Debt­Watch No 26 Sep­tem­ber 2008: Los­ing con­trol of the mar­gin?

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Late last year on SBS News, when Stan Grant asked me which way the RBA would move rates in 2008, I replied “Up, and then down”, Stan quipped “Spo­ken like a true economist–an even handed answer!”–to which I replied “More down than up”.

I expected the intial rate rises because of the RBA’s focus on the rate of infla­tion, and a sub­se­quent fall, not because infla­tion would be head­ing down, but because the econ­omy would be–and the RBA rate would be forced to fol­low it

That day seems to be immi­nent, with the “sur­prise” 1% fall in retail sales, and the first signs of a taper­ing in credit demand as well. The RBA is now no longer focus­ing exclu­sively on infla­tion, but also on an appar­ently stalling econ­omy. All mar­ket econ­o­mists have now joined with me in expect­ing a rate cut this month–despite infla­tion still being above the RBA’s tar­get range.

Until last month’s sur­prise announce­ment by the National Bank, it seemed that the only thing that wouldn’t be head­ing down was the mort­gage rate. Now, espe­cially after Wizard’s pre-emp­tive cut on Sun­day, it’s fairly cer­tain that all lenders will pass on Tuesday’s expected RBA cut. But there are good rea­sons why this is unlikely to be the case for sub­se­quent cuts.

The idea that there is some sta­ble rela­tion­ship between the RBA rate and the mort­gage rate is a fur­phy. When the RBA attempted to man­age the econ­omy by try­ing to con­trol the money sup­ply, the gap between the aver­age mort­gage rate and the RBA’s overnight rate fluc­tu­ated wildly between minus 5.5 per­cent and plus 2.5 (see Fig­ure 1).

Figure 1

Margin between average mortgage rate and the RBA Rate

Mar­gin between aver­age mort­gage rate and the RBA Rate

After the RBA aban­doned tar­get­ting the money sup­ply, and instead adopted a pol­icy of try­ing to con­trol short term inter­est rates, a sta­ble rela­tion­ship of sorts did develop. The gap set­tled down to about 4 per­cent, once the econ­omy recov­ered from the 1990s reces­sion.

This was roughly equal to the his­tor­i­cal aver­age gap between the rate banks charge for loans and the rate they offered for deposits–and banks, after all, make their money out of the spread between loan and deposit rates. Inter­est rate tar­get­ting “worked” because it con­trolled the banks’ costs of funds–as is evi­dent from Fig­ure 2, which shows that the 90 day bank bill rate has been very sta­ble rel­a­tive to the RBA rate since 1990 (though even this link is break­ing down now–the mar­gin between bank bill rates and the RBA rate is an indi­ca­tor of how much banks trust each other, and they trust each other rather less now than in the recent past).

Figure 2

Margin between 90 Day Bank Bill and RBA Rate

Mar­gin between 90 Day Bank Bill and RBA Rate

The gap between mort­gage and the RBA rate plunged from 4 per­cent in 1994 to 1.8 per­cent by mid 1997, as com­pe­ti­tion over mar­ket share broke out between banks and the new wave of non-bank secu­ri­tised lenders.

It should now painfully obvi­ous to every­one that this was not nec­es­sar­ily a good thing.

Those lower mar­gins were dri­ven pri­mar­ily by low­er­ing lend­ing stan­dards, rather than effi­cien­cies, or the much-hyped won­ders of com­pe­ti­tion. It there­fore stands to rea­son that the mar­gin will now rise, as the worst excesses of sub­prime and “low doc” lend­ing are being dri­ven from the mar­ket by the credit crunch.

The mar­gin has already risen to 2.35 per­cent, as banks have increased mort­gage rates above and beyond the RBA’s recent rate rises. But even that mar­gin is still a long way short of the 4 per­cent gap that applied before lend­ing stan­dard plum­meted with deregulation–and even of the 3 per­cent mar­gin that applied at the time of the Wal­lis Com­mit­tee.

The odds are that this mar­gin will rise back to at least 3 per­cent, and pos­si­bly even 4 per­cent, as the RBA is forced to cut rates as the econ­omy falls into reces­sion. So the RBA may have to reduce its rate to 2 per­cent to ensure a mort­gage rate of no more than 6 per­cent.

