We took a break from the share market yesterday to cruise through the latest issue of the Reserve Bank’s Financial Stability Review. It’s a page turner. But it was the pretty pictures that got our attention.
For example, take the picture below. It shows how the global credit binge fuelled house price booms in Spain, France, the UK, the US, and Australia. It also shows house prices cliff diving in the U.K. and the U.S. They are not cliff diving in Australia, yet. Hmmn.
The good news, as you know, is that Aussie banks don’t own heaps of the toxic mortgage-backed debt that’s brought down Wall Street’s investment banking model. It looks like NAB might even qualify to offload nearly $1 billion of the illiquid assets it actually does have exposure to.
The bad news is that it’s still a bear market in credit. You can see from the chart below that lending to business has fallen off a cliff in Australia. Household borrowing is down too. Our worry is that it’s going to be much harder for companies to fund future risk taking with the credit markets still locked up. But that’s what happens when capital is misallocated. Bad projects eat capital while good ones go unfunded.
Markets and Money