My column from last week’s Fin, over the fold
Central banks could learn more from experience
The Reserve Bank of Australia is fifty years old, having been separated from the old Commonwealth Bank in 1960. The anniversary has been a happy event, given the Bank’s success in managing the Australian economy, at least since the ‘recession we had to have’. Through the Asian financial crisis, the dotcom boom and bust and the global financial crisis, Australia has enjoyed almost uninterrupted economic growth.
But the world as a whole has not done so well. As Janet Yellen of the Federal Reserve Bank of San Francisco observed at a symposium held in Sydney to mark the anniversary, a few years ago, central bankers in general would have been congratulating themselves on a job well done. Thanks to the adoption, in the mid-1980s, of inflation targets and ‘Taylor rules’ for setting interest rates, the world had entered a ‘Great Moderation’ in which the volatility associated with the business cycle had been tamed.
While few believed that the Australian experience (nearly twenty years without a recession) could be replicated, or sustained indefinitely, there was widespread confidence that the future was one of stability. With the Asian financial crisis and the dotcom boom and bust fading into the rear-vision mirror, calls for a ‘new global financial architecture’ were quietly forgotten. The handful of policy responses to the excesses of the 1990s, such as the Sarbanes–Oxley legislation in the US were derided as unnecessary over-reactions.
There was a similarly benign attitude to global macroeconomic imbalances, and to the massive growth in liquidity that sustained them. The ‘consenting adults’ school of thought held that, as long as growth in international indebtedness was driven
But, as Yellen observed, that was then. Now, with much of the developed world in deep recession, and the global financial system still on life support, the self-congratulation was more muted.
The key ideas that have debated policy debate since the 1970s were found wanting in the global financial crisis. The Great Moderation turned out to be an illusion. The idea that macroeconomic policy could be run on the basis of judicious interest rate adjustments was abandoned as policymakers resorted to massive purchases of fiscal assets and, in Australia and elsewhere, equally massive fiscal stimulus.
The efficient financial markets hypothesis, which provided the theoretical basis for deregulation, has been abandoned by all but its most dogmatic advocates. And the general belief that governments should keep out of the way and let markets do their work has been replaced by the recognition that in a crisis, governments provide the last line of defence against systemic collapse.
In attending the symposium, on the topic ‘What have policymakers learned over recent decades, and what needs to be reconsidered’, therefore, I was rather more interested in the second part of the question than the first. What, I wondered, did central bankers see as the key weaknesses in the theoretical and policy frameworks that led us into the global financial crisis, what policy responses to the crisis had worked well or badly, and what were the most promising new lines of thinking about the future?
On the whole, I was disappointed. The only issue that received serious reconsideration was the question of whether central banks should target asset prices. As RBA governor Glenn Stevens correctly pointed out, it’s misleading to phrase this question, in terms of the desirability of using interest rates to ‘prick asset price bubbles’. By the time an asset price bubble has emerged, policy has already failed and all the options are bad ones.
For a central bank with only one instrument, interest rates, the implication is that rates should be raised early in the business cycle, before asset price inflation has a chance to get going. That’s a reasonable judgement, and Jean- Trichet of the European Central Bank engaged in some justified preening at the expense of critics of the ECB’s similar tightening. There was also some discussion of ‘open mouth’ operations of the type undertaken by former RBA governor Ian Macfarlane in the early 2000s when he warned housing investors not to count on ever-rising prices.
But surely the deepest global recession, since the 1970s, and on some measures since the 1930s, calls for a bit more reconsideration than that. As long as we combine unrestricted financial innovation with an effective guarantee that no systemically important firm will be allowed to fail
On the contrary, the main message from Trichet was ‘…’
The handful of policy responses that might make a serious difference to the operations of the financial system were dismissed the panelists. Proposals for a tax on international financial transactions, first put forward back in the 1970s by Nobel laureate James Tobin, are finally on the global policy agenda, but they got no support at the symposium. Although there was general agreement that financial market outcomes were far away from those predicted by the efficient markets hypothesis, and that huge transaction volumes were part of the problem, the Tobin tax was rejected because ‘it would impede market efficiency’.
Paul Volcker’s proposals to separate the ordinary financing activities of the publicly guaranteed banking system from the speculative ventures of hedge funds and investment banks received similarly short shrift.