The RBA’s dilemma is triv­ial com­pared to its US coun­ter­parts, how­ever. US mort­gage rates have risen in the last year, even though the Fed­eral Reserve has reduced its rate from 5.25 to 2 per­cent (see Fig­ures 3 and 4). The Fed­eral Reserve has become almost impo­tent with respect to loan rates–and that impo­tency has got more extreme with time.

Figure 3

US Interest rates and the Federal Reserve rate

US Inter­est rates and the Fed­eral Reserve rate

When the Fed cut its rate from 6.5% in 2001 to 1% in 2004, mort­gage rates fell from 8.5% to 5.5%–so just over half of the rate cut was passed on to mort­gagors. This time round, the Fed has cut its rate from 5.25% to 2%, only to see mort­gage rates barely move–from 6.7% to 6.4%.

Much the same story applies to cor­po­rate bor­row­ers. Aaa cor­po­rate bond rates now are the same as when the Fed­eral Reserve rate was 3.5% higher. The US Fed can do some­thing to restore the prof­itabil­ity of finan­cial institutions–by increas­ing the gap between lend­ing and bor­row­ing rates–but it can do pre­cious lit­tle to take the finan­cial pres­sure off US house­hold­ers and cor­po­ra­tions.

The dan­ger for banks of course, is that their long run prof­itabil­ity depends not just on the spread between loan and deposit rates, but on bor­row­ers actu­ally meet­ing their com­mit­ments. A prof­itable spread means noth­ing if your bor­row­ers are send­ing you jin­gle mail rather than money.

Figure 4

US interest rates--the last 5 years

US inter­est rates–the last 5 years

It thus appears that one other casu­alty of the Credit Crunch has been the capac­ity of Cen­tral Banks to
manip­u­late the mar­ket inter­est rate. They can still con­trol the short term rates–things like 90 Day Bank Bills here, and the Prime Short Term Busi­ness Rate in the USA (see Fig­ure 5)–that set the banks’ cost of funds. But they have lost their capac­ity to influ­ence long term rates, the price that banks charge their lenders. The days of inter­est rate tar­get­ting by Cen­tral Banks may well be over.

Figure 5

US Interest rates minus the Reserve rate

US Inter­est rates minus the Reserve rate

The US Fed­eral Reserve is start­ing to appre­ci­ate this, as offi­cial rate moves have done bug­ger all to reduce lend­ing costs–in con­trast to Australia’s record, where mort­gage rates have until recently closely tracked move­ments in offi­cial rates (see Fig­ure 6).

Figure 6

 

Mortgage rate margins above Central Bank rate, USA and Australia

Mort­gage rate mar­gins above Cen­tral Bank rate, USA and Aus­tralia

But after this month’s com­pli­ance, lenders will start to use some of the future falls in the RBA rate
to restore their mar­gins between loan and deposit rates. Impru­dent lend­ing drove the mar­gin down to unsus­tain­ably low lev­els, and it has to rise in future to make respon­si­ble bank­ing prof­itable once more.

Figure 7

 

Australian interest rates

Aus­tralian inter­est rates

Figure 8

 

Margins above RBA rate of mortgages and 90 Day Bank Bills

Mar­gins above RBA rate of mort­gages and 90 Day Bank Bills

Comments on the Data

The turn­around in credit growth seems to be under­way. Though the monthly data is volatile, and sub­ject to revision–last month’s pre­lim­i­nary fig­ures of credit growth have been revised upwards, from 5 bil­lion to 22 billion–there is clear evi­dence of a break from decades of debt grow­ing faster than income, to debt grow­ing more slowly than income.

Monthly change in private debt (business+household)

Monthly change in pri­vate debt (business+household)

Though this is nec­es­sary in the long term to wean Aus­tralia off its debt depen­dence, in the medium term it will cause a sub­stan­tial slow­down in the economy–and it will push the econ­omy into a deep reces­sion.

