The Parliamentary Library arranged a debate between myself and Rory Robertson of the Macquarie Group on the financial crisis today. We had a good audience of about 70 Parliament House denizens. You can download the Powerpoint Slides slides for my presentation, and the Vissim model of Minsky’s Financial Instability Hypothesis which was part of the presentation ( Right click and choose “Save As” since this is a text file; then install the viewer, which can load the file and let you run it (I’ve also loaded the EXE file of the viewer onto my site as another way of getting the program). You can make changes too, but they can’t be saved).
The Library has put the recording of the debate up on its Vital Issues page. Since this will change over time, shortly I’ll add the MP3 file to my list of podcasts.
November 26th, 2008 at 3:47 pm
Was it a K.O Steve or did you just get a points decision?
Also was it recorded for publication or were they too embarrased ?
November 26th, 2008 at 4:23 pm
Rory actually rates as a “bear” amongst market economists, though a fair distance from me in the growl stakes. The discussion was pretty amicable, and it came down to whether or not the RBA had the power to manipulate (i.e., keep high relative to incomes) house prices via dropping interest rates.
We took a bet on the issue. If house prices drop less than 20% peak to trough, I lose; if they fall 40% or more, Rory loses, and the loser has to walk from Parliament House to Kosciusko.
The audience was pretty focused on my analysis, and it included a large number of advisors (though the only MP present was the Chair, Sharryn Jackson [Labor, WA]).
We’ll see what comes of it. I gave the most analytic presentation I’ve yet given on the topic (outside the presentation I gave to the Centre of Excellence in Complex Systems), mainly because I think people working in parliament don’t need to know the facts–which they get pummelled with every day–but some theory that makes sense of them.
No recording so far as I’m aware though! It would have been interesting…
November 26th, 2008 at 4:33 pm
Steve
I was at the talk this afternoon and throughly enjoyed it. Quick question I didnt get to ask. What is your opinion on the rising credit card debt and its implications for the current financial crisis.
The focus is clearly on interest rates but the lowering of rates by the RBA appears to have little to no impact on credit card rates ?
Thanks
a.
November 26th, 2008 at 5:22 pm
[...] Read the rest of this great post here [...]
November 26th, 2008 at 5:34 pm
Steve,
I find your heterodox views on economics intriguing. You are certainly one of the few economists in Australia that I have any time for, I certainly have no time for Treasury or the Reserve Bank! I have been reading your blog for some time now and your comments in the media.
I agree with many of your views, especially your view that this crisis is primarily a result of too much debt in the economy. A recession is needed to deflate the bubble asset prices that have built up recently and reduce debt in the economy. The government should let the recession run its course rather than making problems worse by attempting to continue reckless consumer lending and bubble asset prices.
Still, it is apparent that your views do not entirely represent the “Austrian School” of economics, which in my view contain all of the explanations for this crisis. I think the actions of governments in Australia and the US in making this problem worse and not allowing the massive build up of debt and asset prices to wind down quickly will lead to a severe depression and ultimately lead to the discredit of most modern economists and reserve bankers and the end of the fiat monetary system.
It is pleasing to see Peter Schiff’s (Austrian economic) views in the United States are gaining momentum. You can see his views by reading this link:
http://au.youtube.com/watch?v=TP_aJ7LcAAA
Regards
David
November 26th, 2008 at 7:25 pm
I’m not certain that losing the bet is a bad thing, that section of the Australian Alps Walking Track http://www.australianalps.deh.gov.au/parks/walktrack/index.html is beautiful. Maybe Rory is a bushwalker ?
I hope someone is keeping a record of the pronouncements of the OECD and various economists. For anyone writing a book it would be great to start a chapter with the appropriate “The crisis is over” quote just before the next disaster.
November 26th, 2008 at 7:39 pm
Steve,
It would have been an interesting debate and I would have loved to have been there.
Would it be possible to view the powerpoint presentation provided by Rory Robertson assuming, of course, that he made his delivery via Powerpoint? Perhaps you could consider placing it on your blog.
Cheers
November 27th, 2008 at 11:28 am
Anthony, credit card debt is only a small proportion of total debt, about 2-3%. The high interest rate reflects the increasing risk seen by the banks; they have no idea of the risk for many customers. There is nothing stopping someone who loses their job and doesn’t having any assets from having a big spend and then declaring bankrupt.
November 27th, 2008 at 12:35 pm
steve,
what happens if house prices drop more than 20% but less than 40% ? You both walk?
Isn’t this the most likely outcome?
