64 Responses to “Weekly GFC Roll for May 29th 2009”

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1. 1

   dojufitz
   May 29th, 2009 at 7:01 pm

   lol…just scanning thru the roll for May is a laugh…

   ….where will it all end………?
2. 2

   Dave
   May 29th, 2009 at 9:10 pm

   I thought you were a bit tough on Guy DeBelle. He basically admitted that not considering debt is a mistake! The models don’t handle credit well if at all!
3. 3

   ken
   May 29th, 2009 at 9:14 pm

   The Luci Ellis piece is fantastic. Another gem “Overall, it seems unlikely that the household sector would spontaneously contract their liabilities and bring about a slowing in overall economic growth.” Try telling that to the Americans. She does hedge her bets “But if a macroeconomic downturn occurs when balance sheets are stretched, the response of highly leveraged households could exacerbate it.”

   Fascinating also is http://www.rba.gov.au/rdp/RDP2007-02.pdf
   “This view was challenged by those that argued that the current account merely reflected the optimal decisions of private agents and, as a result, concerns about sustainability were misplaced and there was certainly no role for macroeconomic policy to intervene.” which is the policy we have. Who cares how much we owe the rest of the world. The Icelanders didn’t.
4. 4

   chrisp
   May 29th, 2009 at 9:26 pm

   “Home prices rebound, almost erasing falls for all of 2008″

   http://business.smh.com.au/business/house-prices-bounce-back-20090529-bpm7.html

   Can anyone comment on this? Is it true and if yes then how would people here explain it?
5. 5

   ak
   May 29th, 2009 at 10:34 pm

   chrisp,

   Wouldn’t it be there?
   http://business.smh.com.au/business/loan-growth-slows-to-15year-low-20090529-bpmd.html

   “Housing credit offered one of the bright spots in the lending data, with loans rising 0.7 per cent in April, and by 7.1 per cent over the year, seasonally adjusted.”

   How long can this artificial support last?

   I just came back from the meeting at the Gaelic club and I would like to thank Steve for an excellent speech putting the current budget in the context of the global financial crisis.
6. 6

   otway-jack
   May 30th, 2009 at 12:38 am

   This article from the Age explains how Great Southern Plantations had a true Ponzi scheme at work. Who’s keeping count of Ponzi’s?

   http://business.theage.com.au/business/once-upon-a-time-in-the-woods-20090523-bigl.html?page=1
7. 7

   W800I
   May 30th, 2009 at 1:30 am

   Alan Kohler had a piece this AM, which appears to have a swipe indirectly at the big kahuna ( not sure if this is how you spell it).

   “That, of course, is the big question. I suspect it will be the latter, but then two years ago, like many, I found the property bears’ predictions of a house-price slump convincing. These arguments, for Australia at least, now look to be completely wrong.”

   http://www.businessspectator.com.au/bs.nsf/Article/House-rules-pd20090529-SGSL7?OpenDocument&src=sph

   Thanks
   W800I

   I like the new link section!!
8. 8

   Tel
   May 30th, 2009 at 1:46 am

   Who cares how much we owe the rest of the world. The Icelanders didn’t.

   We have a large local supply of food. The Icelanders didn’t.
9. 9

   BrightSpark1
   May 30th, 2009 at 2:41 am

   Tel

   Have you noticed just how much food is imported or made from local and “imported” ingredients? Check your local supermarket shelves.

   Perhaps we will eat well on bread dripping and wild rabbits.
10. 10

    hbl
    May 30th, 2009 at 3:13 am

    Is the commentary written by Steve or Evan? I had assumed Steve but a few things surprised me, e.g. those seemingly suggesting inflation could take hold such as “Long gold and oil” and “key quote: … ‘So QE would indeed create inflation’… surging interest rates in the early 80s…” Am I misinterpreting?

    Regarding the comments that “banks use the bail out money to bail out the Treasury and Fed” — I agree, and this will likely be a big part of keeping longer term interest rates low in the medium term, as maybe happened in Japan and the Great Depression (mechanics discussed here, is the logic wrong?).
11. 11

    Steve Keen
    May 30th, 2009 at 9:06 am

    Evan is writing the commentary hbl,

    He sends it to me first and I will edit where I see necessary, but that’s it.

    As most of you know I expect deflation to eventuate despite the Fed’s attempts to reverse it.
12. 12

    MACCA
    May 30th, 2009 at 9:13 am

    Perhaps homes4aussies has a take on the house price data?

    However, for SE Qld , house prices are heading lower. It is a well known fact here that house prices in many Brisbane and GC postcodes are well off their highs- some 20%+ but most 10-20% down. They topped out over 2nd and 3rd Qtr 08. I suppose that over the annualized figures it has yet to show. But in the 2nd half of 08 on settlement and asking prices have most definately fallen.

    Anecdotally, speaking recently with a fellow school parent ex RE agent, originally from out of state- his advice was don’t buy now – no way. Prices are coming off and once the FHOG stops, it will leave a very big hole.

    Here is an article sourcing RP Data. It is predominantly about high end RE but contains other info:

    “The fall in top-end prices mirrors the overall trend.

    House prices across the nation have fallen by almost 7 percent in the last year, piling pain on cash-strapped families already nursing heavy losses on their superannuation funds.

    An Australian Bureau of Statistics survey showed homeowners in Perth were the hardest hit, with prices down over 10 percent after falling more than 3 percent in the final quarter.

    House prices in Sydney have dropped 7.3 percent in the year to the end of March, while Melbourne saw a 6.7 percent drop, Brisbane was down 6.3 percent and Adelaide slipped 2 percent. Meanwhile, house prices in Canberra suffered a 5 percent drop in value.

    Darwin and Hobart were the only major cities to record a rise in prices, up 10.8 percent and 0.6 percent respectively.”

    http://money.ninemsn.com.au/article.aspx?id=814289

    A cannot reconcile what I see happening in the property market and what RP Data-Rismark is reporting. So I will keep watching closely.
13. 13

    Bullturnedbear
    May 30th, 2009 at 9:41 am

    I do not trust RP Data’s information at all. Their business depends entirely on property bullishness. Businesses buy their information with the hope of making money from same.

