Home > Economic policy > (Re)defining low interest rates

(Re)defining low interest rates

February 28th, 2005

I was watching Costello discussing the likely increase in interest rates on the news last night and he said something “Whenever you have a single digit in front of your interest rate, it’s low”. I couldn’t see a reference to this in the papers today, and I wonder if any readers can locate a transcript or similar.

This is all relative of course. My first home loan was at 9.5 per cent and that was considered outrageously high. For those who experienced the economic management of Howard and Keating in the 1980s, such a rate came to seem amazingly low. But with the levels of indebtedness prevailing now, I’d have thought 9.5 per cent would be ruinous for many.

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  1. harry clarke
    February 28th, 2005 at 07:01 | #1

    Presumably the high levels of indebtedness give the RBA lots of punch. They can defuse the real estate bubble with only gentle interest rate rises and negative moral suasion. As you say however even these gentle rises will cause lots of pain to those with high preexisting debt levels — the middle income earners with $300,000-400,000 mortagages. I think the RBA have been smart in conducting monetary policy over recent years.

  2. still working it out
    February 28th, 2005 at 07:29 | #2

    The housing bubble is over. There is no longer any need to defuse it. A look at the Sydney property market shows its flat or falling and Sydney has been ahead of the curve for the entire just ended boom.

    If they wanted to defuse the real estate boom action (not necessarily raising interest rates, there are plenty of other options) should have been taken four or more years ago. Its weird that the Reserve Bank governor is now complaining that the low interest rates were squandered on housing. If he can see the problem now why didn’t they say/do something during the boom when it would have made a difference? The problem was just as obvious then. Its almost like he is admitting he failed in his job.

  3. February 28th, 2005 at 09:41 | #3

    While the RBA has only limited control over it (compared to the government), how smart has been a monetary policy that has seen indebtedness in non-productive housing rise to unprecedented and dangerous levels, and transferred a massive amount of wealth from those who don’t own property to those who do, in any way smart?

  4. February 28th, 2005 at 09:41 | #4

    Apologies for the poor grammar in the previous post, but hopefully the point is clear enough.

  5. Katz
    February 28th, 2005 at 09:48 | #5


    Costello’s single digit sound-byte is quoted in the Australian here:


    I guess Costello doesn’t expect home-loan interest rates to exceed 10% in the near future, else this quote will bite him on the bum.

    Given the tax advantages accruing to capital gains on main residences, McFarlane’s complaints about the squandering of investment capital on housing seem less naive than disingenuous.

  6. ab
    February 28th, 2005 at 09:51 | #6

    Robert Merkel said: “…transferred a massive amount of wealth from those who don’t own property to those who do, in any way smart”

    I don’t own any real property. In what ways has my wealth been transferred to those who do own such property?


  7. Tony
    February 28th, 2005 at 10:22 | #7

    Private sector debt is at record highs. Public sector debt is at record lows. The government has transfered the bulk of its debt to the private sector. Governments can generally borrow at 2% less than the private sector.This higher risk premium being charged dictates we are all paying higher rates than we should.

  8. Youie
    February 28th, 2005 at 11:24 | #8

    John, the full transcript of Costello’s interview is at sunday.ninemsn.com.au

  9. still working it out
    February 28th, 2005 at 12:04 | #9


    If you want to buy some property you will have to pay an inflated price for it which will go to someone who already’s owns property and did not pay very much for it. In practice this is wealth transfer from the younger generation (who generally do not own property) to the older generation (who generally do).

  10. still working it out
    February 28th, 2005 at 12:36 | #10

    You know if Kim Beazely has any brains at all he must be salivating at the prospect of taking on Costello directly. The guy has foot and mouth disease. How stupid and out of touch is that single digit quote going to sound next to stories of families losing their homes because they can’t afford interest rates of 8.25%, let alone 9% plus. I hope Labour have got that footage ready to slip into an ad for the next election.