This is because aggre­gate demand is the sum of income plus change in debt. For the last decade, the lat­ter fac­tor has been adding to demand–and aggre­gate sup­ply, asset prices, and our import bill have adjusted upwards to suit. But as the change in debt drops and ulti­mately turns neg­a­tive, it will sub­tract from demand–and sup­ply (read employ­ment), asset prices and imports will fol­low it down.

Contribution that the annual change in debt makes to aggregate demand

Con­tri­bu­tion that the annual change in debt makes to aggre­gate demand

It seems prob­a­ble that the Debt to GDP ratio will peak at about 166% of GDP. If Aus­tralians decided to reduce their debt to income ratio by 10% each year–to get back to the 25% level that applied back in the 1960s (before this long-term spec­u­la­tive bub­ble took off)–it would take roughly 15 years to get there.

Australias 45 year long debt bubble seems to be reaching a peak of 167% of GDP

Australia’s 45 year long debt bub­ble seems to be reach­ing a peak of 167% of GDP

Australias Debt to GDP ratio--the long term view

Australia’s Debt to GDP ratio–the long term view

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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  • Peter W

    I would be inter­ested in the cap­i­tal rela­tion­ships between SME’s — house prices — mort­gage debt.

    Large pub­lic listed cor­po­rates have rel­a­tively well under­stood mar­ket cap­i­tal­iza­tions — debt — GDP ratios.

    The SME’s could be the black swans in all of this.

  • Peter W

    It would be inter­est­ing to know the ratios & links between SME’s — House prices — mort­gage debt — SME work­ing cap­i­tal.

    SME’s could be the Black swan.

    SME’s are not scru­ti­nised like the pub­licly listed ASX busi­nesses for mar­ket cap­i­tal­iza­tion — debt/equity — rev­enues — mar­gins — GDP.

  • The Out­back Ora­cle

    Peter W

    This is just one SME! I have posted this ear­lier in the thread but every day the sit­u­a­tion gets worse! We are importers from China of out­door recre­ation goods. Infla­tion is hap­pen­ing so fast we can­not keep up with it. We can­not change our prices at a rate to keep pace with the nin­fla­tion.
    We put out for­ward Order prices in June which are cur­rent till Jan­u­ary. Since then we have had FOB USD FOB China price increases of about 10% (on top of the about aver­age 30% in the 9 months prior). We then put out a price list as at Aug 1. The change in the dol­lar has already increased out Landed costs by more than 20% since then. So, prices ris­ing slower than out inven­tory replace­ment cost equals a squeeze on our Work­ing capital.……are we feel­ing it day to day??? You bet your sweet life! And we will still have to pay the damned income tax on money that we are not mak­ing! We’re squ­uezed! And I’m one of the few that was aware of all this com­ing!
    Cheers

  • The Out­back Ora­cle

    BTW
    For August turnover was down but our GP was way up! We are sell­ing older stock at the new prices. If GP is based on replace­ment cost…we are dead!!!

  • hyper­pro­duc­tive

    Hi Emil, and oth­ers.

    Your argu­ments seems to be that the upswing is sen­ti­ment dri­ven, the down­swing is sen­ti­ment dri­ven so the down­swing will equal the upswing.

    Play­ing dev­ils advo­cate, on the upswing there were lots of peo­ple that made lots of cash and got out at the right time. Not every­one will be losers out of this.

    So whats stop­ping the peo­ple who won on the upswing (bought low, sold high, held cash and rented) buffer­ing the falls, so long as they main­tain their jobs?

    Get­ting back to my ques­tion, why is Steve so con­fi­dent debt lev­els will recede to a long term aver­age as opposed to some other level? Of course there are busi­nesses who have relied on the arti­fi­cial advan­tage of man­u­fac­tur­ing over­seas, sell­ing local (such as the out­back ora­cle), cheap debt etc but there are lots of busi­nesses that will ben­e­fit from a lower dol­lar, imported infla­tion and ris­ing debt costs. Not every business/person got caught up in the irra­tional exu­ber­ance…

    I don’t ques­tion the need for a cor­rec­tion, or that there will be a cor­rec­tion. I just ques­tion that the cor­rec­tion will return debt lev­els to their his­toric aver­age?