    At present, virtually no one in the property, real estate or finance game is making money like they were two years ago. As such RP Data would be losing masses of customers by the day. It is very much in RP’s interests to skew the numbers to show that property is going up up and away.

    A good friend of mine’s flat mate lost her job at RP Data 6 weeks ago. They are in cost cutting/retrenchment mode.

    Their products are very expensive and one of their largest customers is real estate agents. With housing sales volumes down dramatically, many agents will be desperately trying to cut costs.
14. 14

    MACCA
    May 30th, 2009 at 10:28 am

    http://globaleconomicanalysis.blogspot.com/2009/05/rail-traffic-down-truck-traffic-down.html

    US freight traffic still looks sick.
15. 15

    evan
    May 30th, 2009 at 12:37 pm

    hbl

    As Steve has noted, I select most of the links and provide the commentary before Steve provides some vetting/editing to balance things out.

    For the record:

    1) I’m a bit more agnostic on the inflation/deflation debate than Steve. I have few doubts that there *should* be debt deflation (in line with Steve’s analysis) but I take a more pessimistic view of the US Fed, other central banks and commercial banks. I think they *may* go beserk and create inflation even if it takes them $100 trillion and unconventional means to do so (“whatever it takes”).

    2) I’m also influenced by those who emphasise structural/geopolitical risks and the potential for paradigm shifts.

    3) I think the role of fraud in the gfc is massively understated.

    I don’t necessarily agree with all the views in all the links. I want to provide a range of topics and viewpoints. I’m interested in the disconnect between the view of the world championed by Steve and active debtdeflation blog members and the view championed by neoclassical economists, the RBA, government, the banking cartel, the property industry and the mainstream media.

    If anyone has more feedback I’d appreciate them letting me know by posting comments or emailing gfcwrap[at]gmail.com. Any contributions are much appreciated.
16. 16

    ken
    May 30th, 2009 at 1:02 pm

    The problem with property prices is that you can only defy gravity for a certain length of time, in this case as long as public debt (it helps people pay their mortgage) can balance the drop in business and private debt. Maybe that will be 6 months or 6 years, if another bubble is created.

    Of course, do this and in 6 years time we have public debt at 30-50% GDP, private debt at twice GDP, massively inflated house prices and not much margin to drop interest rates, sounds like America in 2006.
17. 17

    MACCA
    May 30th, 2009 at 1:23 pm

    Hi evan,
    Thanks very much for this weeks effort btw. Great reading and I can see the thought put into the selection.
18. 18

    ak
    May 30th, 2009 at 2:07 pm

    I’d like to move the “printing money/ deficit/ financial system stability/ inflation” topic from the previous thread to this one in order not to let it die as the fundamental issues mentioned there need to be addressed.

    To me it is obvious that several different issues have been mixed up. This mix-up has been exploited by Mr Redbull and his associates to wage a propaganda war against the government.

    Problem 1. Can the government of a sovereign country service its own debt? Answer: yes without any reservations.
    I hope that it has already been explained why.

    Claiming that our children are condemned to keep paying back the debt is a cheap political shot, a kind of Tampa affair recycled again by the same spin-doctors. I am surprised that the government and the left-leaning part of the official media are not quick enough in debunking that myth. It might be so because some more fundamental questions can be asked then.

    Problem 2. Will be side effects if the government of a sovereign country spends more money than the value of goods and services the economy can deliver on top of private consumption and export?
    Answer: This will lead to demand-pull inflation – term explained here :
    http://en.wikipedia.org/wiki/Demand-pull_inflation
    However if the government doesn’t breach the supply barrier (and this is unlikely now due to deflationary effects of deleveraging) there will be no pull inflation. Because of the size of the bursting bubble Steve has predicted that deflation will prevail.
    At some stage when the economy starts expanding again money may need to be drained by the government either by selling more bonds or increasing taxes. Not in the near future though.

    Also – If the government keeps expanding the public sector too much for too long it will lead to decreased efficiency. I am not advocating socialism as I know that even if it looks great as an idea it has one bad feature – it simply doesn’t work. You can’t make it working regardless how much you want to tweak it. Because people have no incentive to work. This is my main concern regarding “full employment policy” supporters. One day I may want to discuss this topic but probably on another forum.

    Problem 3. Will the international monetary markets react in short term to QE by adjusting exchange rate of the local currency?
    My answer is – yes because bonds denominated in local currency are redeemed in the same currency. But if monetary base is expanded international investors may have less interest in buying these bonds.

    In my opinion this may lead to cost-push type inflation. Can Steve comment on this?
    (Note. The explanation of the term found here:
    http://en.wikipedia.org/wiki/Cost_push_inflation
    might be tainted with neoclassical theory.)

    But this is a smoke screen of a much more serious problem.

    Problem 4. I will put it that way: Will the trade deficit cause exchange rate of the local currency to fall?
    The official answer is – yes. However by selling bonds to foreign investors trade deficit can be propelled for years.

    Now let me make a bold claim that people who would like to keep in place current arrangements want to prevent free market adjustment from taking place.

    Yes, you dear friends you are anti-free market because you want the current process of borrowing overseas to persist forever.

    Of course it cannot persist. I am not advocating debasing the currency because it doesn’t need to be advocated. It is a natural free market adjustment process not anything which needs to be caused by the government. “In the long run” we should sell enough goods to be able to buy what we need overseas. Otherwise our currency will fail.

    Advocates of gold standard would say that the proper way of adjustment of a trade inbalance is by draining gold. However this process had serious side-effects discussed some time ago and the system was abandoned in favour of the free-floating fiat currencies system.

    Let’s discuss now problem 5. Yet another elephant in the room is the US trade deficit financed by selling bonds.
    http://www.marketoracle.co.uk/images/2008/US-Trade-Deficit-GDP-July08.jpg
    US dollar has a special status of the currency used in international trade – a leftover from the Bretton Woods system.

