The Daily Tele­graph ter­rorises the RBA

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This blog entry first appeared as a fea­ture in the Daily Tele­graph on Wednes­day April 9th 2008. If you’re a new­comer to it cour­tesy of that fea­ture, and you want to look at this issue in more depth, there are links below to more detailed analy­sis.

The Daily Tele­graph lived up to its nick­name of “The Daily Ter­ror” last week, with a front­page attack on Reserve Bank of Aus­tralia Gov­er­nor Glenn Stevens enti­tled “Is he Australia’s most use­less?”, and an edi­to­r­ial that was no less provoca­tive: “RBA boss is los­ing inter­est”.

It would be easy to crit­i­cise the Telegraph’s com­ments on the tech­ni­cal­i­ties, many of which they got wrong (I’ll out­line some of those below). But what I saw behind the com­ments was a sense of frus­tra­tion that, I believe, is jus­ti­fied.

Why? Because over a decade ago, our Gov­ern­ment ceded con­trol of mon­e­tary pol­icy to the RBA, in keep­ing with a world­wide belief that “Cen­tral Bank Inde­pen­dence” would result in bet­ter mon­e­tary pol­icy.  We were told that if we took mon­e­tary pol­icy out of the hands of the politi­cians, and handed it over to the experts, the finan­cial sys­tem would work a lot bet­ter.

If that’s the case, then some­thing has gone ter­ri­bly wrong. Far from giv­ing us sta­bil­ity, the period of Cen­tral Bank Inde­pen­dence has ush­ered in an unprece­dented finan­cial cri­sis, and extreme finan­cial hard­ship for many ordi­nary work­ing fam­i­lies (to use a Kevin­ism).

This is what moti­vated the Telegraph’s ire—especially since Stevens’s tes­ti­mony appeared to down­play both the seri­ous­ness of the cri­sis, and the dam­age that a dys­func­tional finan­cial sys­tem has done, and is doing, to the rest of soci­ety.

Stevens’s tes­ti­mony empha­sised the RBA’s role in fight­ing infla­tion above all else. But the broad job descrip­tion of Cen­tral Banks is to ensure the sound­ness of the finan­cial sys­tem, and on that Cen­tral Banks world­wide have clearly failed.

Think about it. If this pol­icy had been suc­cess­ful, then the Daily Telegraph’s spray wouldn’t have hap­pened, because finance would have been on the bor­ing back pages of the paper.

So how did Cen­tral Banks get it so wrong?

Largely because they fol­lowed accepted eco­nomic the­ory about what their role should be. At the time Cen­tral Banks were allowed to set mon­e­tary pol­icy inde­pen­dently of gov­ern­ments, the con­ven­tional eco­nomic wis­dom was that they should:

  • ignore stock and hous­ing mar­kets;
  • for­get about try­ing to con­trol the money sup­ply;
  • dereg­u­late the finan­cial sys­tem to make it more effi­cient; and
  • just use short term inter­est rates to con­trol infla­tion.

If their suc­cess is mea­sured solely on the front of con­trol­ling infla­tion, then the RBA has met its tar­get of keep­ing infla­tion in the range of 2–3 per­cent over the medium term. The aver­age value from 1996 till now is smack in the mid­dle of this range.

How­ever, while the part of the sys­tem that Cen­tral Banks have focused on has done pretty well, the rest has gone to hell in a hand­bas­ket.

The finance mar­kets were over­taken by alchemists who promised to turn lead into gold—or sub­prime mort­gages into AAA secure bonds. Instead, they deliv­ered lead aplenty to bor­row­ers and investors, and absconded with the gold them­selves. Debt reached lev­els that have never occurred before in human his­tory. Asset prices reached unsus­tain­able (and for hous­ing, unaf­ford­able) lev­els, and are now crash­ing, and tak­ing peo­ples’ hous­ing and liveli­hoods with them.

It’s worth get­ting a han­dle on just how badly the period of Cen­tral Bank Inde­pen­dence has gone wrong—and not only in Aus­tralia.