November 27th, 2008 at 2:24 pm
Question to all,
If reflation is so easy and obvious, why didn’t Japan just reflate 15 years ago?
Is it possible that there is a more powerful force than loose monetary and fiscal policy?
November 27th, 2008 at 2:44 pm
Another excellent presentation! I see you’ve successfully added Ponzi finance into your Minsky-sytle model. Looks good!
To David: the problem with traditional Austrians is they don’t like to put numbers on things, so it’s hard to test their ideas. Steve’s models incorporate much Austrian and post-Austrian thinking.
Given that people are starting to listen, I would like to see you make some specific comments on the Keynesian approach of the government, the extent to which the RBA has gone down the US path, and what alternatives should be considered.
You might also comment on the kind of path we’re likely to see here, given that we do not share the same currency, housing, banking or political system with the US.
November 27th, 2008 at 2:49 pm
Bullturnedbear,
As Steve has pointed out on numerous occasions, implementing his idea of government controlled wages is absolute heresy within the neoclassical school of thought.
As the Japan experience has shown, decreasing the interest rates (BoJ 0.1%) will not reflate the economy, as individuals/households/businesses will use their incomes and lower interest rate loans to pay off existing debt rather than consume and invest. Furthermore, a low interest rate may well contribute to the formation of asset bubbles years down the track, thus facilitating the cycle once more.
November 27th, 2008 at 3:45 pm
A podcast of the Parliamentary Library Vital Issues seminar with Steve and Rory can be found on the Parliament website at http://www.aph.gov.au/library/pubs/Vis/index.htm
November 27th, 2008 at 3:50 pm
A podcast of the Parliamentary Library Vital Issues seminar with Steve and Rory can be found on the Parliament website at http://www.aph.gov.au/library/pubs/Vis/index.htm
Copies of Steve and Rory’s powerpoint presentations are also avaliable at this page.
November 27th, 2008 at 4:03 pm
I am quite amazed at the continuing total consdideration of the External Account. Let’s assume that Rory’s expectation that the Reserve Bank can lower interest rates enough to refloat the real Estate bubble comes to fruition. Bloody bewdy!!!!!! We have a boom again at no cost to anyone….this is pure alchemy!!!
Let’s look at what the real result will be
1. Smash the real wealth of the prudent in our society and tax them for the privilidge of losing all their money.
2. In the process make it clear to all Australians that it never pays to save and it always pays too overspend.
3. Substantially enlarge Australia’s overseas debts (currently something over $600 Billion i.e. $600,000,000,000 – I suppose a zero here and there never hurt anyone?
4. Require the sale of even more of our resources to opverseas interests. I understand that foreign ownership is now about 80% of the Mining industry. The food chain is long since sold and most major companies supplying goods and services to the population are overseas controlled.
As I understand a balanced economy it is this (contrary to modern economic thinking)
1. The private sector is balanced – income roughly matches expenditure with a fair percentage of saving providing capital for the corporates and other requirements for new capital.. Debts are controlled and manageable without having to resort to artificially low interest rates.
2. The Government sector is balanced. Again Income roughl;y matches expenditure, especially when measured over a number of years.
3. The external account is balanced. The Current Account is in balance or in some surplus depending on the circumstances.
What we have at the moment is a Government sector that is balanced…BUT!!!!…at the expense of a seriously unbalanced household sector AND an external account that is now so out of whack that it can never be balanced!! Costello Henry et al managed to balance the budget…but not through any great wisdom. It was balanced through the reckless stimulation of the household sector, resulting in more income for the Government but, at the same time, more household debt and more owed to foreign governments, foreign institutions and individuals, as well as the reckless disposal of the nation’s assets and the destruction of the independence and pride of a nation.
Why is everyone so hell bent on ignoring this very important aspect of this whole debt, saving, interest rates scenario?
Because we are ruled by a bunch of bloody psychopaths who don’t give a rats about the nation, it’s children or their future. We are governed only by the total self-interst of those with their snouts in the trough.
November 27th, 2008 at 6:03 pm
A few good calls Outback,
Especially the call on taxing savers. Problem is they might try to do it, because everyone in the west has turned into a borrower. Politics will dictate that Governments will try to favour the borrowers.
The massive debt problem is going to be fixed. The fix has already begun. That is, the greatest debt deflation in history (even greater than The Great D) is underway. The Governments of the World have NO IDEA!!!! They are changing their minds and policies by the week. They have NO POWER TO FIX THIS THOUGH. It will just run its course.