    “We sell them bond they sell us oil / whatever.”
    (There was a joke in Poland in the 80-ties – “we give you coal you give us bananas” about trade in Comecon http://en.wikipedia.org/wiki/Comecon Haven’t the Americans created their own Comecon?)
    We can’t pay for oil or imported goods in AUD. They can pay for everything in USD. Not for very long though as their currency will lose its special status. I think that the process of adjustment of the exchange rate has already started.

    Steve, can you comment on the prospect of sparking cost-push inflation, please? Is the deflationary hole in the US big enough to swallow this?

    The financing of trade deficit by selling bonds and other financial manipulations was probably a very wanted side effect of propping up GDP growth in the US and cherishing for bubbles by Mr Greedspan.

    This is the ultimate killer of the productive economy in both US and Australia though. Let it recover guys. Don’t kill it! This is OUR economy. Let the currency fail in a controlled manner – this is natural. It is not stealing your welfare.

    Problem 6. If USD exchange rates fail and they will be forced to pay in another currency this will be an additional burden for the already sick US economy. Take away a few % of GDP because of the deleveraging and decrease the consumption level by a few % because trade deficit must be balanced and this is it.

    Now let me list problems I cannot address here because I don’t have time or they are off-topic too much.

    7. a possible global political instability due to the failure of the US to afford to spent USD 1tn/year on flexing muscles everywhere

    8. foreign currencies denominated debt – bad indeed.

    9. taxation and welfare redistribution – let’s talk about it separately.

    10. stability of control systems “In theory, I agree that it is possible to be neatly counter-cyclic and inject the cancellation signal right into the system” – not true in general if you have a feedback system
    http://en.wikipedia.org/wiki/Nyquist_stability_criterion

    11. replacing the capitalist system by another one. Why? Let’s fix the real problems like bubble creation or damaging the environment. Let’s change Intellectual Property laws. Too difficult? Making anarchism or socialism working would be easier? People tried to make socialism work for 70 years. Did it work? How many millions people died because of this “great experiment”?
19. 19

    ak
    May 30th, 2009 at 2:12 pm

    sorry “currency fail” should be replaced by “fall” – exchange rate fall
20. 20

    wait2buy
    May 30th, 2009 at 4:26 pm

    chrisp,

    I just sold my 3-bed room unit in Sydney (inner west, 10km from CBD). The price is approximately 5~6% above what I could achieve a year ago. From my experience, first home buyers are willing to pay more than investors. And, some really stretched but unsuccessful buyers helped to push up price a bit.

    Meanwhile, I am looking for a house in good Eastern surburb in Melbourne. Prices have gone up, very obviously from March — some spiked by 10% at the 700k+ to 1M range. Some people indicated there are overseas buyers who are loaded with cash and taking advantage of low OZ dollar (OZ dollar is no longer low now).

    It is pain to be patient.
21. 21

    gaday
    May 30th, 2009 at 10:06 pm

    WOO81-
    I agree Alan Kohler’s article is not only confusing but contradictory of previos comments by.
    This is easily understood as day to day reports are inconsistent. I answered his comments as best as I see it as “store blind” which I believe a lot of people get when they are too close to a situation especially media personnel in this instance. News after all is only as good as it is stated at the moment and the moment needs news to be reassessed to make it new news. This problem I don’t find with Steve, for his discipline for a start is learned therefore his overview has perspective and is less subjective than most. For me to maintain sanity it requires an acceptance of the “big picture” tweeked occasionally with a “steady as she goes logic” I remind myself that “debt is debt” it must be repaid long term if it is to alleviate pain as it is designed to do. immediate recovery therefore is impossible.
    In my opinion it fits into place that deflationary processes will eventuate. The rest is rhetoric.
22. 22

    Lyonwiss
    May 30th, 2009 at 10:37 pm

    Many posts here argue from pure economic theories which mostly igonore fraud and corruption and hence do describe the real world. Fraud and corruption are an integral part of the cause of the global financial crisis, which have not been adequately recognized. Until the selected solvers of the problem are recognized as a main part of the problem itself, there can be no solution. Read and hear about Summers and Geithner:

    http://maxkeiser.com/

    The Australian situation is only different in degree and not in kind. Markets can fail, but governments and bureaucracies have fraud and corruption, which are hard to prosecute because of the lack of transparency and accountability. The MP expenses scandal in the UK was exposed only because it was so widespread.
23. 23

    Philip
    May 30th, 2009 at 11:11 pm

    Lyonwiss,

    You make some good points. We will never know the scale of corruption that has occurred, whether legal or criminal.

    Even if no crime or corruption occurred within the private and public sectors, the GFC and associated problems would have still happened due to the endogenous instability of markets. Corporate capitalism, backed by statism, has made it worse.

    As the economist Dean Baker has pointed out, putting Summers and Geithner et al in charge of the “solutions” is like placing bin Laden in charge of the war on/of terror.

    Politicians abusing the public treasury in the current UK scandal are minor criminals compared to the major criminals in the corporate sector.

    “This explains why, since the birth of the State, the world of politics has always been and continues to be the stage for unlimited rascality and brigandage…”

    Given your dislike of conventional economic theory, you might like this:

    http://anarchism.pageabode.com/afaq/secCcon.html

    It uses Steve’s work as well as others you may be familiar with.
24. 24

    ak
    May 30th, 2009 at 11:29 pm

    Philip,

    So what is your proposal? How would you like to organise our society so that corruption and fraud are minimised or eliminated?

    Is there a silver bullet or do we just need to adjust our law – reform financing of political parties (German model is not bad), separate investment banks and commercial banks again, modify patent law, close loopholes in taxation, etc.

    Yes this seems boring and it is difficult indeed because there are so many vested interests of tycoons who can always hire a spin-doctor and convince us that it is in our own interest as a society to have negative gearing…
25. 25

    Tel
    May 31st, 2009 at 12:32 am

    3) I think the role of fraud in the gfc is massively understated.

    You have my full agreement there. And add to that, the many regulators who did not do their jobs, and the books of regulations that served no function in preventing the problem.
26. 26

    Post Keynesian
    May 31st, 2009 at 12:51 am

    You do see the odd argument by those in the Neoclassical arena that it is hypocritical for a non Neoclassical to decry the return to equilibrium when at the same time it is argued that housing prices will return to a long run average when compared to income.