Coming out of the symposium, it was clear that the lessons of the 1970s and 1980s had been learned well, perhaps too well. By contrast, it seems that little or nothing has been learned from the failures of the past decade.
John Quiggin is an ARC Federation Fellow in Economics and Political Science at the University of Queensland. His book, Zombie Economics: How Dead Ideas still Walk Among Us will be published by Princeton University Press later this year.
John Quiggin 
smiiths – 2009 was a bonanza year for the investment banks as they helped corporates recapitalise their balance sheets. Debt is a dirty word post the GFC so the hot item in 2009 was equity raisings. Have a look at corporate Australia – bonanza years for equity raisings. That also just happens to be one of the highest margin businesses for investment banks who are prepared to underwrite the raising. Corporates are very happy to pay investment banks to give them equity raising certainty – a CFO’s worst nightname would be an under-subcribed equity issuance.
Investment banks make money because they take a tiny tiny cut of a HUGE number
yes but where did all the money come from for these equity raisings?
The money came from the investment community – which in Australia is probably roughly split – 25% retail investors / 40% Australian private superannuation funds / 20% international institutional investors / 15% government or industry funds. (my guesses).
@sdfc
It would reintroduce the restraints on conduct that Greenspan wrongly assumed were there. If you think you could lose, then you will probably resist getting into high risk low return options. What you want is to reconcile ensuring that the people who invested unwisely lose while everyone get basic protection from ruin. When assets return to their actual (rather than notional) value, the state can acquire so many of them as it deems consistent with good public policy — housing and other infrastructure assets are the obvious targets here.
That way you don’t need to coercively nationalise anything. The asset holders will simply hand it over and thank you. The public sees that only the state stands between them and ruin, and can then reason to the next questions — what assets should the state hold? In what ways can state control serve public utility? Under what circumstances and under what conditions should assets be reprivatised?
At the moment, the Obama administration is being challenged by people who ought to be discredited and bankrupt but who are pretending the administration is the friend of Walls Street AND socialist. A shakeout would have made this approach unthinkable and forced the Repugs and their parasitic allies to climb over each other to avoid drowning.
We could have had a new broom go through not only housing and infrastructure policy but through health and environment and much else. Instead, the Repugs are now re-energising through a bizarre but apparently not implausible to some Americans brand of right wing populism.
No attack intended but I will rephrase.
Alice – you seem to be attributing to me an outlook that I don’t hold. I didn’t claim that Australia had sound policies (nor the opposite). I merely noted the different experience in Australia versus the USA and pointed to a possible cause in the way of branch regulation. We had one bank failure they had many thousands. Clearly differences exist and we should be inquisitive about what those differences were.
i wrote a post about central banks which has again dissappeared, did you remove it john?
Let me put it simple terms for you Fran.
Big bank A goes down because some bright spark reckons it is a good idea to teach the fat cats a lesson. Banks B, C and D go down with it because all of a sudden they can’t get the cash they need to keep their doors open. This is largely because banks E, F and G are concerned with counterparty risk and so hoard funds rather than engage in the interbank money market. Several thousand businesses have to close their doors because all of a sudden they have no access to credit.
Nationalisation is not coercion, it is the state stepping in to administer a bankrupt financial institution. Bailout or nationalisation that is your choice.
@sdfc
Concur completely.
Wouldn’t it be great if this could happen without collateral damage. A pipe dream perhaps. If this could happen peacefully and orderly without a bank failure then maybe we might be constructively tackling climate change without waiting for “proof” it’s already causing widespread misery.
Wouldn’t it be great if this could happen without collateral damage. A pipe dream perhaps. If this could happen peacefully and orderly without a bank failure then maybe we might be constructively tackling climate change without waiting for “proof” it’s already causing widespread misery.
It seems he is on a hiding to nothing. But of course the socialist wall street bankers are no doubt at the centre of the communist plot to install a world government via the IPPC. Getting close to a unified theory a la rouche!
Sad indeed. One can only hope that the teabaggers eventually turn their deranged bile on each other.
Apologies about the double post – the last one had formatting errors. Just about everytime I attempt a joke I get tripped up by a typo or something. Serves me right.
Couple of points
Some succinct analysis of derivatives I have read makes it plain that these things were very risky – they created a whole new class of risk. RBS in the UK, for instance, was using derivatives to support leverages of up to 50 times its initial investment – and selling them as A-grade securities.