The Great Depres­sion began with pri­vate debt lev­els in the USA equal to one and a half times its GDP, and then deflation—falling prices—and falling out­put drove it up to 215 per­cent by 1932. Today, US debt is 280 per­cent of GDP.

Aus­tralia peaked at 77 per­cent of GDP in 1932; we’re already at 165 percent—when the RBA appears to think every­thing is func­tion­ing well. And another 14 major OECD coun­tries are in the same pickle (the only major excep­tion is France).

Asset prices are also sim­ply crazy.

The best mea­sure here is to com­pare them with the con­sumer price index, and on that basis US house prices bub­bled from 12 per­cent above the long term trend, to 120 per­cent above it in the first ten years of Greenspan’s inde­pen­dence.

Our hous­ing price bub­ble was even worse than that, and though it has not yet started to deflate as has America’s—where prices have fallen 16% in real terms in the last two year—ultimately it must.

If politi­cians had been respon­si­ble for a pol­icy mess like this, the press would have had their guts for garters—and rightly so. But since the so-called experts are in con­trol, they can’t be held to account—and hence the Telegraph’s frus­tra­tion, which boiled over last week.

In fact, econ­o­mists aren’t experts about the econ­omy in the same fash­ion that physi­cists are about nuclear energy. As George Soros argued recently in the Finan­cial Times, the approach Cen­tral Banks have been fol­low­ing has clearly failed, and it’s time we gave a new approach a try—one that doesn’t sub­scribe to the myth that the best mar­ket is a dereg­u­lated one.

The errors in the Daily Telegraph’s article

The RBA’s job isn’t to tell banks what to charge on mort­gages. The one rate they have con­trol over is the inter-bank rate, which is used when one bank has to pay inter­est to another when their accounts don’t bal­ance. That sets the floor for short term rates–and the RBA sup­plies as much liq­uid­ity as it needs to make sure this rate applies.

Then banks set their own longer term rate in accor­dance with this base rate and mar­ket con­di­tions. In the recent past, com­pet­i­tive pres­sure from non-bank lenders made the gap between the (short) RBA inter­est rate and (long) mort­gage rates the low­est they’d ever been–but much of that reflects what is now euphemisti­cally called “a mis-pric­ing of risk”.

The dilemma for the bank is that the credit crunch has caused this once nar­row gap between short term and long term rates to balloon–and there’s lit­er­ally noth­ing they can do about it. In one sense, it helps keep banks solvent–since they make money from the spread between short and long term inter­est rates–but it makes the RBA even less able to influ­ence mort­gage rates.

The Com­mon­wealth Bank also didn’t increase its rates just because of Stevens’s speech. They would have done their cal­cu­la­tions about their increased cost of fund­ing cour­tesy of the credit crunch, and how much this was cost­ing them, well before the speech. Maybe it did how­ever make them think that “now’s the time” to move on it.

The real issue, as I out­line above, is that the era of Cen­tral Bank Inde­pen­dence hasn’t “taken finance off the front pages”, but made it front and cen­tre with the biggest finan­cial cri­sis in world his­tory.

Further reading

  • This blog. I started it one and a half years ago, when I con­cluded that a seri­ous debt-dri­ven finan­cial cri­sis was inevitable, and some­one had to raise the alarm about the pos­si­bil­ity of one hap­pen­ing. Here you will find: 
    • The Debt­watch Report (21 to date) which come out just before the RBA meets each month to set rates, and takes a top­i­cal look at eco­nom­ics and the rate deci­sion in par­tic­u­lar;
    • Aca­d­e­mic papers that focus on the top­ics of debt defla­tion and the mon­e­tary sys­tem;
    • A Pod­cast recorded after each Debt­Watch report by Stu­art Cameron of Rife Media
  • My report And Deeper in Debt pub­lished by the Cen­tre for Pol­icy Devel­op­ment last Sep­tem­ber.
  • Debunk­ing Eco­nom­ics, a web­site that sup­ports my book of the same name, and stores my lec­tures on eco­nom­ics and finance at the Uni­ver­sity of West­ern Syd­ney.
  • Blogs by other com­men­ta­tors whom I believe have a han­dle on what has hap­pened. For a decade or more, these writ­ers have been “con­trar­i­ans”, rail­ing against the stu­pid­ity of Wall Street and accom­moda­tive Cen­tral Banks while the rest of the pun­dits applauded such finan­cial inno­va­tions as … sub­prime loans: 
  • Lest it be thought that I’m a critic of every­thing the RBA does: 
    • Most of my Aus­tralian data comes straight from the RBA Bul­letin Sta­tis­ti­cal Tables
    • The RBA Con­fer­ence on Asset Prices and Mon­e­tary Sta­bil­ity has some excel­lent papers. I only wish that the ori­en­ta­tion set in this con­fer­ence had guided sub­se­quent RBA pol­icy.
    • This RBA paper com­par­ing the Great Depres­sion to the 1890s Depres­sion is one of the most infor­ma­tive his­tor­i­cal analy­ses I’ve ever read
  • Ditto for the US Fed­eral Reserve. While I believe that the “Greenspan Put” has encour­aged “moral haz­ard” behav­iour that has made this the worst finan­cial bub­ble ever, the Fed has also been a bas­tion of free and acces­si­ble data. My US data largely comes from its Flow of Funds report.