    It also makes me wonder at the strength of the Liberals in the post-Howard era. Say what you want about Howard, but he is very very careful (skillful?) in his use of language. He would never say something as dumb as that. Costello seems to be a shoe-in for Liberal party leader, but he has never had the chance to really learn how to play politics with his policy mix and run an election campaign. Potentially quite a bit of weakness there.

  11. harry clarke
    February 28th, 2005 at 12:57 | #11

    Robert, Smart in the sense of avoiding a nasty recession, sustaining high economic growth at among the highest levels in the developed world, keeping inflation low and keeping unemployment at its lowest levels for decades. I wonder if having Paul Keating at the helm of Government would have led to another ‘recession we had to have’.

  12. alpaca
    February 28th, 2005 at 13:56 | #12

    Peter Costello’s remark about interest rates comes from his interview on the Sunday program of 27/2/2005. A transcript of that interview can be found at:


  13. joe2
    February 28th, 2005 at 15:59 | #13

    Howard ,during the election, promised that interest rates would be lower under the Liberals than Labor. He is on a winner there because we will never know. Never before has personal debt been so high and precarious. A point that was never allowed to surface.

    Australian Treasury Secretary,Ken Henry warned very recently that the U.S. is close to meltdown if money stopped pouring in to support it’s economy. A drop in their dollar would presumably have consequences for our own. A great opportunity, for those rich in Euros, to buy real estate here and maintain very high prices. Please note,I do not own real estate or Euros and barely passed economics.

    What do ya reckon?

  14. February 28th, 2005 at 16:01 | #14

    But, Harry, hasn’t it all been achieved on the basis of radically increasing debt to do up our houses and import plasma TV’s? And isn’t it quite likely that our debt binge will catch up with us some day soon?

  15. Andrew Reynolds
    February 28th, 2005 at 16:02 | #15

    SWIO – If you expect interest rates to go that high then make a bet on it. Borrow fixed at the current rates, sit on the cash for however long it takes for the rates to go up and then lend at that higher rate. If you are right then the more you borrow now the richer you will be.
    If you are wrong, however, bankruptcy looms. In practice, however, it makes very little sense to bet against the market. In the short to medium term, the market does not expect rates to go over 6% any time soon, so I will take their guess against your, thanks.
    Costello has a fair idea what he is saying – much better than the “By 1990 no child will be living in poverty” from a former Labor leader, whom Beazley was a minister under.

  16. Razor
    February 28th, 2005 at 16:28 | #16

    Dear Mr Merkel

    The reason for the increase in consumer debt is a combination of a wealth effect – the vast majority of Australians are economically better off and feel willing to spend more, and the improved flexibiliy in financial markets, allowing for more lending/borrowing. Please explain exactly how you see the linkage between borrowing to renovate a house (increasing the resale value of an appreciating asset!) or to buy consumer goods and whatever event will “catch-up” with those that have particpated in these evil activites (are they going to get square eyes from watching too much TV?). Are you expecting an economic slow-down, leading to loss of jobs, leading to default on debt, etc. etc.?? If you are expecting this, please explain why you expect it – what will cause it and what will be the outcomes.

    Or are you just anti-consumerism?

  17. Ian Gould
    February 28th, 2005 at 17:16 | #17

    Ab: I don’t own any real property. In what ways has my wealth been transferred to those who do own such property?

    Well for one thing, you paid higher taxes than would otherwise have been necessary to make up for tax deductions on the negative gearing of investment properties.

  18. February 28th, 2005 at 17:56 | #18

    Investing in property is not “non-productive”. What should humans spend money on if not a house? Higher house prices have resulted in a development boom, which has resulted in more houses being built. If more houses for more people is not productive… then I’m not sure what is?

    And improving house prices have not made anybody poorer. Non-home owners have the same money they had before. If they choose to buy a house now it costs them more… but they also get a more expensive asset… so they are no worse off.