Second is that while a fall in house prices played a major part in triggering the collapse, the prices that fell were not just the riskiest end of lending. And the leveraged derivatives market fed not just house prices but also college loans, credit card debt, municipal bonds and much else – anything that could be packaged, rated, and on-sold. It was house prices that acted as the trigger, but it could have been almost anything.
A final point is that I find the ascription of the crisis to “moral hazard” quaint. Moral hazard is to people what flying is to birds – it’s the way we live because we are ultra-social animals. This kind of naive deterrence theory has repeatedly been shown not to correspond to reality in other fields (eg think of the death penalty), so why should it operate in finance?
I see no way to run a bank where the operators will feel personally liable for losses unless we re-introduce the stocks, or tar and feathers. I suspect the latter would fit the popular mood.
@TerjeP (say tay-a)
Seeing I am allowed one post per thread per day…Terje – I will say this. I made the comment on weekend reflections that I agreed with JQ that he was seking more civility and less personal attacks – and I think its a good idea and especially from those on the right that seem to me to have a natural tendency for rudeness of expression in their responses.
I dont know what comment of yours was deleted Terje (and I dont care to know at this point) but I would like you to remember this. You are posting three comments a day on average in a thread and I am restricted to one. Yes, I would like you to keep your personal attacks to a minimum.
If you see the difference between the US and Australia as interesting in your point that “Australia had only one bank failure in the great depression” – yes I would like to know what point you are making… and why…and I do note you made the same point on ALS website Terje.
Was this really in Australia’s advantage or not Terje? I would like your opinion on that..not a personal attack thanks (and bear in mind Im not at liberty to defend myself against unwarranted personal attacks just yet).
Alice – firstly I intended no attack and I’m very surprised that JQ interpreted it as such. I think that removing my comment and leaving the edit remark that JQ entered makes it look like I said something terribly antagonistic. It is not in my nature to attack people although I’m sure my remarks may at times offend some people. I was merely being defensive in terms of pondering why you appeared to be putting words in my mouth but perhaps it came across poorly.
In terms of which side of politics is more or less civil, that is a discussion I won’t buy into today.
My point about Australia and the US being different was in response to comment #8 and #19. I don’t think the USA in the 1930s makes the case for protecting big banks. I think it makes the case for removing branch regulations. In other words it indicates that banks shouldn’t be restricted from diversifying geographically (and hence across multiple industry sectors) as they were in the USA. Australia was better placed in this regard. However I wouldn’t conclude that the Australian banking sector, or regulatory framework, was without problems.
That the cra was in any way responsible for the gfc is a pure rightwing myth. I’d go into mor
e detail but I’m limited to an iPhone at the moment, however you only need to look it up on wikipedia to find references to the relevant academic studies that debunk this tired old lie. Professor q should include this cra BS talking point in the book
p.s. And whilst it is quite long I really do recommend the podcast from EconTalk.
http://www.econtalk.org/archives/2010/01/rustici_on_smoo.html
The online summary for the talk reads as follows:-
Even if you end up disagreeing with the conclusions the historical account of how events unfolded is fascinating.
Gerard – I presume this is the link you are refering to;
http://en.wikipedia.org/wiki/Community_Reinvestment_Act#Relation_to_2008_financial_crisis
Surely a purely econometric analysis of the tariff misses the point. Key parts of world trade in 1930 relied on US demand to earn the money to pay loans from the US that had financed the war or, in the German case, the reparations. This was a fundamentally unstable system, particularly as it consistently offered Germany – the major debtor – too little too late. Once Germany showed signs that it would not play by rules set by the creditors in London and New York, the rest followed.
Thanks for the link Terje.
Yes – lots of opinions for and against the role of the CRA. For Gerard to sneeringly dismiss the role of lax lending practices as the root cause of the GFC is pure left wing spin. It’s much easier to blame greedy investment bankers isn’t it.
Fact 1 – the GFC was a result of inter-bank lending grinding to a halt due to toxic debt clogging up the system
Fact 2 – the primary source of this toxic debt was the US mortgage market
Fact 3 – the reason the US mortgage market turned ‘toxic’ was that too many people were borrowing too much money against inflated property prices that they couldn’t really afford
Fact 4 – there was a big push in the 1990s by the Clinton administration to ‘encourage’ lenders to make make home loans widely available.