About Steve Keen

I am Professor of Economics and Head of Economics, History and Politics at Kingston University London, and a long time critic of conventional economic thought. As well as attacking mainstream thought in Debunking Economics, I am also developing an alternative dynamic approach to economic modelling. The key issue I am tackling here is the prospect for a debt-deflation on the back of the enormous private debts accumulated globally, and our very low rate of inflation.
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  • Zoo

    Oops, for­got to turn off my quotes above. Sec­ond bit is just my rant.

    Since I am dou­ble post­ing any­way, the fol­low­ing is Pro­fes­sor Nouriel Roubini’s blog from yes­ter­day. If he’s telling Cana­di­ans that com­mod­ity prices are going to slide by 20–30%, then Aus­tralia had bet­ter take notice:

    Esti­mates of $1 tril­lion are now a floor, not a ceil­ing, for the losses in this finan­cial cri­sis…
    Nouriel Roubini | Apr 9, 2008

    As times are very busy it is some­times eas­ier for me to present my views as reported by the press/media rather than by writ­ing directly. So my apolo­gies for free rid­ing today on this press report­ing.

    As reported by the Finan­cial Post today here is a sum­mary of remarks I made today at an event in Toronto: 

    Wall St bear may be gloomy but he’s often right
    Jacque­line Thorpe, Finan­cial Post Pub­lished: Wednes­day, April 09, 2008

    Nouriel Roubini says the United States is fac­ing a 12- to 18-month reces­sion that will make a mock­ery of the recent stock mar­ket bounce and the notion of global eco­nomic decou­pling, cause com­mod­ity prices to slide 20% to 30%, and hit Canada hard. 

    I see the stock mar­ket rally as being the last leg of a sucker’s rally — essen­tially peo­ple believ­ing the Fed can res­cue the econ­omy,” Mr. Roubini said in an inter­view Wednes­day. “Once the flow of mar­ket and finan­cial news gets worse and worse, the expec­ta­tion of the Fed res­cu­ing the econ­omy is going to be dashed, and the stock mar­ket is going to plunge much more.”

    Mr. Roubini, eco­nom­ics pro­fes­sor at the Stern School of Busi­ness, co-founder of eco­nom­ics Web site RGE Mon­i­tor and Wall Street bear extra­or­di­naire, may sound alarm­ing but the rest of the global eco­nom­ics com­mu­nity has spent the bet­ter part of the past two years play­ing catch-up to his increas­ingly dire prog­nos­ti­ca­tions.

    He spoke on Wednes­day at a panel dis­cus­sion in Toronto, deliv­er­ing his com­ments in a rapid-fire monot­one as gloomy as his mes­sage.

    Mr. Roubini first fore­cast a slow­down in the fall of 2005 and said the U.S. hous­ing bub­ble was head­ing for a bust in early 2006 just as hous­ing starts peaked. By August 2006, while many econ­o­mists were still fore­cast­ing a soft land­ing, he said the reces­sion of 2007 would be nasty, brutish and long.