The overriding powerful forces in action are risk aversion and increasingly pessimistic sentiment. This risk aversion will continue to see borrowers pay back debt and lenders reduce the amounts they lend. This will go on until it has gone too far. The train is moving and you better get out of its way. In the next two years there will be mass bankruptcies and many bank failures.
I don’t believe Economics has an answer to this one. The answers are all at the individual level and are as follows:
1. GET OUT OF DEBT. Even if you are going to make a loss on what you need to sell.
2. Sell shares, houses and any junk you don’t need. Convert to cash.
3. I mean physical cash. As much as possible. Do you know how hard it is to get money out of the banks. The RBA has run out of $100 notes. You also need to book in at least a week to get a significant amount of cash out of the banks.
4. Be patient. This will take a long time to play out.
5. Be prepared for wars, terrorism, societal breakdown.
6. Get a dog and a seed bank.
There is probably more to add to the list, I have run out of time. If anyone wants to add to this list that would be fun. I you think I am a total nut, great also. Time will tell.
November 27th, 2008 at 8:31 pm
Outback Oracle, you got the main points right I reckon. There is a no real intention by the government policy makers to rein in debt. (One thing: looks like Aus debt is closer to $1082b)
Govt has encouraged ridiculous amounts of private debt via negative gearing and interest only loans for investment properties and shares. Cutting the CGT in 1999 was the green light for investors to go on a spending spree; tax payers destined to pick up the tab.
Most debt in Aus is property debt: http://www.rba.gov.au/Statistics/financial_aggregates.html
$674B = Owner occupied Housing debt
$308B = Investor property debt (heavily subsidized by tax payers)
There is another $151B in personal debt (credit card, cars, furnishings etc) and business debt is $770B (85 percent is associated with services within Aus that produces no export income).
$1082B in property debt produces not one cent of export income. On top of that there may be up to about $654B of business debt, also not earning export income associated with housing that produces nothing.
Little wonder Aussie dollar is marked down.
Does anyone else think it is ridiculous that we have built an economy on the sands of housing debt? Housing produces no export income and therefore does nothing positive for the Balance of Trade figures.
I look forward to the day the policy makers sit down and consider the future of Australia, rather than propping up prices for benefit of rental portfolios.
November 27th, 2008 at 9:23 pm
Changes to the Capital Gains Tax and negative gearing would have had very little effect on where we are now. The exponential growth in debt is much the same irrespective of these factors. The reason is that dropping below the trend and the economy tanks, so the RBA will never let that happen. They can encourage borrowing by dropping interest rates just as effectively as changes to the tax system.
This is the basic problem. Once an economy is driven by increasing level of debt stopping this will result in a recession, as in 1992. Not starting the debt train would have meant dealing with 10% unemployment in some other way. By 1996 the curve was already upwards and has continued until this year. Now we have a much bigger recession than the one we could have had if this had been stopped years ago.
November 28th, 2008 at 8:43 am
Hi Steve,
I’d wonder if you might indulge me on this: you mention in your case of debt deflation that Japan tried excessive printing of money one year and prices actually fell the next year, which in your mind suggests that the ‘black hole’ of debt repayments will suck printing money from consumer prices circulation preventing the inflation to affect consumer goods.
Could you perhaps go back and check how the Yen faired during that time period… whether it appreciated or lost value? Because, and I may be wrong here, even though money printed may funnel into the debt repayment black hole, the value of the currency will still decrease with the increased printing of money. So while you may have a situation where the price of goods fall legitimately (and I do believe that deflation is the outcome), I fear the governments response in printing money till the cows come home will ultimately result in a currency collapse, which will give the same result as if we had hyperinflation.
Is that a possibility?
November 28th, 2008 at 9:55 am
Seen some comments here:
I have to agree with an opinion I heard awhile ago. A housing bubble is a natural occurance of any fractional banking system and here’s why.
Most of the loans that people get (by value) in in housing. This is mainly a function of our lifestyles. New loans create new money in the system via the fractional banking/securitisation process.
This in turn dilutes the money supply helping inflation of tangible assets (this includes housing). Since the loans are spent on housing first however the inflation effect is most predominant here as the money drives up the price of housing. The first users of the borrowed (almost counterfeited) money get the most benefit from the dilution of money as it becomes concentrated in their hands (hence punishing the savers who money has been diluted through this process).
By the time the money has worked its way through to wage owners it has been diluted and its inflationary effects mostly realised hence the value to the wage earner is a lot less than the initial borrower.
This inflation and bidding for house prices forces new entrants into the market to borrow more for the same thing diluting the money supply even further and causing the cycle over again.
America had this land banking system before. We have it now through the mortgage securities market.
