Saul Eslake, Chief Economist, ANZ Bank

The eventual severity of this event depends on how far financial market opinion and sentiment swings in the opposite direction to where it’s been for most of the past three years. For much of that time, financial markets have been seriously underpricing risk. For some time now, central banks and regulators have actually been wanting some reversal of this trend. It’s in the nature of financial markets that sentiment and opinion swings from one extreme to another like a pendulum. It’s in the nature of pendulums that when they reach the most extreme point on the arc they move in the other direction, but they don’t stop in the midpoint. They tend to go over to the other extreme. I think there are elements of that happening now. I don’t see any reason — and I acknowledge we are dealing with what Donald Rumsfeld would call unknown unknowns — at the moment why there should be a generalised credit crunch in Australia.

Adam Clements, Senior lecturer, School of Finance, QUT

If I knew with certainty where prices are going to go and how long it would take, I could make a heck of a lot of money out of this. I don’t think anyone knows exactly how long this is going to take to work out of the system. The Australian mortgage position is quite different to the US in that the low doc market here is nowhere near the size of the market in the US. From that point of view our mortgage markets are a lot stronger. I guess what makes it difficult to ascertain how long things are really going to take is that it’s not obvious who had big exposures to these sorts of instruments. I think that has certainly spooked the market. Given the volatility in the market, I guess the market is quite unsure about what impact this is actually going to have on corporates in terms of earnings and sales and revenues. It has all been triggered by problems in the debt market, but the linkage to the equity markets is if this leads to a downturn in the US economy in terms of consumer spending, that could well have an impact globally. It could also have an impact on the Australian economy via Chinese exports to the US if the US economy is harmed by US spending. We could be impacted in the long term but it’s really difficult to know at this stage how much that is going to flow through.

Dr Gary Twight, School of Finance and Applied Statistics, ANU

Subprime lending really became a hot market and like leveraged buy-outs before it, when things become hot, the last set of loans issued tend to be very marginal. This could simply be another correction. The market has finally realised that [the businesses] they are lending to now probably shouldn’t be lent to and if that is the case this is a correction which will reduce the set of subprime lending out there and the market will, as it’s done before with all these other corrections, continue on. In terms of the talk around about a “crisis”, I don’t see it. I do appreciate that there is a correction in the market, but it’s not like we haven’t seen this before. The thing we don’t know is the extent to which the subprime market lent to those marginal lenders. When you find that and it is corrected the market will get back to its normal natural behaviour. That said, I’m sure this will affect the Australian lending market. The affect will be longstanding. If the Australian market has lent in the same way as their US counterparts have, and I see no reason to believe they haven’t, then we will witness the same correction here. But in terms of the equity market, this is a correction that is just part of the natural cycle. This wouldn’t appear to be any more devastating than the currency crisis of a few years ago, nor more devastating than the long term capital crash.