    Having said all of that… property prices would plumet if I had my way. Planning laws? Bah! Who needs them? 😉

  19. February 28th, 2005 at 18:00 | #19

    Razor, two things. I think a lot of Australians have borrowed too much and have left themselves horribly vulnerable to interest rate rises, which may be forced on us by global factors. Secondly, we are importing considerably more than we are exporting. This can’t go on forever; sooner or later something will have to give, and it’ll probably be our currency, meaning that imported consumer goods will go up a lot in cost.

    Combine that with the fact that our current account deficit is as bad as it’s ever been despite the fact we’re getting premium prices for exports and discount prices for imports, and you can’t blame me for wondering what’s going to happen when the gods stop being so kind…

  20. joe2
    February 28th, 2005 at 18:11 | #20

    Harry Clarke, just to take you up on one issue.
    QUOTE “unemployment at it’s lowest level in decades”

    Is defining “employment” as 2 hours a fortnight in work,a fair go?

    The current definition or close. Damn it Harry you are right. With definitions like that you can persuade us all that the rate has never been lower in two centuries.

  21. Razor
    February 28th, 2005 at 18:44 | #21

    Dear Mr Merkel,

    Once again you generalise without showing any logical cause and effect relationships leading to the outcomes that you forecast.

    Just because people have decided to borrow a lot and make themselves vulnerable to interet rate rises does not make it a bad thing. They are free individuals, allowed and able to make choices of their own free will. If a person has decided that living with lots of debt is how they want to live – that does not make it a bad thing.

    Interest rate rises are not forced on the Australian economy by the international community. Following that logic, we should have very low rates because the US and Japan have much lower rates than us. Interest rates are set by the RBA, an independent body tasked with controlling inflation. While they may gnash their teeth about Sydney Centric asset price bubbles, their main focus is whether or not inflation is within their target band and what to do to keep it there. The only international influence is indirectly through the impact on inflation numbers through import prices, which are only a part of the factors causing inflation.

    Your concern about the trade balance is touching, however it is only part of the total Balance of Payments, and while the Chicken Little argument about our currency has some weight in some quarters, it doesn’t appear to have much weight in the corner that matters – the AUD (Australian Dollar) market. If you believe what you say, you should be borrowing AUD to invest in offshore currencies – you could make a killing on the currency futures market. I doubt that you are (or are you a plant and actually have shorted the AUD and are trying to influence the global capital markets?)

    It sounds to me you are probably a protectionist and believe in protecting Australian workers from the terrible global industrial military financial complexes that have no feeling for the little people. If you are, and I suspect you are because of the “bad-high-debt” line you are pushing, then you should be praying for a devaluation in the AUD so that Australian produce becomes more competitive (even if we can’t compete with overseas quality in cars, planes, etc. etc.).

    As for getting premium prices for export – most major export commodities are sold in long-term contracts. The premium prices now being negotiated are for future contracts, leading to future demand for the AUD, leading to a the AUD remaining around the current level or higher for sometime to come. At the same time, the higher export prices are caused by a combination of increased demand, mainly from China, which appears unlikely to diminish in thenext 5 to 10 years. At the same time supply is constricted because of lack of investment in resource exploration and development of infrastructure to export the stuff (with the Greenies and Land Rights activist slowing most projects down). So with increasing demand and constricted supply, leading to sustained high export prices leading to sustained high demand for the AUD, exactly when is this fall in the AUD you are expecting going to happen?

  22. Razor
    February 28th, 2005 at 18:56 | #22

    I also wouldlike to add for all the Howard-Haters that the Coalition never promised interest rates wouldn’t go up, only that they wouldn’t go up as much under a coalition government as under a Labor one. Also, even with a 0.5% rise, interst rates are still at historically low levels.

  23. McD
    February 28th, 2005 at 19:00 | #23


    As I understand, the ABS definition of employment has remained the same for at least 20 years. But I’m happy to corrected if I’m incorrect.