From the wiki article Gerard was alluding to –
“Bob McTeer, president of the Dallas Federal Reserve Bank from 1991 to 2004, said “There was a lot of pressure from Congress and generally everywhere to make homeownership affordable for poor and low-income people. Some mortgages were made that would not have ordinarily been made.” He also said “When a bank made a decision to purchase mortgaged-backed securities, they would somehow determine if some of them were in zip codes covered by the CRA, and therefore they could get CRA credit.”
Of course the GFC is a lot more complicated than that little precis suggests – and there were many contributing factors. But this debate started because an earlier poster labelled investment bankers as ‘casino’ bankers and wanted to blame investment banks for the whole mess. I was debunking that simplistic explanation. Commentators like Gerard also need to acknowledge that lending money to people who can’t really afford it is not a good idea – I know that doesn’t fit comfortably with a left-wing view of ‘equality’
Just to set the record straight. I did use the term “casino” banking (OK that was a flippant remark and I withdraw the unintended implication that ALL investment banks are engaged in socially useless speculative activities). The term “casino” was used in relation to the activities of investment banks by Bank of England Governor Mervyn King.
I also never said investment banks were solely to blame or that lax lending practises were not part of the problem.
I would dispute the framing of your “Fact 3.” The reason the market turned “toxic” was that securatisation had made it impossible to know exactly what the exposure to subprime mortgages was – not simply because they contained subprime mortgages. These predate the GFC.
Concerning Fact 4. Perhaps others are in a better position to judge the significance of that, but this was restricted to the US, and I still find the timing strange to blame this on Clinton since the CRA predates him and also operated under Bush II.
@Andrew
Andrew
Your rightist blinkers are showing.
Your fact 1, is a symptom
Your fact 2, is a synonym
Your fact 3, shifts the blame onto the victims
Your fact 4, shifts the blame onto Clinton.
However a more mature consideration would start with the long-run tendencies of capitalism to increase macro-economic imbalances and inflate asset prices.
This is independent of housing. Earlier it was IT assets (dot.com boom), and even earlier it was tulips.
Interbank lending blockage, was a consequence, or a symptom, of the long-run tendency.
The long-run problem has been highlighted by OECD economists in 1985, and well forecast in “The Economist” 18-24 April 1998.
All your of politicised ranting merely demonstrates is that you are poorly informed and a very slow learner.
john, like chris warren i took Andrew’s simplistic inaccurate fairytale of the GFC to task,
unlike Chris Warren my posts keep disappearing,
if i have breached some code could you let me know, if a post is removed can it be replaced with a note as Terje’s was,
it seems to me from my own biased point of view, that libertarian and ignorant comments about economics sit happily on these pages but comments that challenge the toxic viewpoints dissappear
Andrew
On Fact 3 – would it not be more accurate to say “a lot of people were being sold mortgages they could not afford” (by banks eager for commissions, and intending to package and on-sell the mortgages. There was a lot of very fine print, misrepresentation, dodgy salesmanship etc, and no intention on the part of the vendors to maintain a lasting financial relationship. The “toxicity” was created by the banks, and passed to others as rapidly as possible.
Chris – can I say (as a bystander) that I think your final comment was unnecessary.
peter T, i disagree,
i have just spent the last hour reading about barclays investment banker bonuses, barclays tax avoidance, barclays role in creating tax havens in ghana for the looting of mineral wealth, etc etc
it angers me deeply,
so when i read the swill that andrew writes i admire the restraint chris warren showed in wording his criticism in the way that he did,
the impunity with which mega banks and mega corporations are looting the world and trashing decent political institutions is horrifying,
and yet,
when deluded or sycophantic supporters of these activities write in praise or defence,
we are to remain civil and eloquent,
i struggle
It’s ok Peter – I’m not offended by Chris’s personal attack – it’s par for the course that many commentators on this site equate a different point of view with being uninformed. It reflects badly on them when they make those comments – but that’s their problem not mine.
Smiths – why do you implictly link libertarian with ignorant? Surely you can be well-informed and reject a hive-mind approach to life?
Chris – no fact1 is not a symptom – you’re mixing up cause and effect. I guess it depends how you define what the GFC was – but I think the common wisdom is that the GFC started with the collapse of Lehmans which then caused every other major bank to stop lending to each other in case the were lending to the next Lehmans.
Chris and Peter – I’m not shifting the blame onto the victims with fact 3 – I’m merely stating a fact. I didn’t ascribe any motivation to anyone – just stating that too many dodgy loans were handed out. In fact I go on to blame the US government in fact 4.
