Tag Archives: mortgage

Oct Reserve Bank Contemplates Housing Bubble

a door marked "reserve bank" thirteen men sitting at a table one is saying "Professor Beancycle, must you chew bubble gum while the board is discussing the housing boom" while another man blows a bubble. In the background there is a chart titled "lending" that shows a rising graph
a door marked “reserve bank” thirteen men sitting at a table one is saying “Professor Beancycle, must you chew bubble gum while the board is discussing the housing boom” while another man blows a bubble. In the background there is a chart titled “lending” that shows a rising graph

 

In Peter Nicholson’s cartoon “Oct Reserve Bank Contemplates Housing Bubble” the members of the Reserve Bank Board are seated at a long table with the Governor, or chairman, at the head of the table. There is a door marked Reserve Bank and a chart that shows lending is rising in the background. One man at the table is blowing a bubble with chewing gum, and the Governor asks him not to do so “when the board is discussing the housing boom,” (Nicholson). The humor in this cartoon comes from the author’s use of dramatic irony. The reader knows that the “boom” will lead to a bubble, and this bubble will eventually burst (Nicholson). The cartoon was published before the recession of 2008, but anyone reading the cartoon after the recession would know that the bursting of the housing bubble was a major cause of the worldwide economic downfall. Nicholson obviously knows this and points the readers attention to the fact that lending has always been, and will always be, a major factor in economic downturns. This cartoon also relies on the homophone “bubble,” referring to the housing bubble and the bubble gum (Nicholson). The Governor asks his colleague not to chew bubble gum because it will pop just like the housing market.

Nicholson’s cartoon was published in 2002 in The Australian, a long standing news source Down Under. It depicts worries held about a housing bubble that has, arguably, yet to burst. A ‘housing bubble’ is a period of time in the property market during whcih prices go through the roof. A housing bubble is fueled by an increase in demand and speculation. The Australian bubble was not spread evenly throughout the country. Rather, housing markets in Sydney and Melbourne saw a “double digit growth” while elsewhere home values were declining or stagnant (Spasik). This extreme price difference was caused by a shortage in the Sydney housing market (Spasik). To account for the demand “over 720,000 homes will be built across” Australia, at least half of which will be in either Sydney or Melbourne (Spasik). 

The text of the cartoon refers to the property market as a boom rather than a bubble. Excessive optimism was what allowed the bubble to expand. Investors and buyers alike are swept up in the boom of the market, but they always seem to forget the bust. The speculation that prices will continue to rise causes the market to soar. In order to accommodate the demand “loose lending” is often used to entice buyers (Razzi). However, these low interest mortgage rates are one of the primary causes of a housing bubble (Holt).

In a similar fashion to John Knott’s cartoon “It Was a Fool’s Paradise,” published in the Dallas Morning News in January of 1933, Nicholson points the blame at lending, or credit. Just as it was in the 1930’s America it is not the average buyer’s fault for using this credit, but rather a trick that will wreck their economy. Knott depicted the allure of credit as enticing buyers to their doom. Similarly Nicholson makes an effort to include lending in his cartoon while he does not include the Australian public at all. By doing this he alleviates the buyers of any fault and places the blame on the lenders.

While it is clear that the Reserve Bank depicted in Nicholson’s cartoon is the Australian Reserve Bank, the US Federal Reserve plays a large role in Australia’s economy. This global connection caused the worldwide economy to fall into a recession in 2008. The value of the US dollar influences the value of currencies around the world, and should it lower it will “push the Aussie dollar higher,” (Russell). In order to combat the this the Reserve Bank of Australia (RBA) is “lowering interest rates…to keep the Aussie dollar low,” and it is this lowering of rates that has allowed for the housing bubble to expand (Russell). The low interest rates lead to the housing bubble in a couple of ways. They “encouraged the use of adjustable rate mortgages” to combat buyers’ inabilities to pay for their home on a fixed rate mortgage (Holt). These low rates also led to leveraging, or “investing with borrowed money” (Holt). Once again this is reflective of Knott’s cartoon criticizing the use of easy credit, and how lending can turn an economy on its head in a matter of years.

Whether in 1930’s America or twenty first century Australia lending has proven to be a serious problem in the economic longterm. In Australia during the early twenty first century it lead to an incredible increase in housing prices, almost double that of the US (Sheehan). In his cartoon Nicholson is critical of the Reserve Bank’s role in the housing market as well as the role of borrowed money.

Works Cited

Holt, Jeff. “A Summary of the Primary Causes of the Housing Bubble and the Resulting Credit Crisis: A Non-Technical Paper.” The Journal of Business Inquiry 8.1 (2009): 120-29. Web. 19 Nov. 2015.

Nicholson, Peter. “Oct Reserve Bank Contemplates Housing Bubble.” Nicholson. N.p., n.d. Web. 14 Nov. 2015.