  • Peter W

    Debt ratios will return to his­tor­i­cal aver­ages because the return on assets declines when asset prices rise faster than asset income gen­er­a­tion. Debt growth faster than asset income gen­er­a­tion growth has infated asset prices and low­ered the return on asset to the point that there is no profit mar­gin between the cost of debt and the return on asset, espe­cially prop­erty.

  • The Out­back Ora­cle

    Hyperproductive…I’m just curious…did you mean to be obtuse and insult­ing or was it by acci­dent or am I just sen­si­tive?
    I was just try­ing to pro­vide an insight into one busi­ness. FYI I am not over­bor­rowed, nor have I ever been caught up in irra­tional exu­ber­ance. My com­ment was in sup­port of the idea that work­ing cap­i­tal is shrink­ing in SME’s,
    I spent many years as a farmer get­ting the raw end of the pineap­ple from the arti­fi­cial set­tings in this econ­omy.
    I used to man­u­fac­ture here too! I was dri­ven out of it by all the nor­mal things, like Gov­ern­ment inter­fer­ence, arti­fi­icial real estate val­ues, wrong set­tings for the A$ etc…
    I live sim­ply, have a nice and suc­cess­ful fam­ily, drive a snall car.
    So why the insults?

  • Emil

    hyper­pro­duc­tive and out­back ora­cle,

    I (am hop­ing) that hyper­pro­duc­tive was not try­ing to insult you. Pos­si­bly using your story as an exam­ple but I don’t think hyper meant any mailce. 

    You have to play the game within the rules set — buy­ing cheap imports from over­seas and sell­ing for a profit here makes plain eco­nomic sense. If some­one can do some­thing bet­ter than you for cheaper, you should always be encour­aged to go down that path. The cur­rent global sit­u­a­tion is what it is — it may change, but busi­ness own­ers who are now sell­ing instead of man­u­fac­tur­ing are doing that for a rea­son. I don’t think it is irra­tional or exu­ber­ant. Know­ing when to change tact and what is com­ing will prove pru­dent no doubt — but that is a dif­fer­ent mat­ter.

    What is irra­tional is the fact that we have been able to do this for so long. What is irra­tional is that we have been given credit to con­sume with as opposed to pro­duce with. Every time this hap­pens it ends in tears. As soon as the aver­age Joe thinks that credit can replace wages you know that trou­ble is brew­ing and is only a mat­ter of time. The illu­sion will last for a while as it will arti­fi­cially stim­u­late the econ­omy. Peo­ple “feel” wealthy, so they take on more debt and spec­u­la­tion goes up. Cred­i­tors lend because asset prices are ris­ing and peo­ple are spend­ing. Some peo­ple have trou­ble repay­ing, but no prob­lem, there is always more credit on offer to pay debt or con­sume with so there are no prob­lems with debt growth — there is always some­one there to loan just that lit­tle bit more. I started get­ting ner­vous about the econ­omy when I started see­ing signs with cars on them going up say­ing “tomor­rows dream today” — the con­no­ta­tion being that if you can’t afford it, don’t worry, we are in the busi­ness of mak­ing all your dreams come true not mat­ter what the cir­cum­stances. How do things look dur­ing this time? Couldn’t be bet­ter. Busi­ness is boom­ing because the money is flow­ing and the bulls just can’t fathom that any­thing could be wrong. Debt is just how “things work these days” — why would it ever change?

    At some point, peo­ple start to real­ize that maybe they are in too much debt. Per­haps asset prices can’t still keep going up. Look at what has hap­pened in the USA. There is a full blown credit crunch going on and this is before any signs of a real eco­nomic slow­down! Peo­ple were unable to pay their debt and there was barely a hint of unem­ploy­ment. This should be a huge warn­ing sign — peo­ple are in way too much debt that they clearly can’t man­age and prob­lems are start­ing even before there is a lack of demand or slow­ing of the econ­omy (if you believe their GDP num­bers). As asset prices fall, peo­ple tighten up and stop spend­ing which leads to job losses and a self rein­forc­ing feed­back cycle. Who wants to lend against that back­drop? Where is the growth in credit going to come from? Unless the gov­ern­ment just hands out money, how is the sit­u­a­tion going to cor­rect itself? I can’t believe that peo­ple are think­ing the credit crunch is near­ing the end — it is lit­er­ally only just start­ing. Wait until unem­ploy­ment dou­bles or triples and peo­ple are still under moun­tains of debt. 