Inflation dilutes the money supply causing inflation, reducing the real borrower’s debt burden and increases the value of his asset purchased at the same time (i.e a double position – short on money, and using proceeds to be long on asset). If everyone does this in a country and with housing they must (since they need to live somewhere) there will be enough people to keep making this money and using it to prop housing until the wall hits – the interest bill on the money created exceeds real income.
Therefore I’m afraid I don’t see the boom-bust cycle disappearing unless we can get fix how the system works.
November 28th, 2008 at 10:14 am
Yes Oracle I think you forgot a few things:
1) The most important thing a gun. Actually probably allot of guns, and ammo.
2) Empty jars to store urine in, you never know when you’ll need it.
3) 1000 rolls of aluminimum foil used to make hats to block the satellites from reading your thoughts.
4) either a bunker or a unibomber style shack, not sure which would be best, probably both, as long as the expense doesn’t take you into debt of course.
November 28th, 2008 at 10:59 am
Bullturnedbear
You may be interested in the following sites:
michael-hudson.com (contains excellent radio
interview on “New Kleptocracy” and article
published in Harpers 06 on collapse of
housing bubble with reference to Ponzi))
max keiser (follow the money)
alex jones (a bit of rant, some leads)
itulip
Steve – an interesting debtate – don’t stop.
November 28th, 2008 at 12:21 pm
bullturnedbear – why convert to cash? buy productive assets – i.e. equipment that can make useful things. Cash is just the vehicle for exchange, not useful in and of itself. If we are heading for the mess you envisage I wouldn’t exchange cash for anything, but I’d exchange food and clothes for someone that can build a big wall!
November 28th, 2008 at 1:11 pm
Hyperproductive,
As a result of deflation the price of “productive assets” will fall dramatically. The price of food and clothes will also fall dramatically as well. Until the “bottom” is reached. To hold cash now, will allow you to buy more productive assets later when nobody has any cash.
Cash has already risen in value dramatically in the last 5 months. In terms of shares it is worth double, Oil 3 times, etc. This process will continue as debt deflates.
Most people have either debt or illiquid assets. When the debt tap is turned off and the assets fall in value, there will be no cash left. Only those with cash (the super minority) will have buying power.
To Ned,
I guessing from the sarcasm that you think I’m a nut. That’s cool. Time will tell. What are you suggesting we do?
November 28th, 2008 at 2:29 pm
Hey Bull2Bear,
All I’m saying is that it in my life experience it is extremely rare that the grandest or the gravest predictions turn out to be correct so I am not going to get too steamed up just yet. Be prepared sure, but selling every asset I own to hold a fiat currency wouldn’t make me feel more secure. The dollar is a product of debt, if all our debts were paid back there wouldn’t be a single dollar in existence!!!
But if debt is the problem and the world as we know it is going to collapse over it’s debt then holding a few pieces of plastic or a bank statement with a number printed on it will do little to improve your situation. If your predictions are correct then precious metals or oil or other hard assets that you can store will be the things you want to hold in my opinion. Cash will be worthless in the world you are predicting.
November 28th, 2008 at 2:52 pm
Oh yeah, and the oldest bit of investment advice I can remember is don’t hold all your eggs in one basket, if thing go hyper inflation then cash is as worthless as in the post-apocalyptic scenario. Diversify.
November 28th, 2008 at 3:06 pm
Hi Ned,
The cash strategy is for a time and that time too will pass. For the last year it has been the best strategy by far. Who can say what will be the best for the next year? I’m saying the best bet is still cash. That’s just my call.
What’s your call? Are you willing to make one? Have you got an active strategy or are you following the hold and it will all be OK strategy?
That one has worked well in the past and it may well work well in the future.
Good luck time will tell.
November 28th, 2008 at 4:08 pm
Bull,
I agree cash has been excellent over the past year. I would impressed with your strategy if you told me you sold all your Australian dollars and bought $US or Yen in about June this year.
However from what you said in your earlier posts you don’t have cash as an investment strategy, it is a survival strategy in the case you were putting forward. If the events you foresee come to pass I still don’t think holding cash will make you better off, actually in that scenario you are pretty much backing everyone on the planet being far worse off than they are now, so far worse off that virtually no strategy will be able to do allot about it!! Even warren Buffet’s not safe if there’s a nuke headed for Omaha.
My strategy is the same as it was before, buy things that aren’t valuable now and hold onto them until they are. I think that commodities are things that will be valuable and in short supply in the coming years that are cheap now. For now I don’t need to hold them, I am prepared to invest in a index or company that produces these, but if things get worse I will want to hold onto these assets physically. And if things get as bad as you predicted earlier I wouldn’t give you a thimble full of oil for all the dollars you hold, I probably would give you some for some of your grain you posses though.