You just simply can’t escape the fact the GFC originated because too many Americans were borrowing beyond their means using over-inflated asset prices as collateral. Some activities of investment banks exaggerated the problem because they spread the risk far and wide through the CDO market. However the investment banks did NOT cause the GFC – the US mortgage market would have collapsed under its own weight regardless of what was going on in the CDO market.
I know you guys would love to blame the investment banks because they represent everything you abhore about a captialist society – but at best that’s simplistic and at worst it’s simply wrong.
one of my skills as a human is recognising patterns in information over time
I get it – sort of likethe pattern recognition in; left wing = impractical dreamer?
also if i could add, i dont personally abhor certain elements of a capitalist system,
i just dont think capitalist is an accurate label for the system we currently have sitting on this planet suffocating it,
it is a mafia capitalism where the rules are made by the strong and in almost every clash between civil society and giant corporations civil society loses,
if the current trend continues it will slip quietly from capitalism into corporatism into fascism,
if it hasnt already
andrew both of the wing tips exhibit the same behaviors to the extent that it is really more like a circle,
when you have gone far enough to one extreme you have in effect joined the other side
@Peter T
Don’t worry about it.
Anyone who plays cards such as:
Gets repaid in the same coin.
Andrew gets only the same respect he shows to others.
Smiths – yes – I absolutely agree with that sentiment. I would describe myself as a centrist libertarian. In an Australian context I’m your typical swinging middle class voter – I’ve voted for both the ALP and Libs before. I’d never consider voting for the extremes which in Australia are represented by One Nation/Family First on the right and by the Greens on the left.
I don’t believe there is a single cause. Do you think the volume of subprime loans would have been made if the CDO market didn’t exist to dice them up and on sell them? Who created the CDO market and profited the most from it? Have you read any reporting by Gillian Tett of the FT in this issue?
Chris – where in those comments is any sort of personal attack? My comment about ‘left wing spin’ was a direct rebuttal to Gerard’s ‘right wing myth’ comment. The second comment is a simple observation that through a left-wing prism the ideal society seems to be one where we’re all equal – unfortunately that’s not how the world works and if you try to shoe-horn the world into that view you can end up doing silly things like lending $300k to someone on $30k/yr income to buy a $300k house that’s probably only worth $250k.
And so they continue….
Andrew is asking for a kicking.
Michael – I don’t believe there is a single cause either – which is the point I’ve been trying to make all along. Blaming the investment banks is simplistic. I think I’ve ackowledged all the way along that actions of the investment banks have certainly contributed – I agree, the problem would not have become nearly so big without a CDO market to spread the risk. As I said in an earlier post – Manly council and Norwegian pesnion funds had no idea what they were buying – you can blame the investment banks for that. However – the root cause was the root cause – bad housing loans in the US
Chris – time out…… Peace!
I had tongue firmly in cheek with the impractical dreamer comment…..
….. he started it with his ‘uninformed’ comment Mum!!!
Most neutral people will not equate (or associate)
with;
Neutral people will see this lending as a practice of ………….. banks.
Only ideologues would spin this some other way, which is what Gerard was generally indicating.
Your continual, misconstrued, tagging of peoples’ neutral views as “leftist” is obviously deliberate and provocative.
The whole idea that bank lending is caused by “shoe-horning into that view” is politicised SPIN.
It seems you are deliberately provoking responses so you can play the victim, about how unfair it all is. This is an old trick.
Neutral! hah – mate, given your comments I bet you’re a Green voter…… a big hint – that aint neutral. If it was – Bob Brown would be PM!
I’m not a victim – never have played one, never will…… if you can’t engage in a debate on the issues without descending into personal attacks then that reflects on you not me.
I entered the fray to defend the role of investment banks…. no they’re not perfect, and yes they had a role in the GFC – but they’re not the root problem. I’m not interested in continuing a silly personal debate with you.
Over and out…..
OK, enough of this back and forth, please
@Andrew
The Greens are not as far to the left as One Nation/Family First are on the right. The Greens are actually more like what you’d have if traditional ALP had had a small l-liberal makeover in social policy. The ALP has moved sharply in the direction of political conservatism, while the official conservatives have been shunted even further to the right in botgh the major strands of policy.