    So, why will peo­ple reduce their debt lev­els? They won’t have a choice. Lenders won’t be as aggres­sive lend­ing and peo­ple won’t want to take on as much debt on depre­ci­at­ing assets. 

    Many peo­ple argue that it won’t hap­pen as the gov­ern­ments won’t let it. They might be right, but I think the mar­ket is a lot more pow­er­ful force than a gov­ern­ment, and the mar­ket will dic­tate what ulti­mately hap­pens. It appears to me the mar­ket is slow­ing start­ing to appre­ci­ate the real­ity of the sit­u­a­tion going for­ward and it doesn’t like what it sees.

  • Peter W

    It’s inter­est­ing to note that in the most recent months UK lend­ing fig­ures only 33,000 mort­gages were financed. In Aus­tralia the most recent ABS data was 50,000 mort­gages. The UK pop­u­la­tion is roughly 3.3 larger than Aus­tralia.

    The UK is also in a credit crunch.

    Why would lenders offer finance to bor­row­ers with even 25% down if the lenders believe asset prices will drop 25%? Isn’t this roughly the same as 100% finance ~ i.e very risky.

  • Smokey3

    In gen­eral I sup­port the view that eas­ily avail­able west­ern debt has resulted in a com­pound growth of asset val­ues that will ulti­mately see a severe down­ward cor­rec­tion in value. The only issue I am not cer­tain of is the impact of China and other devel­op­ing economies such as India etc on mit­i­gat­ing this cor­rec­tion… Your arti­cle is silent on this issue. Pop­u­lar opin­ion is that the Aust econ­omy and to some degree the global econ­omy will be largely insu­lated from pos­si­ble reces­sion as these devel­op­ing nations and their mas­sive pop­u­la­tions grow and con­sume… I’d be inter­ested to know your view regard­ing China & India’s capac­ity to insu­late us from finan­cial ruin?

  • Emil

    Smokey3,

    China and India have been excep­tional growth sto­ries. I think a lot of their growth has been stim­u­lated by grow­ing their exports to the west. China has been buy­ing a lot of US debt, the US uses this for con­sump­tion and pur­chases cheap Chi­nese goods and the process repeats. As the big west­ern economies stag­nate, you would think that the Chi­nese econ­omy would also take a hit because the stim­u­lus they need from the west wont be as pro­nounced.

    This does appear to be the case. Man­u­fac­tur­ing in China has con­tracted two months in a row (although it is hard to tell what impact forced shut­downs over the Olympics had). Anec­do­tal evi­dence is that things in China are slow­ing down. They also had a spec­u­la­tive bub­ble in their real estate and stock mar­ket. If you look at the Shang­hai index, it is down around 60% and falling still. 

    It will keep grow­ing, but dur­ing a global eco­nomic col­lapse, I don’t see them pay­ing top dol­lar for com­modi­ties and the com­pe­ti­tion for raw resources between their com­pa­nies won’t be as fran­tic.

    The mar­ket seems to think this is the case. Com­modi­ties have col­lapsed lately along with the Shang­hai index. This all points to a severe con­trac­tion.

    So where does this leave Aus­tralia once the min­ing boom is over and we are still left with the high­est debt lev­els in the world as well as the high­est house prices? I’ve always thought that Aus­tralia will be the last to fall, but when it does, it will fall twice as hard. I hope that this won’t be the case and that China and India will recover quickly or be able to move for­ward on their own. I know Peter Schiff who was inter­viewed with Steve Keen on Date­line the other night thinks this way but per­son­ally, I am skep­ti­cal. Time will tell.

  • The Out­back Ora­cle

    Thanks Emil and a great sum­mary of the way of things!