  24. McD
    February 28th, 2005 at 19:02 | #24

    D’oh! First post and I use corrected and incorrect in the same sentence. Mea culpa…

  25. Homer Paxton
    February 28th, 2005 at 19:35 | #25

    The household sector is more vulnerable to rising interest rates now than when interest rates were at 18% under Keating or over 23% under Howard.

    Ever look at a graph of the $A and the Current Account deficit as a % of GDP?
    I thought not.

  26. joe2
    February 28th, 2005 at 20:39 | #26

    McD, 3 hail marys will be sufficient. The lie about unemployment is apolitical. No point scoring here and probably a 20 years old rediculous definition.

    The prob is that the media/politicians/Harry run this line that we have low unemployment when it is a very dubious proposition.


  27. Razor
    February 28th, 2005 at 21:35 | #27


    While your point has some merit, it fails to take into account two significant factors. Firstly, the economy is in a much sounder position than back then. And secondly, there is an increased level of flexibility in the financing arrangements available to lenders than existed back then. It is not a straight apples with apples comparison.

    If you are correct, please explain why the vast majority of professional economists aren’t spruiking the same line as you? Do you have greater insight than they?

    Please note that some joker has taken the Razor name and is dispensing abuse and irrationalities. Please ignore them.

  28. February 28th, 2005 at 22:16 | #28

    Razor, with a farm in the family I would be extremely happy to see a fall in the AUD.

    However, as I understand it, if the AUD fell the amount it’d probably need to to bring our current account deficit down, the inflationary impact (particularly on petrol prices, that issue that nearly sank Howard in 2000) would cause huge pain out in the electorate. Particularly in mortgageland where, from what I was able to deduce from RBA statistics on the matter, recent mortgagees are loaded to the gills with debt and must be counting every penny.

    As for your “put your money where your mouth is” comment, I think our gracious host has made the point before that the market can remain irrational for longer than most individuals can remain solvent betting against it. Not that I have much liquid cash to throw around at the moment (new job starts tomorrow…)

  29. Razor
    February 28th, 2005 at 22:39 | #29

    Robert – good luck with the new job.

    Of course with petrol prices, you are assuming that oil prices stay where they are and that fuel taxes (making a large percentage of the cost of fuel) cannot be lowered.


  30. Fyodor
    March 1st, 2005 at 07:48 | #30

    “Please note that some joker has taken the Razor name and is dispensing abuse and irrationalities. Please ignore them.”

    How do we tell the difference? Sorry, couldn’t resist.

  31. Razor
    March 1st, 2005 at 09:42 | #31

    Boom Tish

  32. Homer Paxton
    March 1st, 2005 at 12:41 | #32

    appropriate Razor we talk on this today when the current account sets a record for Australia.7% of GDP. Well forecasted Henry Thornton!!

    These figures tell me the $A is headed towards tasmania. They don’t tell me when only that they are.
    given the constraints the RBA has talked about with regard to inflation the RBA must be terrified that the fall might happen soon when the increase in costs would be pased on into prices.

  33. March 2nd, 2005 at 00:10 | #33

    Razor, in answer to your question at 21 about why shouldn’t people have debt levels that they freely choose, consider this: financing via debt pays no attention to whether it is financing a tragedy of the commons etc.

    That is, taking houses as an example, availability of housing loans may make former strategies impossible, since – as an engineering approximation – we can pretend that new housing isn’t material.

    Then debt just makes it easier to move things back and forth, mere poaching.

    I modelled this once for debt financing farmers’ loans for fertiliser, but it’s valid elsewhere.

    Even more interesting, once when I asked a building society representative in the UK whether loans drove up house prices, he didn’t address the question, instead citing studies that showed they didn’t affect inflation.