    This Feb­ru­ary, Mr. Roubini pre­dicted “one or two large and sys­tem­i­cally impor­tant bro­ker deal­ers” would “go belly up,” and credit mar­ket losses stem­ming from the sub­prime melt­down could top US$1-trillion.

    A few weeks later, Bear Stearns col­lapsed and the Inter­na­tional Mon­e­tary Fund came up with a remark­ably sim­i­lar pre­dic­tion of losses: US$945-billion. It must be pointed out, how­ever, the IMF esti­mate is only an esti­mate of losses that might be real­ized if dis­tressed secu­ri­ties had to be sold or marked-to-mar­ket at cur­rent prices. Some of the assets are now attract­ing buy­ers.

    In that view then, the esti­mates are still a worst-case sce­nario. Mr. Roubini has, in fact, recently raised his credit loss fore­cast to US$1.7-trillion as cor­po­rate losses pile on.

    He says the stock mar­ket is fol­low­ing the same pat­tern it did in the 2001 reces­sion. It started in March and by April the S&P 500 rose 18% on the view Fed inter­est rate cuts would stave off a reces­sion. When it couldn’t, the mar­ket even­tu­ally fell off a cliff, drop­ping 42%.

    The S&P 500 typ­i­cally drops 28% in a reces­sion, Mr. Roubini says, and hav­ing only come off 12% so far, it has a long way to go, he said.

    Canada will not be immune. A U.S. reces­sion of the dura­tion he is pre­dict­ing will drag down growth in China and the rest of the world and the idea the rest of the world can decou­ple from the United States goes out the win­dow, Mr. Roubini said. 

    That could knock com­mod­ity prices back 20% to 30% and remove a sig­nif­i­cant strut of the Cana­dian econ­omy.
    Mr. Roubini is bas­ing his pre­dic­tion that the U.S. is fac­ing the worst reces­sion in decades on the view house prices will tum­ble a total of 30% — they have dropped 10% so far — wip­ing out US$6-trillion in home equity and putting 21 mil­lion house­holds, or 40% of all mort­gage-hold­ers, in a neg­a­tive equity posi­tion. Cor­po­rate Amer­ica will be the next to suf­fer and the credit cri­sis will con­tinue to spread, Mr. Roubini said.

    But as usu­ally the case in eco­nomic fore­cast­ing, nei­ther the best case nor the worst case sce­nario works out but usu­ally some­where in the mid­dle.

    Also, as widely reported by the press, the IMF is now on board with my esti­mate that credit losses from this finan­cial cri­sis could be close to $1 tril­lion (exactly $945 bil­lion accord­ing to the IMF). As sum­ma­rized by Helen Thomas in FT’s Alphav­ille:

    $1 tril­lion and bust 

    Another one in the can for Nouriel Roubini. He first mooted an esti­mate of $1 tril­lion in finan­cial losses from the sub­prime fall­out back in Feb­ru­ary. The IMF is the lat­est to fall, almost, into line. 

    See the 2008 Global Finan­cial Sta­bil­ity Report, all 211 pages of it (rather more diminu­tive exec­u­tive sum­mary also avail­able).

    The IMF esti­mates total global losses from the dete­ri­o­ra­tion of credit as of March at $945bn, with $565bn com­ing on res­i­den­tial mort­gages and related secu­ri­ties. The remain­der is bro­ken down into $240bn on com­mer­cial real estate, $120bn on cor­po­rate debt and $20bn on con­sumer debt. The full break down is on page 51.

    Its num­bers come out some way above other recent esti­mates — even tak­ing into account that about half the IMF esti­mate on sub­prime mort­gage-related losses will hit banks. S&P last month put total write­downs on sub­prime-related ABS at $285bn, with about $110bn already taken by the banks and $150bn logged in total. The agency didn’t include gov­ern­ment spon­sored enter­prises in its fig­ures.

    Accord­ing to the IMF, US banks and GSEs could report a fur­ther $49bn in write­downs, while Euro­pean banks could be set for a fur­ther $43bn. The full break­down is below.