    Smokey I have been forced to con­tem­plate a lot the ques­tion you pose re whether we might be the excep­tion. The cri­sis that I have felt has been com­ing for a long time, has been post­poned for„,well„,let’s call it “a long time”. We keep up our liv­ing stan­dard by increas­ing the rate at which we both bor­row inter­na­tion­ally and con­tinue to sell our resources, includ­ing our man­u­fac­tur­ing base, food chain and min­eral resources. The CAD has not declined through this great­est boom of all time,so it looks like it doesn’t mat­ter how big the boom is we will just con­tinue spend more than we earn and bor­row to bor­row.
    The National tol­er­ance for the sell-out of the nation has far exceeded my expec­ta­tions. As per ear­lier in this thread the Chi­nese are more than will­ing buy­ers.
    It’s just a ques­tion of for how long the illu­sion can be kept in place. If any­one has an opin­ion non tim­ing, I am all ears! Let’s say I am sort of “short” prop­erty and am ner­vous the infla­tion will hap­pen before the “shake-out”

    On that note I see Gotlieb­sen had a num­ber of $129 Bil­lion for Bank refi­nanc­ings from over­seas sources for the next 12 months. Pre­sum­ing that is reli­able, how the heck are they going to refi­nance $129 Bil­lion in the midst of the cur­rent finan­cial melt­down? And what will the inter­est rates be?

  • The Out­back Ora­cle

    Hyper­pro­duc­tive

    In rela­tion to your pos­tu­la­tion about the swing up and down being equal there are two mat­ters of rel­e­vance.
    Firstly, as Steve points out, at this time, the mag­ni­tude of the swing up and its asso­ci­ated debt lev­els has been so great that it is unprece­dented in the his­tory of fiat money. An equal swing down is going to take us down a long way!
    Sec­ondly, my (too long) expe­ri­ence of life tells me that the swing up is rel­a­tively slow; the fall is pre­cip­i­tous. With­out going back to Steve’s data here, let’s say this period of “up” is 20 years. The whole thing will unwind over say one or two years.
    IMHO

  • Peter W

    The rough maths behind why house prices are not sus­tain­able at 7.5 X wages.

    Max­i­mum rent 30% of wages (taxes, petrol, food etc will take roughly 70%)

    1/(7.5/0.3) = 4% gross rental yield

    Net yield will be ~70% of gross yield = 2.8%

    Wage (rental) growth 4%

    Total house return = 4 + 2.8 = 6.8%

    Debt costs = 9%

    Bank deposits = 7%

    Prices at 7.5 X wages = –2.2% com­pound return

  • The Out­back Ora­cle

    I dunno Peter.…you just don’t get it do you! 🙂
    Real Estate always goes up at 10% per year aver­age, so a bit of neg­a­tive return and increase in debt doesn’t mat­ter. And…all the gain is tax free!!! Just ask any Real estate agent or Prop­erty Con­sul­tant.
    A few years ago my son and I did a small DCF analy­sis on Syd­ney prop­erty. Given the lever­age you can get on prop­erty, the cos­seted inter­est rates, and the tax free sta­tus of gains, if you got a 3% REAL appre­ci­a­tion in the house price, the equiv­a­lent return required in a 100% equity invest­ment else­where (say in some pro­duc­tive enter­prise like a fac­tory) was about 26%. The rate varies a lit­tle with infla­tion rates, tax rates etc but the order of mag­ni­tude stays the same.
    Any­one won­der why Aus­tralians over­in­vest in houses?

  • Peter W

    The main OECD nations nation­alise their mort­gage bank­ing sys­tems because my maths is roughly right. The USA did it last week­end and the UK is hav­ing the polit­i­cal dis­cus­sion at present.

    The miss­ing 3% p.a. has to come from some­where! Nations will choose… wages growth, elim­i­nate deposit/mortgage mar­gin (nation­alise the debt), house price cor­rec­tion.

  • The Out­back Ora­cle

    Peter
    We sold our house recently and there was a bit of nego­ti­a­tion with the Bank. Let’s just say we are a good risk! How­ever our Bank­ing Man­ager was quite frank and explicit. The Mort­gatge was being held by the Reserve Bank.
    I remem­ber the report of it hap­pen­ing about the time of the Bear Stearns cri­sis.
    Again i am only speak­ing from meme­ory but essent­lally I think this par­tic­u­lar (one of the big 4) Bank was lever­aged some 40X.
    So, cor­rect me if I am wrong, the mort­gs­ges have already been nation­aised here in Aus to try to pre­vent bank fail­ure.