  34. Razor
    March 2nd, 2005 at 14:00 | #34

    Dear P.M. Lawrence

    While I am not sure exactly what you mean by “a tragedy of the commons”, I think that what you are saying is that we need to protect people from themselves – restrict their borrowing capacity etc. Sounds very Nanny Statist to me. I believe all individuals should be able to make their own free choices and government should stay out of peoples lives. In terms of borrowing/lending – the market is the best regulator for borrowing capacity. I prefer to treat people like adults. If they decide to stuff it up, so be it.

    If you are concerned that borrowing increases asset price inflation of houses, are you proposing that people not be allowed to borrow in order to buy a house and investment properties. Or, are you saying they should be alllowed to borrow, but only to certain limits (decided by some politcal-bureacratic process rather than the market)?

    Inflation in property prices, (outside of “rare earth” such as water views, inner city etc.) is a function of not only borrowing capacity but also artificially created land shortages. If local and state governemnt released more land and provided the infrastructure, then supply increase placing downward pressure on prices. It is not simply a matter of borrowing causing the increase in prices.

  35. March 2nd, 2005 at 22:09 | #35

    “sustaining high economic growth at among the highest levels in the developed world”

    The world must be doing very badly if it can’t top 0.1% for the quarter. I suppose it’s all because of greedy unions and Dalrymple bay, though.

  36. March 3rd, 2005 at 17:38 | #36

    No, Razor, what I am getting at is that there can be market imperfections lying around which get fuelled by easy finance. Then, because they are imperfect, you don’t have people able to look out for their own interests. Regulation is like a tourniquet, buying time to fix things structurally so you can release the tourniquet.

    The free choice thing works, but only when reality matches the theory. Since finance drives anything that is going, it will also drive any bad things – including distorted housing markets.

  37. Razor
    March 3rd, 2005 at 18:52 | #37

    Dear P.M. Lawrence

    What you are saying is that because an actual outcome (asset prices, in particular real estate prices, in this case) does not match with the predictions of a model or theory (in the case of asset prices that may be the Capital Asset Pricing Model or Efficient Market Hypothesis) then regulation is required to limit or correct a “market imperfection”. A nice sentiment to have. The problem however is where do you draw the line on which asset pricing markets are regulated and how.

    People are able to look after their own interests, even in the face of market imperfections. We do it every day with our superannuation funds being exposed to the stock markets which demonstrate imperfections.

    A classic example was that Apartment property spruiker, Kay I think was the name. What he was doing was an imperfection in the market, and despite the relevant Authorities expressing their misgivings and many respected commentators saying it was fraught with danger, there were still suckers willing to risk it. They saw the risk-return trade-off as being viable and couldn’t be told. Their tough luck!

    I am certainly not saying there should be no regulation, but I believe that the Corporations Law, et al, is sufficient to protect consumers, along with APRA and ASIC.

    In terms of the property market, I do believe one of the problems is that Real Estate Agents are not subject to the same regulation as all other investment advisers (of which I am one) who are required to have an Australian Financial Services Licence and to give good advice.

    I do beleive that this is the biggest market imperfection in Australia, because direct investment in residential rental property does not generally stack up against a well managed portfolio of diversified investments when assessed against all relevant criteria. But Australians continue to invest in residential real estate and do well from it – good luck to them.

    Your comment confirms that you understand the two primal driving emotions in the investment markets – Fear and Greed. Once you understand that and can seperate yourself from those emotions you are in a position to provide good long run returns for yourself by selling to the Greedy and buying from the Fearful. (But what and when to do those things – that is what I get paid for!)

    The beauty of our democracy is the on-going tensions between view points will generally lead to outcomes that benefit the majority. I am probably a little too free-market because I am an educated risk-taker. You appear to have more of a focus on social justice and equity. The on-going debate results in things like the evolution that has occurred in the provision of investment advice in the last decade. Just have to fix up the bloody real estate agents now.


  38. Homer Paxton
    March 4th, 2005 at 09:36 | #38

    Razor raises a good point.
    Real Estate spruikers DO need to be licenced.
    This should have been addressed many years ago when Hockey was the Minister in charge.
    I hope the present Minister pulls their finger out and gains state agreement on this.