    In any case, as Alea sug­gests, the IMF report is rather damn­ing, cit­ing a “col­lec­tive fail­ure” to appre­ci­ate the extent to which lever­age was being taken on by insti­tu­tions, and indi­cat­ing that if any­thing the credit cri­sis is still play­ing out.

    For those per­plexed by what’s going on, the IMF’s mon­ster report should pro­vide some point­ers, if lit­tle suc­cor. It even has a sec­tion, page 23, enti­tled, “Credit squeeze, or credit crunch?”

    Indeed, as I argued a few weeks ago “$1 tril­lion is the new size 6!” 

    As for the blo­gos­phere debate on the shape of the cur­rent reces­sion, fol­low­ing my recent The US Reces­sion: V or U or W or L-Shaped?, here is again — as a sam­ple — FT’s Alphaville’s take:

    Tak­ing a bath: the shape of the down­turn to come

    Now that US reces­sion is a rac­ing cer­tainty, the debate has moved on to the shape of things to come. 

    V-shaped, good: a short, sharp down­turn with a speedy recov­ery. Those who were last year telling us that all was endur­ingly rosy have tended to move towards this let­ter of the alpha­bet in describ­ing the forth­com­ing down­turn. W-shaped: a dou­ble dip. U-shaped, or Mar­tin Sorrell’s bath-shaped or even saucer-shaped vari­ant: a more pro­tracted period spent at the bot­tom.

    And most feared of all, the Japan­ese influ­enced L-shaped reces­sion: a last­ing period of stag­na­tion, bor­der­ing on eco­nomic depres­sion.

    Nouriel Roubini con­sid­ers the options. His view is that we’re headed for a U-shaped down­turn, with the con­trac­tion last­ing 12 to 18 months through to the mid­dle of 2009. The US, he adds, is expe­ri­enc­ing the worst hous­ing reces­sion since the Great Depres­sion, the US con­sumer is shopped-out and debt-bur­dened, and losses that started in the sub­prime melt­down will spread across the finan­cial land­scape in the com­ing slump.

    One can­not rule out a W-shaped expe­ri­ence either. That largely depends on whether the tax rebate received by US house­holds in the mid­dle of 2008 is saved or con­sumed.

    But the noto­ri­ously bear­ish Roubini doesn’t think the US is in for the ulti­mate L.:

    My view is that a pro­tracted eco­nomic stag­na­tion — bor­der­ing on an eco­nomic depres­sion — is unlikely in the case of the US as the pol­icy response of the US is already more aggres­sive than the one of Japan…..Also Japan­ese post­poned the nec­es­sary cor­po­rate and bank­ing restruc­tur­ing for years keep­ing alive zom­bie firms and zom­bie banks via inap­pro­pri­ate forms of for­bear­ance. In the US both pri­vate and espe­cially pub­lic efforts to restruc­ture the impaired assets and firms will start faster and more aggres­sively. Thus the risk of a decade-long eco­nomic stag­na­tion is quite lim­ited so far.”

    Roubini though is bet­ting on the “most severe reces­sion and finan­cial cri­sis that the US has expe­ri­enced for decades,” while mar­kets are still pric­ing in a rel­a­tively mild down­turn. Cal­cu­lated Risk picks up his thread, but is slightly more pos­i­tive about the poten­tial for employ­ment to hold up.

    Either way, it’s all going pear-shaped. 

  • GregH

    Dear Steve

    As a long term admirer of you I was really dis­ap­pointed to see you offer­ing sup­port for this arti­cle in the Daily Tele­graph.

    I have no real issue with your cri­tique of the RBA, but why pick out this arti­cle in such a poor pub­li­ca­tion as a forum? The arti­cle was a per­sonal attack of a bureau­crat who prob­a­bly tries as hard as you do to get things right given the tools he has includ­ing the encum­brance of gov­ern­ment pol­icy.

    The Tele­graph con­text is essen­tially reac­tionary and anti-intel­lec­tual. The envi­ron­ment of your remarks drowns any good effect you might have tried to achieve with your con­sid­ered thoughts.