And if all else fails then I guess I can always join the army.
November 28th, 2008 at 4:24 pm
Hi Steve,
Well done on the debate. Excellent points with very valid logical a neoclassicalist could never comprehend.
I am continually mystified why pundits compare our property bubble to US. I’m the first to concede they are fundamentally different (particularly we are far more overvalued!). The UK market is highly equivalent to our own, and I note prices residential has now fallen 14.46% there. Why did Rory concentrate on the US comparison when the UK is FAR more relevant for the future direction of our property bubble? (namely down, and down BIG).
His analysis smacks of every other institutional economists failure to recalibrate for the transcendental change we are now experiencing.
“Big rate cuts, full-recourse loans and absence of overbuilding offer strong protection from Prof. Keen?s forecast of 40% drop in Oz-wide home prices” – good luck..
Keep up the excellent ground breaking work
Cheers
Mark
November 28th, 2008 at 4:32 pm
The bet has made the SMH http://business.smh.com.au/business/rate-cut-rory-bets-his-boots-on-house-prices-20081128-6mis.html
They didn’t comment that both Steve and Rory Robertson agree that a 30% drop is quite possible. I assume the percentage drop is in real terms, although with deflation it probably doesn’t make much difference.
November 28th, 2008 at 4:35 pm
On a side note…I made sent an experimental e mail from domain to an agent selling a property in Westmead last night:
“Regarding property ID XXXXXXXXXXX, Ill offer 25-35% off the asking price. 700K you have to be kidding. Call me when the seller wakes from his dream. ”
First thing this morning I get a call on my mobile.
The agent is really enthusiastic (desperate?) and tells me he and the owner are willing to “discuss” my offer!!!
So I tell him I didn’t even expect a call, well since you are so desperate I think I will offer 35 – 40% less…The line falls silent. He then gives me this big spiel that the place can be redeveloped and I could make 200k clear off it in a year!!!
I go, “call me back when you wake up pal”
The wolvers are at the door…It’s coming, tick, tick, tick…
November 28th, 2008 at 4:40 pm
BullTurnedBear,
While advocating in the other forum a Holding Tax on cash to assist in a deflationary environment (where nominal rates may be zero & real rates negative), I agree with you – Cash is King for the foreseeable future.
Unless one is able to pick up distressed assets. I know of reasonably quality commercial property that is positively geared within the mandated bank LVR’s. Still, one faces tenant risk and lack of general demand – even with signed long term contracts the risk of tenant insolvency remains.
Equities have clearly been in the pits and plenty of advisers were pulling out their “long-term value” charts suggesting 3600 – 3900 was “fair value”. Where those charts were a year before, I wouldn’t know. But the logic behind their notion of fair value is reasonable enough – around 10% p.a. since 1980 or longer if one does good research. However, since these are a little far from “normal” times, I’m not sure that a notion of “fair value” – which normally contains quite a range depending on particular circumstances – is the relevant notion.
Besides, why do people expect shares to bounce back when shares – by definition – represent the excess beyond creditor’s claims. And creditors, as measured by Credit Default Swaps, feel particularly nervous that they’ll be doing at least some of their dough – suggesting equity holders ought to be *quite* nervous.
Of course, without getting into technical difficulties of doing so, equities can be valued as a call option over the returns excess to creditors claim valued at a strike price of zero.
And while shares do bounce back before the end of the recession, I haven’t seen anyone suggest that such occurs more than about six months ahead of end of recession. If roubini is right and the USA is headed for – at least – a 24 month recession, then what does this mean for Australian equities ?
So, bonds, cash or property ?
Well, Steve Keen has expressed opinion about the return of residential property. Regardless whether he or Rory is correct, is ain’t going up much in the near term.
Bonds, well, look at Credit Default Swaps..
… to the individuals who “diversify”, well, I hope it works for you.
Plenty of studies indicate that upwards 90% of all portfolio returns come from getting asset allocation right. I’ll leave it to Beaver to work out what that means for diversify.
Just remember, every rule of thumb, followed in all circumstances, will lead to ruin with a probability of one.
So, Cash is King and will be until this deflationary thing takes over and interest rates are zero.
Oh, that won’t happen in Oz, since we are already the emerging market and have an insufficient amount of supply… ok, well, then Cash is King.
I’m with BullTurnedBear. But, as mentioned, good luck. Time shall tell.