    Secondly it is highly ironic that greed is bad for capitalism.
    It means people and company go to far and usually provokes a recesssion!

  39. March 4th, 2005 at 15:19 | #39

    Sigh. Razor, that is not what I said.

    Perhaps I should do a detailed comparison of what you just put and what I actually had in mind.

    For now, have a look here for an article of mine that shows the interaction between finance and other things when those other things are themselves distorted.

    You should see that I am not saying that if I don’t like the answer, that means there is a distortion and I am entitled to counter-distort. Rather, sometimes – from separate reasons and with separate evidence – there can be distortions.

    When those come up you have a number of bad choices, and even if you can make structural changes to make the problem go away, you may only have tourniquet style short term options – and tourniquets are bad in the long term.

    For what it’s worth, my personal view is that most of our current problems are locked in by past well meaning social-democratic efforts, which make it difficult to get out of either those or the underlying problems.

    One analogy is divers needing to decompress rather than come straight up. Most right wing “reform” is like coming straight up. If the two sides keep struggling we will eventually run out of options and everything left will be bad.

  40. March 4th, 2005 at 15:21 | #40

    Drat. Damned bad preview! That link should have been this.

  41. Razor
    March 4th, 2005 at 16:28 | #41

    Homer – thanks for the support. May I emphasis that it is not just the spruikers but all Real Estate Agents in general should be under the AFSL regime and be bound by the requirement to give good investment advice. Accountants were dragged, kicking and screaming, into the regime, although I agree that they should be allowed to give generic structuring advice, but not specific investment advice unless holding an AFSL.

    Up the West Coast Eagles!!!

  42. Katz
    March 4th, 2005 at 22:49 | #42

    “For what it’s worth, my personal view is that most of our current problems are locked in by past well meaning social-democratic efforts, which make it difficult to get out of either those or the underlying problems.”

    PML, the experience of the last 120 years in the industrialising, industrialised and post-industrial world would suggest that the rise of government intrusion in central banking, income redistribution, and government fiscal policy coincide with the relative infrequency and peril of periodic panics and economic recessions.

    I agree that not all of these initiatives can be called “social democratic” in the narrow, political sense of that term. Nevertheless, none of these initiatives could have occurred without the impetus of progressive, statist, and humane political impulses, which are the necessary precursors of social democracy.

    Your metaphor of the tourniquet as a short-term emergency measure therefore provokes the question as to whether short-term refers to the period before which we are all dead.

    And if not, may it not be argued that capitalism is a condition of permanent emergency?

  43. Razor
    March 5th, 2005 at 12:06 | #43

    You wish.

  44. Katz
    March 5th, 2005 at 16:54 | #44

    Well Razor

    Which of the following propositions do you disagree with and what are the bases for your disagreement?

    1. Government intrusion in economic and financial management has increased in the developed world in the last 120 years.

    2. There has been a decline in the frequency and seriousness of economic panics over time (allowing for learning curves of management of an evermore complex set of variables).

    3. These government intrusions were motivated and for a long time sustained by progressive and sometimes social democratic priorities.

    4. These intrusions are now a long-standing part of the political economies of nations. (Although it is true that they are being attenuated or even dismantled in certain economies with unpredictable results.)

    5. It is arguable but to soon to tell whether the dismantling of some of these intrusive government-controlled institutions may result in a return to the conditions of instability and periodic crisis that characterised laissez-faire capitalism.

    My only wish, Razor, is that the heat of partisanship may be transmogrified into the light of scepticism.

  45. Ian Gould
    March 5th, 2005 at 19:58 | #45


    Please don’t take this the wrong way but if you aren’t familiar with the meaning of technical terms such as “tragedy of the commons” then you probably shouldn’t be trying to discuss economics.

    It’s roughly equivalent to trying to discuss car engines without knowing what petrol is.