  • Ken

    Tech­ni­cally they are illiq­uid, mean­ing that they can’t con­vert their assets into cash. They are sol­vent because the the­o­ret­i­cal value of the assets is still suf­fi­cient to cover their lia­bil­i­ties. Of course the the­o­ret­i­cal value might be a lit­tle opti­mistic, which may be one rea­son that nobody wants to buy them. The other rea­son may be that every­one is a bit scared. I think the solu­tion of the var­i­ous reserve banks is to do swaps for saleable secu­ri­ties but requir­ing a swap back in the future, at which time there might be a few prob­lems.

  • Zoo

    Hiya Ken,

    If the banks can’t find buy­ers, then the “asset” has a big fat mar­ket value of zero. That’s real­ity, not the­ory.

    The­o­ret­i­cally, hous­ing prices were sup­posed to go to the moon and every­one in Oz could afford any amount of debt, but that’s not real­ity, and that’s what got us to this cur­rent point of debt cri­sis. So the­o­ret­i­cally, I guess the banks can say what­ever they like about their “assets”, but the real­ity is that they have sol­vency issues, not liq­uid­ity issues. The egg timer is still tick­ing.

  • john­boy


    I think what we’re see­ing here is, at least in part, the inabil­ity (or unwill­ing­ness) of many real estate asset hold­ers to grasp or com­pre­hend that what they believe is an ‘always appre­ci­at­ing’ bricks-and-mor­tar per­pet­ual motion machine might, quite pos­si­bly, be noth­ing of the sort. Deflat­ing prices sim­ply can’t be hap­pen­ing, there­fore I’ll hold out/hold up until real­ity realigns itself with my wishes.

    That thread will break at some point, prob­a­bly the ‘max pain’ point.

    From my analy­sis of his­tory this kind of psy­cho­log­i­cal dis­con­nect seems to be very com­mon in the early stages of an asset defla­tion.

    In Australia’s case, Steve’s charts show quite clearly that the rate of debt expan­sion is not yet decel­er­at­ing in Aus as much as the USA, so no won­der house prices are still hold­ing up because the ‘arti­fi­cial’ demand is still there.

  • Thanks every­one for so many inter­est­ing com­ments. Much of the dis­cus­sion I can’t really improve upon, but there are a few points I need to address.

    I’ll start with Greg’s crit­i­cism for my arti­cle in the Daily Tele­graph.

    Firstly Greg, I will defend writ­ing in the Daily Tele–and almost any medium short of a Klu Klux rag. For the last 30 years, the per­spec­tive that I have on eco­nom­ics couldn’t get a run any­where out­side a lim­ited range of non-ortho­dox aca­d­e­mic jour­nals. Now, because poli­cies inspired by the dom­i­nant school of eco­nom­ics have con­tributed to an eco­nomic cat­a­stro­phe, I can get an audi­ence vir­tu­ally any­where.

    I am seiz­ing that oppor­tu­nity while it exists, because a major fac­tor in caus­ing a re-ori­en­ta­tion of eco­nomic thought is get­ting wide­spread sup­port for that new ori­en­ta­tion, from far more than just pro­fes­sional econ­o­mists. As I wrote in Debunk­ing Eco­nom­ics, eco­nom­ics is too impor­tant to just leave it to the econ­o­mists.

    A major rea­son why Keynes had the suc­cess he did–though in the long run his ideas were killed, to coin a phrase–was because he had estab­lished a pub­lic pres­ence via his pam­phlets (in par­tic­u­lar “The eco­nomic con­se­quences of the Peace”) and pub­lic com­men­tary.

    That process began for Keynes in 1919, almost two decades before he pub­lished The Gen­eral The­ory, and he could pick and choose where his ideas were pub­lished. I don’t have quite so much time, so I am will­ing to cast my net a bit wider.

    There is also an issue of whether one should restrict one’s views to only an elite audi­ence. Yes the Daily Tele is a tabloid, and a lot of its cov­er­age and man­ner I object to; but it sells over 300,000 copies each day, and mainly in West­ern Syd­ney.

    Its read­er­ship base is the core of the cur­rent debt implo­sion, and the group that largely gave Howard polit­i­cal ascen­dancy (remem­ber “Howard’s bat­tlers”?). If I ignore them, via ignor­ing a major news out­let that reaches a sub­stan­tial pro­por­tion of them, then what ideas might guide them should eco­nomic con­di­tions turn really ugly, and at their direct expense?