Furball
November 28th, 2008 at 4:46 pm
Hi Ned,
I still have $600K in US dollars. I repatriated $350K when the $A bottomed just over a week ago.
I believe the $US will continue to strengthen and the $A will deteriorate. $A in the 40s next year is likely. But that’s just guessing. If the Bond markets keep deteriorating any number could be possible. Because Oz is dependent on raising foreign capital.
Even though I talk defensive, I am a trader. When and if the Dow gets to 9600 again ( a one third retracement). I will short it again. In saying this only a small proportion of my cash is going to that risk.
Deflation and liquidation suggests a rising $US. That has been playing out. When the music will stop though is hard to say.
Also I expect the share markets to keep falling next year (not in a straight line of course). Therefore the best play in my mind is to “sell the rallies”. That play has been working well for me since I lost money being long in January.
This site is not about trading though. It is about Economic theory. I find that really fun to discuss and debate.
November 28th, 2008 at 4:53 pm
One of the few institutions of sanity left in regards to the housing bubble is Australian Property Monitors. Their quarterly reports are quite interesting.
http://www.homepriceguide.com.au/media_release/index.cfm?action=view_archives
November 28th, 2008 at 6:17 pm
Outback Oracle
A very good summary but I do disagree with one point. There has been a strong bias to fiscal surplusses over the last several years, so the government fiscal account is also out of balance. Curiously my model indicates that these surplusses have actually exacerbated the problem. By taxing us more and then not spending it the government has caused people to borrow more increasing household debt and caused the running down of vital infrastructure which is a state resposibility. Both of these factors are now causing pain.
The reverence in which the libs hold their surplus is cult like. I was dozing in front of the TV on wednesday night when I heard words to the effect “they are going to have a deficit” which were followed by oos and ahs, what was it? tele evangilism? who was the pastor? No it was the house of reps no need to say who the pastor was. Labor is not far behind, in reverence for the “Surplus”! Don’t get me going on their mantra of growth, or is that Groeth, or Groath.
Your refering to those in command as psycopaths is a little harsh on mentally ill people. These people are either idiots, or just plain intellectually lazy (or both). With neo-classical economic theory they could earn fortunes doing nothing other than uttering weaseal words and cliches to reporters, while they were losing our superannuation and destroying the world economy.
I don’t think that they can do much now, it is beyond help (like Humpty-Dumpty), in a state of collapse. What is important now is that we round up competent people to organise the recovery after the collapse has run its course.
It will be interesting to see how far down the AUD will go when the RBA reduces interest rates next week.
cheers
November 28th, 2008 at 8:13 pm
BrightSpark, a surplus doesn’t seem to make much difference but at least they were trying to save. Unfortunately it just seemed to allow the RBA to keep interest rates lower. However our economy does seem to be standing up a bit better than US, UK and NZ. New Zealanders borrowed massively in a higher interest rate environment simply because their economy was even more overheated.
There might be an argument that they starved the states of funds resulting in them using public-private funding. Looking at NSW they seem to have spent the last 10 years giving away money on cheap electricity, water, public transport. For anyone else borrowing has been for real estate so giving them more money would have just meant that they could have borrowed more.
In summary, once monetary policy is wrong and keeps interest rates too low you’re stuffed. Add in bad fiscal policy by spending the surplus that has been generated by the bubble and you’re doubly stuffed because when things go bad, blink and you’re in deficit.
November 28th, 2008 at 10:39 pm
I see in the press how chief economists are saying that everything will be under control and the property prices will start growing again so we should not worry!
I don’t see how having growing prices is good for anything (defenitely not good for me), can someone please explain me how exactly this is good and to whom exactly it is good?
November 29th, 2008 at 1:42 am
Hello chris
It would be good for the neo-classical (chief) economists of course. They are now left with the last control (they would call it “a lever” to borrow an engineering term) measure that they can think of, controlling “sentiment” by trying to “talk up” the situation. Don’t worry the probability of this happening is lower that the chance of scientists inventing a GM flying pig.
Ken
On your last point high/low (RBA set) interrest rates. These (high rates) seem to have kept the AUD exchange rate high completely negating any stabilising effect of rate falls reducing imports, causing a reduction in the CAD. As I understand it this is the simplistic mechanism suggested by, but negated by, these idiots. You suggest a bad result of low interest rates and I have no doubt that your assesment is correct. Also there are many more parameters in play.
As I see it it is not bad monetary policy but the result of bad stewardship of a out of control system. This has brought about the current (monster) crash.