    My reply to that is I do not believe in equilibrium, but I do believe in gravity!
27. 27

    Lyonwiss
    May 31st, 2009 at 12:57 am

    Philip,

    You are certainly right in many of your remarks about corporate capitalism. Things need to change there. But their defects, including fraud and corruption, are more visible and understandable given certain interpretations of “self interest”. But many on the left do not think of government actions as the results of polticians and bureaucrats who are just as corrupt as anyone else. I learned this from personal insider experience, where I observed public sector spends a lot of resources (too much) covering things up and so as to “maintain confidence” (as perception is considered more important than reality).

    Tel,

    you are right that regulators did not do their job in preventing the financial crisis. For an explanation see:

    http://cpd.org.au/article/rethinking-financial-regulation

    Philip,

    I don’t dislike conventional economic theory as such, as there are many valuable concepts and insights among many different schools. Except that none is satisfactory according to scientific principles of causal understanding and predictive ability. What is needed is a rigorous deductive model founded on clearly stated axioms and supported by empirical data, i.e. which really explains the real world. No economic theory (neoclassical or Austrian or post-Keynesian), as far as I know come remotely close this requirement.

    Hence there has been no progress, no synthesis, just more rhetoric in economics for
    decades. People simply pick whatever economic theory they need to justify their political prejudices.

    As your suggested website shows, anarchism has virtue in exposing flaws in ideas about economic and political systems. But I cannot be an anarchist because I believe there is a role for the government, just as there is a role for the market and for the corporation. The task is to use each appropriately to best address social needs. All of them need improvement. Governments and bureaucracies need greater transparency and accountability to reduce corruption and increase efficiency. Corporations need democracy to select real representative directors who do the job they are supposed to do. Markets need appropriate regulation and symmetric information (between suppliers and consumers) to avoid failures. These improvements are all very feasible, needing only the will and the perseverance to overcome vested interests.
28. 28

    Tel
    May 31st, 2009 at 1:19 am

    So what is your proposal? How would you like to organise our society so that corruption and fraud are minimised or eliminated?

    In a commercial environment, if a competitive market exists and several companies offer viable alternative choices for consumers, then the most corrupt will also be the least efficient and will fall behind in the market until either the shareholders demand a cleanup or it falls apart entirely. Eventually being replaced by new upstart companies. The fluid and competitive nature of business makes it practically impossible to stay competitive when saddled with corrupt executives skimming off revenue for themselves.

    In a monopoly environment, the above does not apply. In a heavily regulated environment, the competitive advantage comes not from efficiency but from being able to get favours out of the regulators. In a fully socialist central-planned system favours circulate in much the same way as currency.

    Although the US banking industry does have many private banks, it hasn’t run as a competitive industry for a long time. With huge players such as Freddie Mac and Fannie Mae, who were not really doing banking but are actually delivering political objectives in terms of housing, the market was (and is) severely distorted. Also, the big Wall Street investment banks have had way too much influence over the federal treasury, and an amazingly cozy relationship with career bank executives doing a shift in government to look after their friends.

    Having said that, in any competitive commercial environment we need a referee to make sure the players do play by the rules. Naturally, there are limitations on what is acceptable commercial practice and someone needs to be the impartial judge. Having the players in the game also be the referee really can’t work.

    How to make sure the judge stays impartial? Can’t say I have a great answer for that but here are a few suggestions:

    * Keep the rules of the game simple. Make sure that EVERYONE understands what the rules are so it will be obvious when someone steps out of line. Complex rules just make people shake their heads and give up (like our entire tax system for example).

    * Keep clear separation between government and business with respect to both the people concerned and the purposes of these organisations. Government should NOT be expected to deliver economic outcomes — that is the job of business. Business should NOT be put in the position of supporting political policies nor should it be handing out favours to key voter demographics — business should be only doing the job of maintaining the flow of goods and services, nothing else.

    * Don’t allow government to keep secrets (at all!) Someone who keeps secrets has something to hide and in government you can be sure that what is hidden must be something bad. Private individuals should be allowed to keep their business dealings private, unless they are working for the public in which case the terms of their contract should be public.

    * Try to keep markets competitive, make it as difficult as possible for any small number of players to dominate in any market. Come up with well understood and simple tests to check whether a market is competitive.

    * Allow the person who pays a bribe to a government employee to escape from guilt if they openly publish the details of the bribe, who they payed it to, how much, and why. Thus the person accepting bribes can never be sure they will not be sold out.

    * Government should be very slow to break new ground and make new policy. Never should it rush out and make policy to “fix” a particular problem, without extensive debate. The right place for fast reactions and lightweight adaptivity is in small business, because they are the ones who are good at it. If a small business jumps into a new area and fails dismally, we accept that, it’s a feature not a bug. Risk (of all sorts) should primarily be taken on by those private individuals or groups who are willingly taking on that risk (not forced in any way) and government should be very risk adverse.

    * As a society we really should learn to be harsh on those pressure groups who want government to fix their particular problems. No matter how noisy they are. Handing out pork has long term detrimental consequences.

    * Have a set of “auditors” who are chosen from the ordinary population in a random pattern (same as like jury duty) and who do maybe 6 months service going through the bureaucracy at their whim and who can ask anyone questions and who publish and comment on what they find. They get some standard pay for the service and it is compulsory for those who are chosen. The positions rotate on a regular schedule.

    I’m sure there are more things we could do. Success and sweet-taking has made us complacent.
29. 29

    Aac
    May 31st, 2009 at 1:43 am

    Tel

    Great ideas. I especially like the last point of getting different groups from the public (like a jury) to audit the system and to then publish the results.
30. 30

    Aac
    May 31st, 2009 at 2:05 am

    ak
    “In my opinion this may lead to cost-push type inflation”

    This is what we got last year in spades with oil prices at $150 a barrell and this what we are likely to get in the future if the Fed continues to print (ie. buy more MBS and more QE).

