Alternate title: If you think Economics is boring and doesn’t affect you in the real world… think again.
Note:This article does not include practical money tips – which is the dream behind nomoney.com.au. (I’ll be back on track next week with the lowdown on HECS, tips for new workers and other stuff)
But I would love to know: (via comment on an article or email to email@example.com) Is it interesting? Do you care? Should I stick to the money stuff? or let me know any other feedback. Happy to hear negative feedback or constructive critisicm.
Mark Bouris @ The Ivy 7:00-8:30am
Did I learn lots of practical tips to share with you?
Well… no. A lot of what Mark spoke about was basically Economics 101… for the real world.
Since I like to get straight to the point -below I’ve included how what Mark said it will affect YOU. Usually people would put this at the end (but read after this and you might learn a few things about Economics in the real world!)
How it affects YOU –
Shopping- Prices might go up (also called inflation). Businesses have to pay more to borrow money (or not be able to get money from banks) – they will try to charge you more.
Saving Money – You can get pretty good deposit rates at the moment (because banks want your money so they can lend to others).
Borrowing money -You might have to pay a higher interest rate when you borrow money. And the banks will be more strict when they lend you (if a house you might need more of a deposit, etc).
Interest Rates – Those who have loans – might find the interest rates go up. Either because the reserve banks raise them (because of inflation – see shopping) or because the banks can’t get money so increase the rates.
This is the end of how it affects YOU. However you may want to read on to gain knowledge about Economics and the real world – Scott
What Is Economics & Where the economy is Now
What is Economics? I checked the wikipedia on Economics - but I seem to remember at uni defining Economics as how people respond to incentives – and make decisions about scarce resources (such as money, goods and services).
Economy in mid 90′s: Mark spoke about back in 1990′s when he launched Wizard Home Loans – money was everywhere. Large Institutions were providing money for Wizard to on-lend to consumers.
This created greater competition and the previous 4% margin the banks would get on loans (the difference between the Cash rate which banks lend each other and what they would charge to consumers).
Then pushed the bank/lender margin down to 1.5%.
Economy 2000′s: Now it is a different story.
2007 Subprime:A few years ago the Subprime crisis hit (see below for my subprime explanation)
So the money dried up. A lot of our smaller lenders (like Aussie, RAMs, Wizard) were bought by the Big 4 banks. And there were a few other mergers as well (St George and Westpac being one)
2009-now - Credit Squeeze - So the situation now is that there are 4 big banks. They now have the power (and are using it). In the 90′s/2000′s you could borrow 90% or 100% on a residential property.
Now the Big 4 Banks will have a stricter lending criteria on WHO and HOW MUCH they lend. But they are still making profits on loans (about 3.5% on the margin now)
How it affects businesses Business lending is always stricter than borrowing for a home. Banks have turned off the taps to provide funding to business. Or they lend with such strict criteria (like covenants where the business has to show their books to the bank and if they breach conditions could have to pay the whole loan back).
Businesses need money not just for rennovations but also to keep the business afloat. Profit does not equal Cashflow. If you have a company that builds Boats – you could make a lot of profit but if you can’t get the money to build a boat then you are stuffed.
Or with a small business – The clothing store has a whole store full of clothing (stock) that has come from suppliers. The suppliers probably want payment in 30 days. The stuff they haven’t sold might be borrowed from the bank as an Overdraft (bank account where you go negative and pay interest at cheaper rate than Credit card)
Subprime Crisis Explanation- In America they gave loans to everyone (if you could breathe you could get a loan). Similar to what we in Australia call No-doc (No-Documentation) or Low-doc loans – America gave Subprime loans.
Then suddenly people couldn’t make the loan repayments (some didn’t even have any way to make repayments in the first place and never should have got the money) .
This created a domino effect (which is Ecomonics).
1. People Couldn’t Pay
2. House prises crashed in America (very different real estate market to Australia – you can just hand the keys back sometime and walk away regardless of the loan)
3. Banks Crashed because they had borrowed from other banks/institutions to get the money
4. Institutions collapsed – like Merril Lynch – one of the biggest stockbrokers.
(however note that Australia has a very different system to America and our house prices are not going to crash, our banks are among the strongest at the world at the moment, etc.)