November 29th, 2008 at 1:44 am
Will Steve Keen win his daring bet?
http://auschart.com/2008/11/will-steve-keen-win-his-daring-bet/
November 29th, 2008 at 5:18 am
Bull,
Fair enough, but originally I was adding to your 6 point plan, looks like you’re not obeying your own point 3 though.
3. I mean physical cash. As much as possible. Do you know how hard it is to get money out of the banks. The RBA has run out of $100 notes. You also need to book in at least a week to get a significant amount of cash out of the banks.
Anyway, good luck man, but sounds like your mattress is going to get awfully lumpy stuffed with all those bank notes man!!
November 29th, 2008 at 7:24 am
Some info on the ground.
I was speaking to a property banker from one of the majors on Friday and he told me about one of his clients. No specifics of course.
I don’t know where this was. But I assume somewhere in NSW or South East Queensland.
The development is now finished. Before construction began 16 contracts were exchanged off the plan. I am not sure how many units there were all up. All 16 contracts have now defaulted and their deposits have been forfeited. The contracted sale prices were mostly in the $900K to $1M range.
The units are now on the market for between $500K and $600K and there are no sales as yet.
The property sector will explode next year. If it hasn’t already?
Look for Perth to have a very rough ride after it had such a large boom in a very short period of time.
December 1st, 2008 at 3:34 am
G’day Brightspark
I don’t think I disagree with you re the Fiscal imbablance. My point was that the “surplus” was created by exacerbating the imbalances in the other sectors (as you describe). However there is the question of what is ’cause” and what is “effect”. I guess that is pretty normal in the world of economics. You argue that the govt surplus is “causing” the increase in private sector debt. My thinking was that Costello (with that idiot Henry’s advice)solved his problem by stimulating the profligacy and distortions in the private sector.
I guess i don’t see ’cause and effect’ so much as one gigantic FUBAR.
My greatest amazement is that the whole shenanigans has never been questioned by even one Financial journalist or Economist (with the possible exception of Steve)
Now as to psychopaths…these people are not mentally ill! Psychpaths know full well what they are doing, they just don’t care what harm they cause.
Your position is i understand it is somewhat akin to a version of Occam’s Razor
“Never attribute to malice that which can be adequately explained by stupidity.
I don’t think they are that innocent!
Elect me dictator and i’ll sort it all out!!!!
December 1st, 2008 at 8:20 am
Ah brightspark…morning brings a little dawning! I missed the essential point of your post perhaps. A surplus IS an imbalance. I guess that is true if continued over too long a time frame.
Cheers
December 1st, 2008 at 1:48 pm
Steve,
Is the article in the newspaper correct? The guy made it seem like you chickened out of your bet about the 40%. The article mentioned that you stated it could take 15 years for it to play out? Made it seem like you were nervous and not confident with your bet. Can you please clarify these views.
Cheers!
December 1st, 2008 at 6:19 pm
Hi Toby,
This real estate thing is becoming a bit of a bore, but to clarify the whole thing:
I was asked what I thought would happen to Australian real estate prices about two months ago, I said that I expected them to mimic what happened in Japan–which was roughly a 40% fall over a 10-15 year period.
That set the economic chatterati going like nothing else I’d said beforehand–even though by then my Minsky-inspired predictions about economic performance had been very accurate, and the neoclassically-oriented predictions they had been making had been abject failures.
When I spoke at the Parliamentary seminar, I didn’t even mention house prices–instead I detailed the theory that had led me to anticipate the serious financial crisis we are now in. That included running the simulation program featured in my most recent Debtwatch.
Rory opened his comments by observing that I was obviously a lot smarter than some of my critics had assumed (thanks Rory), but then continued that he thought that most of the audience at the seminar had come expecting me to explain my prediction of a 40% fall in house prices.
I just reiterated that this wasn’t a prediction so much as an expectation that, having had a bigger price bubble than did Japan during its Bubble Economy days, our asset price fall would be of a similar magnitude.
He then suggested the bet–he walks for a 40% or more fall, I walk for a 20% or less. I thought that was fair enough, so I said yes. But my time frame was always of the 10-15 year period. Real estate is a slow moving train wreck compared to shares.
Somehow some of the chatterati got it into their heads that I had said a 40% fall in five years–Joshua Gans apparently believes so. I never said that, and when Rory suggested a 5 year horizon after the seminar, I said in that case I’d drop the range from 40% to 20%.
He instead said let’s go for the 40% as originally, but from peak to trough.
That raises the question of when the peak occurs, as well as how does one determine the trough.