Razzi, E. “Bursting the Bubble about the Causes of the Housing Bubble.” Washington Post. The Washington Post, 08 May 2010. Web. 20 Nov. 2015.

Russell, Shae. “Why the US Federal Reserve’s Next Move Matters to Aussie Investors.” The Daily Reckoning Australia. The Daily Reckoning Australia, N.p., 04 Nov. 2015. Web. 19 Nov. 2015.

Sheehan, Paul. “Paul Sheehan: All Bubbles Burst, First China, Later Australia?” The Sydney Morning Herald. The Sydney Morning Herald, N.p., 27 Aug. 2015. Web. 19 Nov. 2015.

Spasic, Mat. “Why the Aussie Property Bubble Just Popped.” The Daily Reckoning Australia. The Daily Reckoning Australia, N.p., 21 Sept. 2015. Web. 19 Nov. 2015.

The Credit Crunch

INKCINCT Cartoons, "The Credit Crunch"  A car crash occurs between subprime mortgage market, private investors, and the financial sector.
INKCINCT Cartoons, “The Credit Crunch”
A car crash occurs between subprime mortgage market, private investors, and the financial sector.

“The Credit Crunch”

INKCINCT

September 11, 2008

The Credit Crunch

In 2008, a large number of Americans were fighting staggering unemployment, plummeting house prices, and a complete meltdown in their retirement accounts.  Naïve homebuyers and controversial banking practices had created the biggest financial catastrophe since The Great Depression.

In the years leading up to 2008, the financial sector utilized loose lending practices to qualify individuals with low income and poor credit to purchase homes.  This collection of homebuyers was known as the subprime mortgage market (“U.S. Housing Bubble and Credit Crisis in the Late-2000s”, 340).  By extending credit to an unqualified subprime mortgage market, the banks created an artificial surge in demand for housing, consequentially inflating house prices (Arner, 92).  To further fuel demand for their mortgage products, the banks provided options for small down payments and low introductory rates (“U.S. Housing Bubble and Credit Crisis in the Late-2000s”, 340).  These types of lending tactics enabled individuals in the subprime mortgage market to buy bigger homes than they could actually afford (Arner, 92).  As introductory rates began to expire, these homeowners were unable to make their full monthly payments and the number of foreclosed homes rose at a startling rate (Hirsh, 38).

The increasing foreclosures led to a degradation of the entire real estate market and caused downward pressure on housing prices overall (Arner, 93).  Suddenly homes were not worth enough for banks to recoup their loans amounts from the perpetually growing defaulters in the subprime mortgage market (“U.S. Housing Bubble and Credit Crisis in the Late-2000s”, 340). Accordingly, the banks were forced to take huge accounting losses for their failed loans (“U.S. Housing Bubble and Credit Crisis in the Late-2000s”, 340).  The resulting downturn in the housing, financial, and consumer sectors had a ripple effect throughout the entire economy.  Consequently, stocks and bonds of just about every company tanked.  Small investors who were invested in mutual funds of stocks and bonds through their retirement accounts, college funds, and pensions were unexpectedly devastated (Arner, 96).  Government officials were afraid of the economic ramification of the financial sector collapsing and the lack of consumer protection available to subprime mortgage borrowers (“U.S. Housing Bubble and Credit Crisis in the Late-2000s”, 341).  Therefore, they offered assistance programs to the subprime mortgage borrowers and created enormous bailout plans for the vast majority of the financial sector (“U.S. Housing Bubble and Credit Crisis in the Late-2000s”, 341).  On the other hand, many small investors were losing a large part of their life savings and were left to deal with the consequences on their own.

The article, “More Zeroes for Investors,” described the multi-billion dollar loss in the stock market caused by the subprime mortgage crisis.  Specifically, it highlighted the large percentage drops in each sector of the market and the impact of those declines on small investors (Craig, 1). The editorial provided an anecdote from a non-profit worker, Barron Segar, who was too afraid to look at the computer due to the falling mutual fund prices but considered buying more funds if the downtrend continued (Craig, 2).  It also described a 59 year-old doctor, Roy Steiman, who planned to purchase additional shares in Bank of America and mentioned, “If Bank of America [failed, we’d] be in big trouble” (Craig, 1).  Through those examples, the article emphasized the hopes of people like Mr. Steiman and Mr. Segar as they looked to recoup their losses by purchasing additional shares at lower prices.  The editorial also underscored the notion that these individuals were undoubtedly afraid of further losses.  Mr. Segar was quoted as saying, “I think the biggest lesson that investors [learned was] that there [was] no safe haven” (Craig, 2).  Another example of investor fear in “More Zeroes for Investors” was a story about Mr. Segar’s father.  He was described as a 76-year old man who was heavily invested in financial stocks due to his employment within a bank trust department (Craig 2).  It could be inferred that he was nearing retirement age and depended on those investments to provide him support.  Mr. Segar expressed concern for his father in the article and mentioned, “My dad [was] going to fall over when he [received] his next statement” (Craig 2). The article concluded by noting other areas of the market which were likely to be pushed down and provided a forecast for the general downtrend in the economy to linger (Craig, 2).  In short, as there was more pain ahead for the stock market, small investors were expected to continue to get hurt.