On the substantive question on lending, I’d certainly prefer more robust restrictions on lending. As I’ve said here in the past, I’d like to see an incrementing equity rule on residential property which would provide that each month the required equity to receive a mortgage where residential property was collateral would require cash equity of not less than 5% initially, and which incremented each month from the time of introduction by 25 basis points, so that ultimately everyone needed 20% equity. Nobody would be able to acquire loans requiring service of more than 30% of household income after all other debt service obligations had been accounted for. Anyone who offered a loan outside these terms would not have action for recovery in debt default upheld by the courts and could be liable in the case of serious malfeasance for forfeiture of everything above the benchmark tests.
I’d see the steady fall in low-income earners getting marginal loans for housing as a benefit of such a policy rather than as a deficit. In the longer run, such a policy would undermine asset values, and support urban consolidation. It would make it less costly to build up public housing stock and to develop a range of new and more socially inclusive models for housing people.
Fran,
In the long run what it would mean (IMHO) is that there are more rich landlords and a large number of lower-income people permanently locked out of the housing market. I doubt that asset values would be affected as the people would still need to be housed, and would still want larger houses, they would just have to rent them rather than own them.
In practice, the trend to home ownership has (in the majority of cases, but by no means all) meant that the increase in asset values has been captured not by the banks (who earn little more than base rate on housing loans), not by the rich (although they certainly do get some of it as their large houses appreciate) by by the poor.
Sorry, but all I can see from your plan is that the poor will just end up renting for the rest of their lives.
.
The Greens are, in many of their economic positions, pretty dirigiste. Most of their social positions are now quite libertarian. As far as One Nation is concerned they had an old fashioned left wing industrial policy and an old fashioned (ALP) immigration policy. Not an awful lot of difference there except in social policy.
.
One further note – some people seem to be confusing me with “Andrew”. I am not him.
On social issues the Greens are not libertarian. Take drugs for instance. The libertarian position is that you own your body and it’s your business what you do with it. They believe that the state should not stop you from buying and consuming drugs. Of course libertarians also believe in personal responsibility so the consequences of taking drugs is something you need to deal with. The Greens have backed away from ending prohibition but assuming they came good on that point they still don’t believe in personal responsibity. They believe that society is responsibe if you kill your brain with drugs and need to be hospitalised. They believe that the private sector should not produce drugs but rather the public sector should provide them. They are libertine not libertarian. They want freedom to do as you please but also the freedom to call on the resources of others if there are consequences. The Greens are a waste of space when it comes to the pursuit of liberty. They crowd out sensible arguments for liberty and replace them with stupid recommendations for societal decay.
Of course conservatives also fail to believe in personal responsibility. They want to stop you hurting yourself with prohibition up front. It is unclear which approach is more offensive but quite clear that they both suck.
Terje,
I did say “quite libertarian”, not “libertartian”. They are more libertarian socially than most of the parties.
It does not make me any more likely to vote for a dirigiste party – either Green or One Nation.
@Andrew Reynolds
Andrew – I can identify with that. People confused me with Alicia.
@Andrew Reynolds
“Libertartian” I think the other worldly connotation is sometimes appropriate 😉
Fran – I’m coming back out for my second innnings!
I partly agree with you here if your starting point was the ALP under Whitlam – yes no doubt that Hawke/Keating/Rudd have shifted the ALP to the right since the failed Gough experiment.
BUT – again it’s a matter of perspective. If your world view is naturally left inclined – then of course you’d see the Greens as only a little to the left and One Nation/Family First well to the right. But the vast bulk of Australians who vote ALP or Coalition would see the Australian party political landscape as I do – Greens well to the left, ON/FF well to the right – and ALP/Coalition comfortably in the middle.
I imagine there is a sense of disappointment in Rudd from Green voters – who saw him as a panacea to a decade of Howard government. IMHO – Greens lost perspective on the true Howard by turning him into a cariacature (“ratty”, “Bush’s Deputy Sheriff”, etc etc). Middle Australia quite liked Howard (obviously – they voted for him for 11 yrs) – and doesn’t really mind Kevin Rudd either. Rudd is seen as bit of a geek – but then so was Howard in his early years. Howard grew into a statesman – Rudd may do the same.
They are both fairly middle of the road politicians who make us feel ‘relaxed and comfortable’ about Australia’s place in the world. It means that they don’t have to worry about politics too much – which of course for mainstream Australia is actually a fairly boring topic.