  46. March 7th, 2005 at 14:58 | #46

    Katz, in reply to your comments at 42 above:-

    The state interventions created a sort of moral hazard. While it is unlikely the capitalist system would ever have converged to its equilibrium of banks having funds and long term assets like land to meet calls, state intervention allowed a larger gap to grow without salutary correction.

    Just like airline overbooking, this allowed more business to be done and more growth to occur, but we shouldn’t overlook that a price was paid and that it was of this sort.

    In the mediaeval period, with no genuine business opportunities, loans could only ever fund poaching sorts of activities – and it is precisely this that was captured in allegorical language in tracts of the time, condemning usury as it didn’t relate to anything living. Today’s failure is the reluctance to acknowledge that loans might not drive productive behaviour. But these are each special cases, accurate enough if not taken outside their bounds.

    By the way, Katz, I still owe you a full treatment of your comments when I mentioned Macaulay’s “Civil Disabilities of the Jews” (I nearly put civil disobedience, Freudian slip!). Can you remind me which thread that was, and the one later when you made some follow on comments after further thought? I think I’ve got my own thinking organised enough to get my point across without any misleading impression of antisemitism (the foot I was scared of putting in my mouth).

  47. Katz
    March 7th, 2005 at 16:45 | #47

    PML, only a free market fundamentalist could sincerely assert that loans inevitably drive productive behaviour.

    The historical record would suggest that “salutary corrections” have diminished in magnitude and number with the increase of state intrusion in credit creation and demand management. This fact must be particularly galling for free market fundamentalists.

    Of particular interest is the cast of Long Term Capital Management that would have dragged the entire world financial system into a black hole in the latter part of 1998. McDonough of the New York branch of the US Federal Reserve brokered a deal that averted a melt down.

    I suppose it is true that eventually not even the steadiest and authoritative hand may be capable of averting the perfect financial storm. And it may be true that the history of successful management may itself be a spur for the kind of rashness that brews the perfect financial storm. But I don’t think generations to come can blame the present generation for prudence. It’s not as if wisdom is an exhaustible resource, like oil.

    If you google katz bismarck quiggin you’ll find some of my comments re Maculay

  48. Katz
    March 7th, 2005 at 16:45 | #48

    PML, only a free market fundamentalist could sincerely assert that loans inevitably drive productive behaviour.

    The historical record would suggest that “salutary corrections” have diminished in magnitude and number with the increase of state intrusion in credit creation and demand management. This fact must be particularly galling for free market fundamentalists.

    Of particular interest is the case of Long Term Capital Management that would have dragged the entire world financial system into a black hole in the latter part of 1998. McDonough of the New York branch of the US Federal Reserve brokered a deal that averted a melt down.

    I suppose it is true that eventually not even the steadiest and most authoritative hand may be capable of averting the perfect financial storm. And it may be true that the history of successful management may itself be a spur for the kind of rashness that brews the perfect financial storm. But I don’t think generations to come can blame the present generation for prudence. It’s not as if wisdom is an exhaustible resource, like oil.

    If you google katz bismarck quiggin you’ll find some of my comments re Macaulay

  49. Razor
    March 9th, 2005 at 20:41 | #49

    Dear Ian,

    Obviously the sandstone university economics degree that I studied in the late eighties and the finance degree picked up in the late nineties, plus my diploma in financial planning and the succesful business I have built in the last few years (that pays for my economic opinions) is all a fraud because I have never become familiar with the term “tragedy of the commons”. Should I just throw it all in and walk away?

    You see, I have a lot of “skin in the game”, backed up by a what I consider to be a reasonable level of academic background.

    Rather than being wrapped in the more esoteric points of economic and social theory and policy often discussed on this site (which is why I am drawn here), I am actually fully involved on a daily basis in the capital markets, social/welfare policy, superannuation etc. My livelihood depends on it. And so far I beleive I have been reasonably succesful at it.

    So you can understand if I believe your opinion is a little wide of the mark.