    So I think that I–and, for exam­ple, other intel­lec­tu­als who are experts on global warm­ing, peak oil, and all man­ner of other issues that the Daily Tele­graph may on occa­sions take a “reac­tionary” stand on–to engage with it and its audi­ence when the oppor­tu­nity presents. If we don’t, and if, on these issues, intel­lec­tu­als (or some of them any­way) are right–as in “right vs wrong” rather than the polit­i­cal dimen­sion “right vs left”–then it’s a mis­take not to engage with the Daily Tele­graph and its audi­ence when the oppor­tu­nity arises.

    Then there’s the issue of the orig­i­nal Tele­graph story itself, and it’s effec­tively per­sonal attack on Stevens. That was juve­nile. But so too was the child who said loudly “But Mum, the Emperor is naked!”.

    In other words, though the expres­sion was intem­per­ate, the insight was valid: here is some­one that we are told we can­not crit­i­cise, but from where we stand, he has things badly wrong.

    So I feel for Glenn Steven in being lam­basted that way in public–it’s not nice, and I fully agree with you that he is sin­cere in what he is try­ing to do. Also, I agree he is encum­bered by gov­ern­ment pol­icy; though the RBA has a free rein on mat­ters mon­e­tary, they make their deci­sions in an eco­nomic con­text that is dra­mat­i­cally affected by fis­cal and insti­tu­tional pol­icy too.

    But some­one has to break with the crowd that won’t crit­i­cise the Guv’nor because of roy­alty an’ all that, and unfor­tu­nately it’s more likely to be some­one from the rougher end of town who does it first. I knew they’d be lam­basted for the per­sonal nature of the attack (and quite rightly too), and for crit­i­cis­ing the policies–and here, wrongly. So I started to write a blog on the topic, and then the Tele con­tacted me to ask me to write a feature–so the blog entry became a fea­ture as well.

    So I appre­ci­ate your dis­ap­point­ment, and like you I wish that all pub­lic dis­course, and indeed all of the pub­lic, was con­sid­ered and intel­lec­tu­ally informed. But since that’s an imag­ined world, one has to work out how to engage with the real one. I tried to do so, not by cheer­ing on the per­sonal side of what the Tele said about Stevens, nor sup­port­ing them on the argu­ments they made that were clearly wrong, but by point­ing out where the essen­tial cause of their frus­tra­tion was cor­rect.

  • The­Word


    I’d be very inter­ested in your com­ments regard­ing ANZ’s econ­o­mists, who say Aus­tralian hous­ing is in a super-cycle and that sup­ply and demand issues mean prices sim­ply can­not fall:-

  • Ken

    Zoo, the accoun­tants don’t see it that way and the secu­ri­ties don’t have zero value, they just have less than the banks would like. In no other area of busi­ness would asset val­ues be based on fire­sale con­di­tions.

    In Aus­tralia it doesn’t seem to have been an insol­vency issue any­way, more a case that if the Reserve Bank didn’t do some­thing about the liq­uid­ity our bank­ing sys­tems would be a lot more con­strained. If banks refuse to lend each other money against the secu­ri­ties then each bank would need to more closely bal­ance it’s own liq­uid­ity. This would cause a cer­tain amount of rigid­ity to the finan­cial sys­tem and con­strain debt lead­ing to a crash. Steve, is that a rea­son­able inter­pre­ta­tion ?

    On the Reserve Banks prob­lems, it is almost a corol­lary of Minsky’s law that dereg­u­la­tion will be very pop­u­lar on the up side and will be unpop­u­lar on the down­side. Most likely out­come is increas­ing micro­man­age­ment of the finan­cial sys­tem as the gov­ern­ment attempts to make itself more pop­u­lar by fix­ing “defects”.

  • Peter


    Regard­ing my pre­vi­ous post.