    It has been said by many that it was ‘the over $120 a barrell’ that finally broke the economy as company margins were savaged. Money will flow to commodities in the event of massive printing; this will also hurt third world countries that depend on food imports as it did last year – mind you some have said that the food scare was also about hoarding.
31. 31

    Philip
    May 31st, 2009 at 2:38 am

    Lyonwiss,

    I agree that there is much to be done within the government and corporate sectors. However, I have become more and more skeptical of the idea that society and the economy can be made better off if we just adopt new, improved regulations and punish the corporate and political criminals.

    While the ideals of Keynesianism and social democratic reform have benefited many, it must be asked why such a great amount of social welfare is needed in the first place. I remember one of my Indian friends saying that if it wasn’t for the social welfare state, Australia would look a lot more like India. The social welfare state is continuously attacked by the right (but say little to nothing about the extensive corporate welfare state in all its forms) but the left (in Australia at least) doesn’t tend to criticize deeply enough what I think are the real problems: institutions, namely statism and capitalism. More or less government here and there will not significantly alter things and capitalism will continue on its wealth-extracting mission of cost externalizing, rent-seeking and crime regardless of what is occurring. Also, a communist central planning state is a non-starter.

    To me communism is essentially capitalism taken to its limit: an immense mega-corporation that owns the entire economy, which has purchased back its equity and debt, thus combining the capitalist and managerial class into one. As the mode of economic organization within a corporation is highly inefficient totalitarian central planning, the unelected executives of the state mega-corporation plans the entire economy, to the detriment of everyone else. Capitalism is slightly less worse, with the top 1000 corporations owning and controlling a vast amount of wealth, backed by the (barely democratic) state with its monopoly of violence which protects the interests of the rich first and foremost, with everything else of secondary importance. Under these systems of control, rights are never given; they are always won and have to be maintained by continuous struggle.

    My conclusion is that while better regulation and social welfare does help many people, it amounts to band-aids and bandages on an economic and political system that is deeply flawed and can’t be made better with some reform in the long-run. Throwing out rascally politicians will not change things much (can’t throw out managers and executives because they were never elected in the first place and can serve potential life-terms, a feature found in fascist and Bolshevist states). Institutions of domination and hierarchy (statism, capitalism, communism, feudalism, monarchy, theocracy, to name a few) are the problem. Unless such systems can be totally reformed or abolished, the same problems will keep on plaguing society again and again.

    As for economic theory, I would place my vote with post-Keynesianism as the least worst of the lot, with its emphasis on disequilibrium, irrational expectations and uncertainty. Econophysics looks more promising, though it is in its very early stages. Given time, hopefully this school of thought will be able to smash all others. As for anarchism, I have only recently started to investigate, so I remain to be convinced as of yet (though it looks promising).

    ak,

    Thankfully, like everyone else, I am in no position to organize society along the lines of how I think (though, unfortunately, the richer a person is, the more influence and control they have). As such, I would advocate the following:

    - The breaking up of the neoclassical monopoly on economic theory, thought and policy and putting an end to a priori, deductive reasoning and emphasising empirical science.
    - Massive public debt spending as the only major way to deal with the social and economic problems that debt-deleveraging imposes (won’t work well as Steve has pointed out).
    - Eliminating IPR and creating publicly financed organizations that replace all R&D (will actually result in less tax and corruption).
    - Opening our borders to anyone who wants to work in Australia in highly-paid professions (executives, managers, lawyers, doctors, economists, etc). More competition will drive down wages closer to the “equilibrium” wage, resulting in consumer gains, boosting spending, less tax (state hires less expensive professionals), more remittence are sent back to poor people from where the professionals came from – everyone gains except of course professionals who are subsidized by consumers by the lack of competition.
    - Reduce defence spending. Australia hasn’t been attacked since 1945 and our criminal wars are increasing the threat of terrorism, not reducing it.
    - Discard membership of the IMF and WTO (really the WMO or World Monopoly Organization).
    - Institute Keynes’s international clearinghouse to manage trade and currency conversion instead of deluding ourselves into thinking that freely floating currencies backed by neoclassical theory will balance our accounts.
    - Create a set of measures by which a firm must be split up in order to prevent the “too big to fail” policy of corporatists from threatening markets.
    - Eliminate all work-related tax deductions, then tax business and labor at a lower rate to compensate (this will clear out a lot of fraud and corruption).
    - Externality taxes to price commodities at its full social cost.

    There are a lot more, and I am sure others can think of alternative ideas.
32. 32

    ak
    May 31st, 2009 at 9:55 am

    Tel, Philip,

    I agree with the majority of these of your proposals which are not contradictory.

    I’d like to add:

    1. giving more rights to shareholders to censure company managers

    2. significantly lowering income taxes and gradually starting taxing consumption of natural resources (either at the producer side – carbon trading scheme or better at the consumer side – personal allowances). We have to move forward with our energy efficiency. This goes along Philip’s “externality taxes” proposal.

    3. considering Steve’s proposals to discourage speculation with company shares and real estate – things which led to Ponzification of the economy. In this context the actual solution to the debt problem should be considered as printing money will only inflate another bubble

    4. we may need to repel FTA with the US as it makes things like Intellectual Property rot spreading easier into our system.

    I think that public-private partnerships are the elements of the system corrupting it the most. Either there should be service-delivering organisations in public hands fully accountable to the electorate (public schools and universities, public hospitals providing basic level services for everyone, Centrelink) or private companies which can bid for grants in an open process. I don’t think that building a broadband network is a government business by the way.

    Unfortunately I don’t believe that defence spending can be reduced. I fully agree with Kevin Rudd’s plan in respect to increase defence spending. The strategic landscape of the Asia-Pacific area will change because of the diminishing US global power.

    If there is a fallen state in the region we may be easily dragged into the conflict or “settled” by tens of millions of displaced people.

    Having said that I am not convinced that our army should be used in places like Iraq. It should be a strong deterrent and can be used for humanitarian missions only.
33. 33

    W800I
    May 31st, 2009 at 10:23 am

    Hi again,
    the tax act is the first place I would start. Recall all copies of said act, apply liberal amounts of kerosene, then when they are in a big pile, light it. Hmm perhaps bring some meat for a BBQ as well!!