The political cartoon, “The Credit Crunch” also portrayed the suffering of small investors as it illustrated the interaction between the three primary participants in the 2008 credit crisis:  “small investors”, the “subprime mortgage market”, and the “finance sector”.  The involvement of these groups was shown through a car accident in which the small investors were crushed in between the subprime mortgage market and the finance sector. Though there were several elements that contributed to the 2008 credit crunch, the artist placeed an emphasis on the general obliviousness of the subprime mortgage market and the cold-hearted greed of the finance sector.

In “The Credit Crunch”, the finance sector was driven by a pointy-nosed chauffeur inside of a large Roll Royce.  This representation alluded to the enormous amount of wealth generated by the banks using their loose lending policies.  It also underscored the greed that was involved in carrying out their deceptive practices.  The subprime mortgage market was shown through what appeared to be a lone driver in a giant SUV.  This portrayed the consumerist nature of the subprime mortgage market participants and their inclination to purchase items that were larger or more expensive than necessary. The finance sector was depicted as leading the pack and could be seen as the forerunner in the crisis.  The subprime mortgage market was thoughtlessly following the path laid out by the finance sector unaware that it caused small investors to suffer.

The individuals shown inside the cars also contributed to the message of the artist.  The finance sector participants were shown with emotionless, forward looking faces, which indicated their apathy towards the individuals they had hurt and the general unawareness of the destruction they had left in their path.  The individual shown inside the subprime mortgage market vehicle looked young and clueless.  His youthful demeanor and wide-eyed smile indicated his naïve nature and obliviousness to the damage caused by his actions.

Both the subprime mortgage market and finance sector were illustrated as larger vehicles that were seemingly damage free.  Meanwhile, the artist portrayed the small investors with a tiny automobile that was completely crushed and had a life-less hand of one its passengers hanging out from the side.  It appeared that there were many passengers inside the small investors’ car; however, they were shown without faces in order to possibly hide the emotional turmoil they encountered. Through an otherwise humorous medium of a political cartoon, the author emphasized the seriousness of the anguish and devastation felt by small investors during the 2008 credit crisis.

The article, “More Zeroes for Investors”, and the cartoon, “The Credit Crunch” both highlighted the damage the banks and the mortgage market created for the small private investors during the 2008 Credit Crisis. The excessive borrowing, lending, and fear in the markets that were seen in the modern credit crisis echoed the events that led up to The Great Depression (Arner, 98). The 1931 Knott cartoon, “Urgent Letter to Santa Claus” and the accompanying editorial, “Panic or Prosperity” referred to the extreme borrowing of Germany following the First World War that ultimately led to the disastrous Great Depression. Likewise, the concept of over-lending and over-borrowing was present in the modern credit crisis between the banks and the mortgage market.

Works Cited

“Credit Crunch.” The Encyclopedia of Money. Larry Allen. 2nd ed. Santa Barbara, CA:   ABC-CLIO, 2009. 92-93. Gale Virtual Reference Library. Web. 17 Nov. 2015.

Hirsh, Michael. “Mortgages And Madness.” Newsweek 151.22 (2008): 38-40. Academic Search Complete. Web. 17 Nov. 2015

“U.S. Housing Bubble and Credit Crisis in the Late-2000s.” Corporate DisastersWhat   Went Wrong and Why. Ed. Miranda H. Ferrara and Michele P. LaMeau. Detroit: Gale, 2012. 339-342. Gale Virtual Reference Library. Web. 17 Nov. 2015.

Arner, Douglas W. “The Global Crisis of 2008: Causes And Consequences.” International Lawyer 43.1 (2009):91-136. Academic Search Complete. Web. 17 Nov. 2015.

“Credit Crisis: Market Effects | Investopedia.” Investopedia. N.p., 18 Nov. 2008. Web. 17 Nov. 2015.

“What Is a Subprime Mortgage?” Investopedia. N.p., 02 Sept. 2007. Web. 17 Nov. 2015.

“The Credit Crunch.” INKCINCT Cartoons. N.p., n.d. Web. 17 Nov. 2015.

Craig, Susanne. “As Subprime Write-Downs Top $100 Billion, Dow Industrials Drop 306.95 Points; Small Investors Brace for More.” Wall Street Journal 18 Jan. 2008, Eastern ed., sec. 15: 1-2. EBSCO eBook Collection. Web. 12 Dec. 2015. <http://web.a.ebscohost.com.ezproxy.lib.utexas.edu/ehost/detail/detail?sid=121db932-d031-4e4f-aa5f-64985dccdfef%40sessionmgr4002&vid=0&hid=4114&bdata=JnNpdGU9ZWhvc3QtbGl2ZQ%3d%3d#AN=28450284&db=a9h>