  • Peter W

    The RBA allowed some­thing like a 1 year repo on the failed RAMS port­fo­lio undewrit­ing ~ $5 — $10 bil­lion. It would be sev­eral orders of mag­ni­tude larger if the entire mort­gage debt was nation­alised ~ $1 tril­lion. The USA just did 1/2 of it ~ $5 trillion(US). It will make busi­ness real tough for all the deposit funded banks to make a com­pet­i­tive loan.

  • The Out­back Ora­cle

    Peter, you seem to know a bit. We are with West­pac and the mort­gage was being held by the Reserve bank? Def­i­nitely!

  • Peter W

    I’m not sure nation­al­is­ing mort­gage lend­ing is good pub­lic pol­icy. Indi­vid­u­als get the ben­e­fit of the nations AAA credit rat­ing but should that be extended to busi­nesses as well (neg­a­tive gear­ing rental prop­erty)?. What about all the other busi­nesses that will be excluded AAA credit price, includ­ing all the recent infra­struc­ture pri­vati­sa­tion. Surely power ports roads etc are equally impor­tant to a func­tion­ing econ­omy!

  • Peter W

    Asset shift­ing from pub­lic > pri­vate > pub­lic bal­ance sheets shifts costs & ben­e­fits in ways that are prob­a­bly unde­sir­able and seems to be some­what cycli­cal. We change Goven­ment, they clear the national bal­ance sheet, we wreck our own pri­vate bal­ance sheets, we want to trans­fer it back. Do we wreck the national bal­ance sheet again? Frankly it would be bet­ter if we all priced ‘risk’ appro­pri­ately. Those who don’t should fail. These are com­mer­cial trans­ac­tions. If you don’t save enough and you over bor­row to aquire an asset at inflated prices and recieve insuf­fi­cient cash­flow to amor­tise and own it, and that recipe fails for you, why reward the behav­iour? Moral haz­ard!

  • hyper­pro­duc­tive

    Hey Emil, Ora­cle, def­i­nitely no mal­ice intended.

    It was more a stream of con­science, i didn’t mean to imply the Ora­cle was caught up ‘irra­tional exhuber­ance etc’.

    I’d per­son­ally like to see a big read­just­ment in cur­rency val­u­a­tions so that nations can com­pete on an equal foot­ing. I agree it is ‘ratio­nal’ to to go make some­thing cheaper where you can, but to me, it should be cheaper because some­one can do it better/smarter, not because some­one can do it in a coun­try whose cur­rency is worth pea­nunts — and the peo­ples wages reflect this. To me, that is artif­i­cal com­par­a­tive advan­tage.

  • Debt to GDP is not 170%. GDP is about $1000 bil­lion. Australia’s for­eign debt was about $500 bil­lion before our dol­lar dropped.

    The Reserve Bank holds most of Australia’s for­eign debt. The Cur­rent Account Deficit puts Aus­tralian dol­lars on the world mar­ket that no one wants. These dol­lars are mopped up by the Reserve. Yes, apart from the Aus dol­lar at 98 cents: being caused by cur­rency spec­u­la­tors wait­ing for the $US to bot­tom.

    So the Reserve sets the price of $Aus, like goldilocks, not too high nor too low, accord­ing to the eco­nomic cir­cum­stances.

    Reserve banks bor­row printed money from each other. Cur­rency swaps were only stopped as it made bla­tantly obvi­ous that Reserves were print­ing money to lend to each other. Debt is not a prob­lem: mop­ping up debt with printed money pos­si­bly could be.

    We could have a 15 year Japan­ese bub­ble, yet. 

    The best con­tri­bu­tion for the eso­teric elite e.g. (Steve Keen) to make, is to put the plain truth on pub­lic record. 

    What does it achieve by test­ing out the gen­eral pub­lic. Even if they have infor­mal exper­tise, their think­ing will never make a dif­fer­ence in con­tribut­ing to a bet­ter world. 

    .