    The collapsing MIS schemes are only the latest example of dare I say Ponzi schemes that are directly encouraged by generous tax incentives in my opinion.

    Mr Howard (ex PM) recently said that instead of sending everyone a stimulus cheque Mr Rudd (rudinator) could of spent the money on removing taxes directly linked to the cost of employing people eg payroll tax. I mean great idea baby but you had 11 years !!!

    Ahh the defence department. They are like looking at all of the Mr Smith’s in the matrix. If it can be gold plated, isn’t produced by anyone else or needs to be invented then we will buy it. Think I’m joking. Boeing admitted that project Wedgetail, which is the new 737 based radar plane for the RAAF, had many systems as part of the overall package that hadn’t been invented when they were tendered for by the commonwealth nearly 10 years ago. Whistling in the wind man. When defence buy off the shelf their are generally less tears eg the C-17 cargo plane and F-18F Super Hornet.

    The F-35 lightning fighter bomber is another example of the defence multi verse getting confused. Lets buy a plane that no one has in squadron service yet (immature), that won’t have allot of the weapons cleared for use from the aircraft when we buy it (less capable) and the software on board will be the first or at very best second tranche thus will be less capable than required (risky). The RAAF will have shiny new fighters for the media to look at but 5 to ten years of tears getting them up to scratch.

    W800i
34. 34

    ak
    May 31st, 2009 at 11:01 am

    W800i
    Don’t buy that stuff from the US. The sooner we detach from them the better.
35. 35

    GSM
    May 31st, 2009 at 12:28 pm

    Interesting article and following discussion about the US yield curve and the moves by FCB’s into the short end, at the expense of the long end.

    The commenter WSTroupe sees a more sinister reason for this: Part of China’s ongoing plans to exit it’s “dollar trap”.

    http://blogs.cfr.org/setser/2009/05/29/record-demand-record-angst/

    Giethner is visiting China shortly, openly calling for China to stimulate it’s domestic consumers so as to “restore balance” to trade. I wonder if Troupe’s concerns are being confimed. Convincing China to pour a larger portion of it’s trade surplus into domestic stimulous soaks up dollars that would otherwise go into short dated treasuries (and put upward pressure on the RMB)Is this a defacto weak dollar policy?
36. 36

    ak
    May 31st, 2009 at 1:27 pm

    GSM,

    I think that the Americans should have fixed that problem >5 years ago when they were “liberating” Iraq instead. Now it is too-little too-late. Assuming that Chinese will buy American products and restore the trade balance is simply naive.

    “This is the message from the Chinese Government. Each of you has to go to shops and spend 1000 RMB on American goods immediately otherwise our great friends will suffer. Remember. No Chinese products this week. Don’t eat rice only corn. Buy ringtones, music and great Hollywood movies. Buy only American”.

    The only argument which can be accepted in this context is that the sudden collapse of USD will lead to losing value of Chinese deposits. But this is exactly what the Chinese Prime Minister said a few months ago so there is no point in convincing them about that.

    The way to escape the dollar trap for China is to invest money elsewhere not to waste it on buying overpriced and useless stuff from the US. To deal with the consequences of GFC and drop in export demand they should stimulate their local economy.

    This is exactly what they are doing.

    What the Americans can do to convince Chinese to continue buying US long-term bonds? They can:

    - sell some sophisticated military technology (which hasn’t been acquired by other means yet)
    - stop the US Navy from visiting South China Sea
    - allow for peaceful reintegration of Taiwan and stop meddling in Tibet
    - stop meddling in Central Asia and leave it as a natural influence zone of China and Russia
    - evacuate a few military bases in a few countries in the region

    Unthinkable? As unthinkable as the collapse of USD and the whole American economy which will lead to similar consequences. As unthinkable as the Russians buying 35% of Opel from GM were a few years ago.

    Is this good or bad for us in Australia? I think that there can be some jitters in the nearest future but I’m not sure we should cry for the fallen empire in the long run.
37. 37

    GSM
    May 31st, 2009 at 3:32 pm

    ak,
    Being a pragmatic bunch, the Chinese are not going to contribute to their own financial losses by overtly selling down the dollar.

    It is in their interests however to diversify thier assets and trade surplusses.Converting over time existing assets into things like sdr’s, commodities, gold, other currencies and food producing assets makes a lot of sense if they want to ultimately extricate themselves from the dollar trap. The key being, “over time”. Moving USD exposure into the more liquid shorter dated Treasuries makes sense when following that ongoing strategy.

    This would all be happening during a period when increasing China’s internal demand would also be prioritized. But can the US debt situation hold together long enough for China to achieve a manageable exit (from the trap)? I think it (they) can- after all they are the creditor of the US so they do hold the initiative. I think WSTroupe in that article raises a good point. Notably, Setser seems to not disagree.

    All this sounds dollar negative to me. Especially as I’m convinced that given the particular economic policies prevailing in the US currently , a weaker dollar could put more demand in place for exporting industries and help shares generally. A weaker dollar also helps inflation perceptions – all good outcomes for Obama’s Administration at the moment.

    I don’t however wish for the demise of the US financially or politically. I don’t see China as a benign influence , far from it. Like all major powers throughout history, they too will exert their influence on world proceedings and not being a Democracy they will always default to national interests.I’m thinking overt nationalistic influences here, not political ideology.

    If US influence receeds sufficiently from Asia, Australia’s defence strategy for the last 75 years becomes redundant.That is definately NOT a welcome development for Australians.
38. 38

    Philip
    May 31st, 2009 at 6:03 pm

    ak,

    Here are some more:

    * The creation of a new government department called the Department of Private Costs. In previous posts I mentioned that the public costs (negative externalities, state protection and crimes) of the US corporate sector amounted to $US2.68 trillion in the year of 1994 while its profits were $US530 billion. Thus costs were 506% greater than benefits, which gives one example of the extreme inefficiencies of capitalism. No doubt it is similar in Australia and serious research needs to be carried out to inform the public of this.

