments can print money indefinitely to employ people directly when the private sector cannot absorb such capacity and also when the private sector aspiration is to net save(like in a recession). The US defaulting on its dollar debt is impossible , US causing hyperinflation on the dollar is very remote.


  21. I dont think US will be unhappy if there is a devaluation , the biggest losers are the creditors , a cheap dollar will rev up the manufacturing industry within the country. It was the foolish chinese who were shipping out real assets to the US in return for “printed” dollars. The US is one of the rare countries that is self sufficient in almost everything so it can really focus inward to manufacture what it desires to maintain whatever standard of life required.

  22. Nirvan, the government adds no productive capacity whether they print money or not. The US can default on its debt if the paper the US Treasury & the Fed issues is no longer accepted.

    Just because it hasn’t happened yet doesn’t mean it won’t.

  23. Yes the government can add productive capacity through government subsidies , direct employment , direct investment , nationalisation and whole other ways.

    No longer accepted by whom?

    US should now focus on bringing some relief to main street through direct employment through further stimulus. Japan did this for 10 years and we havent seen Yen being devalued.

    I wouldnt bet for another world market tanking because of a dollar default.

  24. The United Nations of Socialist Governments will ensure economic malaise forever.

  25. “Well, if that’s true, you’re forever stuffed, Bargeass!” she said as he forked out a plate of stuffing…. :)


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