Why Has The Australia Economy Rebounded So Quickly

Simple - There was nothing wrong with it in the first instance

So there you are standing in a conference room with a couple of hundred other people and you hear someone yell, Fire, Fire! Instantly everyone starts looking around the room for smoke. You can’t see any, but everyone in the room is getting jumpy and the dead silence that hung over the room when the word fire was first heard has now turned into a hum of chatter.

Out of the corner of your eye, you see a group of people start moving towards the fire exit and you watch as this casual movement turns into a brisk walk. The noise level goes up a notch as one of the people in your group says, “com on we had better get out of here quickly”.

In no time at all the crowd is moving rapidly to the exit and you have convinced yourself you can smell smoke. People are now running towards the exit sign, tripping over each other and a sense of panic fills the room.

As you burst through the exit door and make you way down the fire stairs, you feel for the first time anxious about your safety. Finally, the exit door is right in front of you and you make your way outside the building.

Looking back at the building, your eyes scan the building for smoke but none is to be seen. No smoke, no fire, nothing but a whole lot of panicked people concerned for their life and wellbeing.

I am sure you have heard the names Fannie Mae and Freddie Mac but do you know the history behind these organizations?

Well here is a little history for you as reported in the SMH Tuesday November-4-2008:

The US housing market was dominated by two companies set up by Congress, known as Fannie Mae and Freddie Mac (their real names are too complicated). From 1938 to 1968, the US secondary mortgage market was monopolised by Fannie Mae, operating as a government agency. In 1968, to help balance the federal budget, Fannie Mae was converted to a private corporation. To offset this private monopoly, Congress chartered Freddie Mac as a competing private corporation.

The system worked well until 1995, when Freddie Mac began receiving government credit for buying or guaranteeing lower-quality mortgage debt from lower-income borrowers. By 2003, it was obvious bad credit was infecting the system and President George Bush recommended a legislative overhaul. The reform was blocked by the Democrats because it would restrict financing for low-income housing for minorities, a critical part of the Democratic base.

At the same time, another guardrail was being dismantled. The private debt ratings agencies, most notably Moody's, were becoming overwhelmed by the quantity and complexity of financial instruments being issued by the banks.

In 1999, a prominent Democrat, Howell Raines, chairman and chief executive of Fannie Mae, began a program, which eased credit requirements for lower-income borrowers, especially "minority" applicants. Raines is African-American. In 2006, the Government filed suit against Raines to recover some of the $US90 million in income he had made at Fannie Mae based on overstated company earnings. The suit was settled this year and Raines fined about $US1 million.

Although he is now regarded as a culprit in the credit scandal, Raines is an adviser to Senator Obama. His predecessor as chief executive at Fannie Mae, James Johnson, is also an adviser to Obama's advisory team. After arriving in Congress, Senator Obama received $US126,349 in campaign contributions from Fannie Mae and Freddie Mac, the second-highest amount given to anyone in Congress.

It is difficult to convey the cost of these decisions but try getting your head around 20 trillion dollars. If you were to multiply the entire Australian gross national product by 75, you would get an approximate sense of $US20 trillion, which is roughly the combined weight of the United States national debt plus the losses in American asset values sustained so far in the current financial scandal.

Following is just one example of the crisis and how people were drawn into this trap.

While earning a salary of $US21,000 a year, Leesa Robinson assembled a property portfolio worth almost $US1 million in 2006. The 45-year-old single mother had started buying houses after watching late-night infomercials. Several lenders provided home loans totalling $US800,000 so she could buy eight rental properties in working-class, inner-city neighbourhoods in Milwaukee.

Half were purchased with no money down. All but one of the loans came with high-interest, adjustable rates. During 2007, she lost all eight houses and went bankrupt as Milwaukee's mortgage crisis hit primarily low-income, predominantly African-American neighbourhoods, where borrowers with meagre financial resources had received loans to buy property or refinance their mortgages. Many mortgages unravelled within months. The median time from the date of the loan to the filing of the foreclosure suit was 427 days.

A majority of borrowers had a troubled financial past before they received mortgages. Nearly a quarter of successful loan recipients had previously filed for bankruptcy. However, financial institutions, real estate agents, mortgage brokers and appraisers raked in upfront fees before the risky loans were packaged and on sold to Wall Street. Now, as taxpayers finance a $US700 billion bailout, tens of thousands who have lost their homes will not benefit.

What this story from Milwaukee hints at, but does not expressly state, is that the US Government is going to have to spend a vast amount of money to solve a problem it helped create.

So let’s get back to the FIRE!

There was no fire in our building. What we heard were cries from the building next door. A poorly regulated building who’s economy is in deficit, whose financial crisis is now claimed to be our financial crisis. The building management have sunk $US700 billion into propping up the problem they created in the first instance.

Our building on the other hand is well managed and is well regulated. The banks in our building won’t lend $800,000 to a person earning $21,000 a year. Our building management operates with a significant surplus and has done so for the past 10 years. This well managed building with all of its surpluses is giving $10 Billion dollars to its tenants to stimulate the buildings economy.

So answer me this!

Why is the Australian Dollar drop to $0.67 cents from a record high of $0.96 cents only to rebound to $0.92?


Why did the Australian Government need to spend $40 Billion dollars stimulating an economy when the only thing that was missing was confidence in ourselves?

So let’s get down to the R word - Recession.

Our building is not on fire and Australia was not in a recession until we talked ourselves into it.


From a marketing perspective those companies who continued with their marketing efforts while their competitors cut, trimmed or reduced will emerge from this R period with a substantial increase in market share.