    * Legalization/decriminalization of drugs. Almost half of all crime is directly and indirectly linked to the illegal trade in drugs. Tax and regulate policies will ensure a reduction in crime, increased tax revenues, enhanced civil liberties, better health and social outcomes, and a significant proportion of the police force, judiciary, and law profession can be sacked, saving immense amounts of tax.

    * Repeal the AUSFTA. There are three problems with FTAs: nothing to do with freedom, very little to do with trade, and they are not agreements. The freedoms discussed benefit corporations and capital, not the free flow of labour across borders. While tariffs and quotas are axed, protectionist measures in the form of IPR and professional labour is increased, leading to greater distortions than the ones been reduced. If the people knew what was in the FTA, they would probably reject it.

    * Eliminate all corporate rights. This is based upon the Hegelian doctrine of organic entities having rights, often over and above that of humans. This doctrine also has its roots in fascism and Bolshevism. It is an absurd fiction that non-living entities have rights, let alone corporations having rights greater than that of my pet cat.

    * Implement Steve’s two ideas of limiting the mortgage value to a multiple of the imputed rent and reform the stock exchanges with the voting bond system.

    * Implement a time-regressive financial transactions tax (0.1% to 1%). This tiny sum will not bother long-term investors or hedgers, but will cause a great deal of speculation (seconds, minutes, hours, days) to cease, thus reducing volatility and increasing tax revenues.

    * Create a government department called the Department of Peace and Democracy. Its purpose will be to research better ways to ensure political peace and democratize the totalitarian system within corporations.

    * Seek to reduce as much legislation and regulation as possible. Extensive growth in this area tends to benefit lawyers, not business or individuals.

    * Create a separation of business and state, like the separation of church and state. Rent-seeking is a truly massive problem. If economists were honest, they would recognize the greatest returns on investment isn’t stocks, bonds, property, etc but rather political campaign contributions.

    * All natural/technical monopolies should be nationalized (telecommunications, seaports, airports, stock exchanges, etc). Public monopolies are easier to regulate and are less likely to plunder consumers than corporate monopolies.

    * Eliminate ludicrous forms of social welfare such as the baby bonus, cash handouts, etc.

    * Eliminate tax deductions for superannuation. The taxpayer should not be subsidizing the highest income earners in Australia.

    * Criminalize dealings with known tax havens that are are non-transparent.
39. 39

    ak
    May 31st, 2009 at 7:57 pm

    Philip,

    You are definitely more to the “left side” of the political spectrum than I am.

    I fully agree with some of the points you presented like fixing the bubble-creation problem (specifically by applying Steve’s ideas).

    I fully agree with getting rid of the middle-class welfare. This is not “stealing by taxation”. It is just pugging loopholes in the system.

    You have already mentioned including the full environmental cost of economical activities in the taxation system.

    I agree with repelling the AUSFTA which is ideologically-driven and not serving our national interest in the rapidly changing global environment. It is good for some corporations only. The same applies to rectifying our patent law and copyright regulations. We don’t have to follow the US. We can even start by adopting some European regulations (software patents do not exist in some countries there).

    However I see certain risks associated with for example nationalisation of the telecommunication industry which is by the way not a natural monopoly. It used to be 30 years ago but both of us know that multiple competing companies can exist for example in the mobile telephony business. Regarding backbone optic fibre networks there is an argument for multiple networks to co-exist that is creating another layer of redundancy.

    I would be careful with taxing short-term speculation as this might affect the liquidity on the markets and prevent arbitrage. This could in fact make financial markets more prone to instabilities.

    I don’t think that promoting peace and democracy by the government is a good idea as it might be prone to ideological manipulations. I think that the state should remain as neutral as possible regarding what people believe in – even if some people believe in rubbish.

    This is by the way consistent with “seeking to reduce as much legislation and regulation as possible” what I strongly agree with.
40. 40

    JS
    May 31st, 2009 at 8:22 pm

    Thanks for posting the Lost Vegas link. I wasn’t aware this was happening in America. The whole Vanguard series seem to be interesting.
41. 41

    Philip
    May 31st, 2009 at 8:45 pm

    ak,

    Good points. You are right about the government promoting “peace” and “democracy” when it usually defiles both. Statism is a religion unto itself.

    One of the major functions of this department would be to carry out extensive analysis of public opinion and that of special interest groups. It should have the independence from the legislature and executive branch as the ATO does. I borrowed the idea from Representative Dennis Kucinich (D-OH).

    For instance, it would be interesting for the public to know that the majority of Australians oppose foreign adventurism, while at the same time, the executive branch ignores public opinion on this matter. State officials, when confronted with this, will have to justify to the public why such actions are carried out when the public opposes it. I think it is a good idea but will never, ever be implemented.

    You are right about the financial transactions tax: even progressive economists have argued that financial transactions taxes could lead to more instability by discouraging arbitrage trading. However, the net effect of financial transactions taxes on stability would have to be relatively limited in either direction.

    There is another side benefit: because this type of tax falls on those who engage in finance, tax revenues garnered from financial activity can be used when it comes to the inevitable bailout of the financial industry. It would serve justice better that the financial industry be taxed for its bailout than the general population doing it.

    As for telecommunications, perhaps I should have been more accurate. It has been advocated by economists across the spectrum since the 1990s that Telstra should be split apart. The retail section should be spun off to compete, and the government should run a technical monopoly on the telecommunications infrastructure.

    At the moment, Telstra is a bastardized, hybrid business that has a technical monopoly but also competes in offering retail services using its own infrastructure. This leads to quite a few problems, least of all ACCC intervention and red tape.

    For a good overview of monopoly, read Steve’s Debunking Economics: Chapter 4 – Size does matter. As Steve points out, competition in telecommunications infrastructure has led to the laying of multiple cables in richer, densely populated areas, but often none in poorer, less populated areas.

    As for economic ideology, I think that the right has it easier than the left. Due to the neoclassical delusion that capitalism is efficient, the current distribution of wealth and income are considered “natural” outcomes. Thus, the right can claim that these efficient outcomes shouldn’t be tampered with. When the liberal/left sectors argue for wealth redistribution, it can then be attacked as an inefficient intervention.