@Andrew Reynolds
I disagree. It would mean that real capital gain in housing became much less common because the credit to underpin asset price inflation would be staunched. Landlords, such as they were, would have to make all of their returns on dividend (rent), and one could legislate standards for housing, meaning that the quality of stock would improve. Reductuions in real growth in housing cost would mean that the state could directly or indirectly increase public housing stock at acceptable cost.
The “capture” when it does occur, is illusory, fort the new “equity” is required to fund a new purchase of new real estate and it comes at the cost of exposure to risk of loss, serious debt serviceing stres and of course it drives housing choice to the urban periphery causing sprawl and marginalisation. It also drioves up infrastructure cost. The benefits, where they are utlimately realised in liquid form tend to go strongly to the upper half of the populace and especvially the top 20%.
There is nothing wrong with renting. I’ve been a renter since 1991 and have survived the sale of the property in 1998.
As far as One Nation is concerned they had an old fashioned left wing industrial policy and an old fashioned (ALP) immigration policy.
Parochial and xenophobic are not “left-wing”. Left-wing industrial policy would be for industry-wide policy and across national frontiers, under the aegis of workers’ control. I must have missed that in One Nation’s platform.
@Andrew
This misunderstands the 11 years of Howard rule. Haoward had a strong ideological core vote and he then put together other constituencies to which he wasn’t entitled, exploited malapportionment and clung on. In 1998 he lost the popular vote but the Democrats allowed him to get the votes of those who opposed Telstra privatisation and the GS&T and those who supported it or would endure it.
In 2001 he was looking like his run had ended until TAMPA and 9/11 came along and incumbency and xenophobia came to his rescue. In 2004, ALP disarray (especially in Tasmania) and the Latham factor and hostage voting saw him win again, by default. Howard was never widely liked. He was tolerated and lucky.
Fran,
I would disagree. The credit would only flow to holders of the 20% equity – i.e. those already wealthy – and the basic drivers of the housing market would still be there. Many people want larger houses and they tend to want to live near each other. They would just be paying through rent instead.
I have no problem with people financing their place of abode through rent (I have done it myself for extended periods) but that it what it is. A financing option, not a means of redistribution. The capital gain goes to the owners and restricting people artificially, which is what you are proposing, just means those so restricted find it more difficult to own.
@Andrew Reynolds
yes, and no … The people qualifying for credit have a weaker rationale for buying if prospective real capital gain is smaller. That will be so because demand for credit and money supply within the housing sector would fall. They will have a far more static and illiquid asset. Those with access to credit would likely shift their investment portfolio in favour of more rewarding sectors of the economy with similar risk.
Those that did buy property at or near the 20% equity rule would have lower debt service both because they had greater equity and because the purchase price would be lower. People would buy property for absurd reasons like “I’d like to live there”. There would also be a massive disincentive to overcapitalising, so we’d have less waste as well as less urban sprawl. People would sell when they no longer wanted to live somewhere and they could buy into a non-inflated market. And with lower propertyy values, there would be downward pressure on rent.
People would probably save more too, because they would have an incentive. If you know that houseprices are rising faster than you can save, your incentive is to borrow rather than save, and vice versa.
So in the end, nearly everyone would be ahead.
Fran,
There are a lot of claims in there, but I cannot agree with many of them. People would still need houses and the supply of them would still be restricted in the same way they currently are. The difference would only be that those unable to raise the 20% equity would have no choice but to rent.
The pool of renters would therefore expand greatly – raising the returns to those with the funds to cover the 20% hurdle. This would just mean that those that can finance housing that might otherwise put the money into the stock market or elsewhere would be now putting it into housing and making more out of it, while those who cannot raise the hurdle would be paying rent and not getting any capital gain.
The rich get richer and the poor lose out – the usual outcome of these sorts of restrictions.
If you claim to be a libertarian, Fran I would see this sort of argument as being more akin to a Rothbardian one – focussing as it does on the (supposed) problem of credit creation and the (supposedly) adverse results.
Personally, I disagree with the idea that these are problems in and of themselves. Credit creation is not a problem provided it is allocated in an efficient way. These sorts of restrictions merely serve to distort individual incentives to improve their own lot – leading to a drop in overall welfare. In this case all I can see happening is that the poor will have their access to credit restricted, meaning they lose the prospect of capital gain. I cannot see this as a good outcome.