    When I look at the data, in 1970 the Case Shiller Index and the Nigel Sta­ple­ton Index were both roughly 100 and the AUD/USD Fx rate was roughly $1.50. The diver­gence is almost exactly the decline in the AUD/USD at pur­chase power par­ity. If the Case Shiller ‘mean reverts’ to 100 and the Sta­ple­ton Index is still 300 it would seem to imply the AUD/USD pur­chase power par­ity exchange rate should be roughly $0.50. The alter­na­tives would be some com­bi­na­tion of changes in both the Aus­tralian house price and the AUD/USD ppp Fx rate.

    Presently the median Aus­tralian wage is $58K and with an AUD/USD mar­ket Fx rate near on par­ity (1:1) the US median wage is $43K. We are being priced out of our own jobs to pay for our houses vs the USA as we speak.

    Does this make eco­nomic sence (I’m not an econ­o­mist)


  • Dear Peter,

    I think those met­rics do make sense. Ulti­mately you’re look­ing for imbal­ances, and they are cer­tainly there. What’s more likely as a cor­rec­tion though is that our house prices will start to fall–though not as rapidly as the USA’s–so that Stapledon’s index will drop too. That will coun­ter­act where the Aus/USA dol­lar rela­tion might go, and gives some idea too of how long the imbal­ances are likely to per­sist.

  • Peter


    Well that’s not going to be very good.

    We are essen­tially say­ing house prices reflect the rel­a­tive pur­chase power of a wage earner in nom­i­nal dol­lars in that wage earn­ers coun­try.

    1. If you agree that the Case Shiller will regress to it’s 100 year mean of 100 over the next 5 years (that also seems to be what the FED, IMF & mar­ket think)

    2. The AUD/USD exchange rate is roughly 1:1 i.e. par­ity and stays around that level

    3. The Sta­ple­ton index must ulti­mately fall 50% and it will likely begin its fall very soon.


  • BrightSpark

    Your ideas are most refresh­ing. As an Engi­neer (Elec­tri­cal) I appre­ci­ate the com­ments you make about con­trol the­ory and won­der why the pseudo sci­ence of eco­nom­ics is so prim­i­tive. If engi­neers under­stood con­trol as well as the aver­age econ­o­mist we would not even build a con­trol­lable air­craft let alone land a craft on Mars.

    What I am most con­cerned about is the Cur­rent Account which has been which has been in deficit con­tin­u­ously since July 1973. Is this not the most sig­nif­i­cant source of inter­nal credit? As I under­stand it, this is cov­ered by asset sales and bor­row­ings (by the banks), and that this debt is passed on to con­sumers who have bid up the price of every­thing, is this cor­rect?

    What hap­pens when we run out of peo­ple capa­ble of pay­ing the inter­est on this “pri­vate” debt as it under­goes “growth”?

    Has this debt resulted in both the no doc/sub prime prob­lem and the cur­rent oil price rise? 

    Aus­tralia is now so tech­no­log­i­cally dumbed down that is will take a gen­er­a­tion to be able to actu­ally bal­ance the Cur­rent Account.

  • Hi Brightspark (a good nick­name!),

    Yes, the state of knowl­edge of dynamic sys­tems in eco­nom­ics is truly appalling.

    The CAD is cer­tainly part of the story behind the growth in NoDoc/subprimes, though not the whole story. In a nut­shell, I argue that all mon­e­tary sys­tems have an endoge­nous capac­ity to expand indef­i­nitely, but if that is allowed to hap­pen, one impact will be a debt-dri­ven capac­ity (for a while) to pur­chase imports.

    So rather than see­ing the CAD as a reflec­tion of the gap between Exports and Imports–the con­ven­tional eco­nomic interpretation–I see the CAD as fuelling our excess of Imports over Exports.

    At some point, as you inti­mate, the debt ser­vic­ing bur­den that gen­er­ates will become overwhelming–or the cur­rency will col­lapse, or some com­bi­na­tion of the two.

    And yes, to get back to bal­ance again, we need to pro­duce: though “XM for some sub­stan­tial time to reduce it. We may get some salve out of our resources on that front, but with the move to treat­ing the coun­try as pri­mar­ily a quarry, we’re always going to be pay­ing to import other people’s tech­nol­ogy.

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