    The capitalist efficiency dogma can be summed up in the twin propositions that the rich aren’t paid enough and the poor don’t work hard enough (J.K. Galbraith).

    Both right and left have interesting proposals, but in the end I think they tend to be marginal as it doesn’t deal with the underlying issues of institutions of control and domination.
42. 42

    Philip
    June 1st, 2009 at 6:13 am

    Highly-paid professionals love competition, don’t they? Instead they hide behind the state in order to limit supply and drive up their wages, which essentially amounts to a consumer tax. In this case, its Australian doctors.

    From Wikileaks: “Too sneaky by half: plan to keep local Australian doctor numbers low, assorted documents, 2000-2009″

    http://www.wikileaks.org/wiki/Too_sneaky_by_half:_plan_to_keep_local_Australian_doctor_numbers_low%2C_assorted_documents%2C_2000-2009
43. 43

    Tel
    June 1st, 2009 at 10:18 am

    Highly-paid professionals love competition, don’t they? Instead they hide behind the state in order to limit supply and drive up their wages, which essentially amounts to a consumer tax. In this case, its Australian doctors.

    Very much this depends on the industry. The computer industry is getting well paid but has been highly resistant to anything resembling a union or a regulated industry (given the speed at which the industry moves, regulation is pure death, people would move long distances to route around regulation).

    In the medical industry, the AMA are probably one of the most powerful unions and the Aus government is too frightened of them to do anything. They are having a go at elevating the top levels of the nursing industry up pretty much equal with doctors in an end-run move, also more and more medical information is available on the Internet so doctors don’t have the mystique that they used to have, and alternative medicine is also getting popular. The free market adapts, even when vested interests make it as difficult as possible.

    Wait until India’s medical tourism industry gets fully operational, then we will see real competition

    I think that overall there is good support amongst professionals for a competitive market, even though there are a few examples of strong unionist activity in certain spheres.
44. 44

    SuitablyIronicMoniker
    June 1st, 2009 at 10:22 am

    One of the dirty little secrets of health economics. Restricting the supply of medical services is one of the few ways of decreasing costs. If you train more surgeons, you increase the number of operations performed (this is true in the public sector as well as the private sector).

    So governments of all colours work hard to decrease the supply of doctors, hospital beds, radiology equipment, etc. The cost of services doesn’t determine use to nearly such a degree. Across the US, there is a large variation in cost and supply of medicine, and the correlation is strongest for supply. Increase supply and you increase cost.

    The problem is that demand is always enormous, and there is almost always a third party payer (government or insurance companies). Because increasing cost does not reduce demand, the only option is to ration supply.

    I have worked in health care in Australia, US, UK, Ireland and Scandinavia – all countries limit supply to try to contain cost.
45. 45

    evan
    June 1st, 2009 at 11:44 am

    Does anyone know how auction clearance rates are calculated? No doubt this issue has been raised previously.

    In the paper yesterday, the following data were displayed:

    Listed for auction: 670
    Sold at/after auction: 265
    Withdrawn properties: 27
    Passed in/vendor bid: 103
    [of 670 auctions, only 395 results are disclosed - where are the other 275?]
    Clearance rate at auction: 65.59%

    There were only about 300 Sydney auction results listed individually. Where are the other 370?

    How did they come up with a clearance rate of 66% when the “sold” proportion of the total auctions was only 40% (265/670)? Am I being stupid?

    This is relevant as the papers are reporting that auction clearance rates are back up to 2007 levels:

    http://www.news.com.au/business/money/story/0,25197,25567285-14327,00.html
46. 46

    Effit
    June 1st, 2009 at 12:55 pm

    I read that too evan.

    More of Australian Property Monitors head of research Ms Chan’s remarks and a comment from a Brisbane reader.

    ‘However, Ms Chan warned that first-home buyers were the only force driving up clearance rates and holding up the market. “All the action in the market this year has come from first-home buyers and demand from first-home buyers is definitely still very strong,” she said.’

    And just one of the comments from someone in Brisbane: ‘This story is rubbish, just propaganda from the real estate industry. The area I live in has houses still waiting to sell after 8 months and properties up for auction 2 or three times and still not selling. Report the facts people, not misinterpreted statistics.’
47. 47

    bfg
    June 1st, 2009 at 1:14 pm

    Auction clearance rates are a sham. You only need to watch the auctions for a couple of weeks to see:

    1) Properties being passed in not being included in the data.

    2) Properties auctioning weeks before being included in the data a second time.

    Some properties that do sell, but for a heavily discounted price, are excluded from sales statistics too.

    This is what happens in Victoria anyway.
48. 48

    evan
    June 1st, 2009 at 1:34 pm

    Thanks Effit and bfg. I know that Crikey did an expose on the auction data as well but I don’t know what came of it.

    Thanks also Macca for your comment.

    ak, Philip, Lyonwiss et al… I think the following book review is relevant to your on-going debate regarding the intersection between politics and economics:

    http://www.nakedcapitalism.com/2009/05/guest-post-review-of-karl-polanyis-the-great-transformation.html

    Relevant quotes:
    - “Time after time, Polanyi shows the very visible hand of the government interfering in all aspects of society in order to insure market dominance.”
    - “…the centralization of political power in DC proved as problematic as centralization of economic power in our mega-corporations.”
49. 49

    MMitchell
    June 1st, 2009 at 2:04 pm

    Polanyi was actually more of an anthropologist. I read some of Polanyi’s writings a couple of years ago and I was quite amazed at his straightforward assessments of our situation in light of his knowledge of economies in past cultures.

    At one one point he described our system, wherein social values are demoted below economic ones, as a great experiment, the first time this has ever occured in human history, and one he wasn’t sure humanity would survive. Quite brave and insightful propositions for for 1944 I thought.

    His daughter is now a professor of economics in Canada. I believe she was one of the people behind the push for triple-bottom-line accounting. Her site is: http://www.karipolanyilevitt.com/
50. 50

    MACCA
    June 1st, 2009 at 2:11 pm

    evan,
    Thanks so much for your link to Polanyi. A most interesting read.

    Thinking it through, Polanyi’s thoughts have rather dire implications for us if the US continues down it’s current path.

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