    Good day, Sir!

  50. March 10th, 2005 at 02:56 | #50

    Razor, it is quite possible to be a success doing things that wouldn’t work if everyone did them. One famous example is standing up at a sports event to get a better view. The catch is that if everyone else does and you don’t, you’ll be worse off than them.

    The tragedy of the commons is when you have to do something because of that vicious bind, even though all you’ll get is tired legs; it’s because your gain is compared with others, not compared with the optimum (often compared with what used to be).

    When people come to believe that is really good, that flawed thinking is called “the fallacy of composition”. People can believe that what they are doing is right across the board because it works for them, but that’s only because they are leading the race to the bottom and gaining at others’ expense.

    In the financial markets there are some real things done, things where competition really adds up to proper results. It’s only that the lesson “competition is good” isn’t universal, there are real exceptions and people shouldn’t assume that all markets are perfect. Some aren’t, so we should look before we leap.

  51. Ian Gould
    March 10th, 2005 at 08:17 | #51

    Guess what – I too have a degree from a sandstone university and I too work daily in the fields of superannuation and fund management. I also worked as a policy officer, statistician and environmental economist for the Queensalnd government for about a decade. I am currently the Vice-President director of Foresters ANA Friendly Society and inter alia chair their investment committee.

    Now that the dick-waving is out of the way.

    “Tragedy of the commons” is a term most economics students would have picked up by the end of first year University.

    There’s no shame in not knowing it but I’d suggest a more apporpriate response than a dummy-spit is to go to google and look it up.

    While you’re there, you might also want to look up “market power”; “market failure”; “externality”; “public goods”; and “Pigovian taxes”.

  52. Razor
    March 10th, 2005 at 13:25 | #52

    Dear P.M. Lawrence – thanks for the pointer.

    Dear Ian Gould,

    Had a look at your Foresters ANA website. I trust you sleep well at night protecting the environment and pursuing social justice outcomes while your fund members’ returns lag behind everyone else’s. Of course you can probably point to that period in 2001/2002 and maybe 2003 where many superfunds went backwards. I am happy to say that my clients have outperformed often by double the returns your fund has achieved in ever comparable year, even the early 2000’s.

    A couple of questions – how does your investment strategy meet the different needs of clients with different risk profiles? (as you are required to do by law).

    And, why isn’t your Australian Financial Services Licence Number included clearly in your website? (I’m pretty sure you are required by law to do that, too. Better get on to your IT guys before ASIC or APRA get shirty).


  53. Ian Gould
    March 10th, 2005 at 19:57 | #53

    Dear Razor,

    Thanks for the invective and the veiled threats.

    The Super Fund is designed to be and advertised as a conservative, low-risk capital stable investment.

    The share portfolio component of the fund has actually outperformed the ASX for the past several years but the bulk of our funds are invested in fixed interest and mortgages.

    I haven’t checked the relevant figures lately but the last time I checked we were outperforming many of the large mainstream funds over 3 and 5 years.

  54. Razor
    March 11th, 2005 at 15:30 | #54


    Let us be absolutely clear that there are no veiled threats in my last post – I was just giving you a friendly pointer, maybe I’m wrong about AFSL numbers. From what I saw, as long as your investors knew what they were getting into, and I have no doubt that they would, then you really don’t have anything to fear from ASIC or APRA. If the only thing they can chip you for is AFSL numbers then you, as a Director, are doing a grand job.

    As for invective – I wasn’t attacking – just making reasonable comparisons of investment returns. If you think that is invective, there’s nothing I can do about that.

    Best of luck for the future prosperity and sustainability of your beneficiaries’ funds.

    Kind regards

  55. Ian Gould
    March 11th, 2005 at 17:34 | #55


    Sorry if I overreacted. AS it happens the website isw currently being reviewed by our new CEO in any case.

  56. Razor
    March 11th, 2005 at 23:10 | #56

    No Probs.

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