I expect that the March figures may be the peak–an ABS index reading of 131 from memory–but there is a slim chance that the First Home Buyer con may push the index a bit higher, so that the peak might be more than 131 and later than last March. I don’t expect so, but it’s possible.
Also, a trough has to be a clear turning of the market–not just a one quarter blip in the index. The Australian market moves a lot more slowly than the US, which has fallen every month since it turned in 2006. I doubt that the Australian, when it does turn, will be as consistent as the Case-Shiller Index. So I’d refer to see 3 quarters of rising prices before I’d call the trough as having occurred.
So that’s the basic bet: from peak to trough, with 20% and 40% triggers.
But I reiterate that this issue is a trivial one to me alongside the macroeconomic disaster that this crisis is going to become. I’d rather forget the whole wager until such time as it is triggered one way or the other.
December 3rd, 2008 at 8:03 am
Nice presentation Steve –
Firstly, I can also see from your occasional paper to the Centre for Policy Development, “Deeper in Debt”, that you are not afraid of proposing some policy prescriptions radical enough to shake the establishment (in order to save it).
Secondly, there are those who argue that it is only demand that is forcing up house prices. The Age’s property writers have been suckered into this theory which is being popularised by Macquarie Bank. Robertson thinks the reason why house prices have gone up in some places but not others is because some places are “sexy” and others are “dull”. Australia is rather flattered by this perspective because on the Robertson gauge, all our capital cities must be sexy. If there were no restrictions on land for building, it would cost $60,000 for a fully serviced block on the fringe of Melbourne. Yet, according to the Urban Development Institute, the average price is $145,000, having doubled since 2001. In Perth, government restrictions have brought a four-fold increase in land prices. Slow land releases around the country have identified as the cause of higher house prices. Higher house prices in turn push up rents. Labor’s housing spokesperson Tanya Plibersek’s solution is more levies on new houses to cross-subsidise low-income housing.
Thirdly, analysts at Goldman Sachs JB Were have written a remarkably honest confession to their clients about why analysts keep getting profit forecasts wrong in a downturn like this. And it contains the first public admission I have seen from any analysts that it is hard to reduce earnings forecasts because they need to “curry favour” with company management. The confession was contained in last Friday’s daily to clients from GSJBW and was written by Sam Ferraro and Matthew Ross:
They haven’t seen anything like this before — that is, “the paucity of financial crises … in recent history” means they tend to “underestimate the effects of systematic or top-down developments”.The companies haven’t seen anything like this before. A survey of analysts reveals that 25 per cent of companies that used to provide profit guidance no longer do (and guidance is all-important — see the next point, below). CEOs, they say, are chosen for their “left brain skills: optimism, ambition, hard work, focus and decisiveness. Patience and an appreciation of history are not considered virtues for these individuals”.Analysts “seek to curry favour with management in order to preserve their information networks”. Everyone knew this already, but it’s the first time I’ve seen it admitted.Analysts need to manage their “reputational risks”, so they “engage in herding behaviour”. That is, the costs of getting a big call wrong far outweigh the benefits of getting a big one right.
The bottom line, Steve, is that analyst forecasts — such as those of Robertson — are virtually useless.
- RJW
February 10th, 2009 at 9:38 am
[...] http://www.debtdeflation.com/blogs/2008/11/26/parliamentary-library-vital-issues-seminar/ [...]
February 21st, 2009 at 12:42 am
Dear Prof. Keen,
I come to your very much with cap in hand sir. I am certainly not an economist, more of a computer geek who has some familiarity with simple economic theory.
As a new husband and an even more recent father and have not yet entered the housing market but having compiled the sum of $1h for a house deposit, I do have a question if I may be so bold?
Are house prices going to fall or is the value of houses going to fall by the prices staying the same and high inflation taking place which would cause the real value of all assets to fall. I don’t really want to think about the ramifications if this is correct. Are we all going to have to pay for this abuse of credit? Even for those of us who haven’t used it much (we have only one credit card with a modest limit), we currently have no debt and in the face of inflation would suffer a loss in real terms of our earnestly assembled house deposit.
I hope that you receive this message at a time that allows you to give a benefactory response.
Sincerely
Dr. Bob
February 21st, 2009 at 7:04 am
Hi DrBob,
Forget the cap mate; this is a pretty egalitarian (if not libertarian) site!
On house prices, since I expect deflation, I also expect falling house prices in nominal terms–which was the Japanese experience. Inflation may ultimately occur, but it will be some years in the future I expect, as it was in the Great Depression.
The best guide you can have to what’s likely to transpire here is the record of Japan’s economy over the last two decades.