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Clearly there was a strong financial aspect to this, but an interesting post by two senior OECD economists over at vox raises questions as to the direction of causation – they point to new figures coming out on US and international labour market productivity as a possible cause, which later fed into debt problems. They are saying that the market missed this; largely because the data for productivity is slow to come out.

Interesting thought – else where I read that it may have been the 2008 oil price spike that essentially was the trigger on an already over the top lending problem. If you look at their figures (particularly for construction productivity) they have a good point.

Hat tip – BankWatch.

Time for a quick poll. The ABS figures today claims that Australia had positive growth over the previous quarter – but revised downwards estimates for growth in the two quarters before that.

This vote, then is simple – do you think that next quarter the ABS will revise downwards its estimate for growth this quarter and, if so, will that be enough of a downward revision to mean that we had a technical recession?

Will the ABS revise growth downwards? (Poll Closed)

With the end of another year, as normal, the mind turns towards the year ahead. That, and a little bit more crystal ball gazing made me think about where the industry is going in the long term.

The trends over the last few years are clear – the big 4 are dominating the landscape even more than they used to, the second and the third tier seem unable to compete and are being swallowed up by the big 4 and the credit unions seem to either be subsisting or disappearing.

Longer term, it appears likely that the mid-sized institutions will disappear entirely, leaving the behemoths to dominate the landscape and the tiddlers to be largely ignored.

Pity. It will make the big 4 even more arrogant (and firming them up in the “too big to fail ” category) and effectively freezing any foreign competitors out. The only way for an international bank to get in, then, will be to buy one of the four. The ANZ remains my favourite for this to happen to, but I cannot see it over the next couple of years as overseas balance sheets are stretched at the moment and shareholders are unlikely to accept shares in an overseas bank in exchange for their Australian ones.

Over the break I was sent a copy of “The Long Wave” which is a newsletter by Ian Gordon, an analyst looking at Kondratieff cycles and postulating that we are about to go through a cyclical downturn.

On this matter I must firmly disagree. Much of the economics that came out of the Soviet Union was bunkum, but there were a few bright sparks. Kondratieff did some useful work retrofitting theory to the data, as beloved of technical analysts, but it is too easily proved wrong by looking at his supposed causes.

Despite my (well documented) disagreement with Rothbard on the matter of banking, I believe he (and the rest of the Austrian School) puts the position correctly on business cycles – they are caused not by underlying instabilities in capitalism but by government action. There is nothing inevitable about a business cycle: there is a lot that is inevitable about governments.

If you are looking for the causes of any future downturn in the US look to the budget deficit, wasteful spending, attempts to block free trade and to over-regulate other areas of the economy. Blaming a downturn on a cycle over which you have no control is a cop-out.

All political campaigns generate their own examples of economic idiocy and this one in Australia has been no exception. Listening to the radio this morning, though, reminded me of this. I thought I was listening to some hick economic populist – then I realised it was a serious policy announcement from the Opposition.

The announcement was of a tax break for people who have not yet owned a home to create what amounts to a special savings account for the deposit required to buy a home “so that they can get out of the rent trap”.

Looks attractive – sensible policy right? Wrong – and this is wrong on so many levels it is not funny.

  1. Renting is not a “trap” it is a valid financing decision for a home. If you believe that housing prices are going to drop, particularly over the long term renting is a good idea. Renters in Japan over the last decade, for example, would be laughing at those who borrowed heavily to get into the “joy” of home ownership. The same could happen here, particularly given the high current prices.
  2. Renting is also very useful if you are only going to be in an area for a few years – if you have the sort of job that moves you around a fair bit then it may be completely inappropriate to buy.
  3. Giving tax incentives to buy your first home reduces your mobility – your tendency to move to get that next job. The government will help you get that first home, but not the second. In fact the Australian State governments will tax you for doing so – probably taking all the money the Feds dropped in to help you buy it and more. If you are not prepared to move for a job then you are either going to stay where you are or, worse, become involuntarily unemployed.
  4. Most crucially – the housing affordability “crisis” is not going to be solved by throwing money at it. It is not. The problem out there is not that there is not enough money chasing homes, the problem is that there is not enough housing being built. With prices above record levels in most of Australia there is little or no evidence that more money will solve the problem – in fact the reverse is true. All that more money thrown at the housing market will do is to increase prices further, further reducing affordability.
  5. Glib, shonky promises like this one give the impression of helping without actually doing so and end up convincing more people that there is something seriously wrong.

There are many more problems, but that is enough to go on with.

If the opposition (or the government) were serious about tackling housing affordability there are a few steps they could take:

  1. Release more land for building – either green or (better) brownfield land for multi-unit development. This is the one step that will truly tackle land prices.
  2. Reduce or eliminate taxation on land and building construction and transfers to reduce the costs of moving.
  3. Do the same for the firms seeking to supply building materials to reduce the costs of those materials.
  4. Recognise overseas qualifications to improve the labour supply.
  5. After the others – remove the impediments on lending to people seeking to build or buy a house, such as the 80% LVR restriction.

I would also like to see the development of alternatives to the current means of financing house purchase – such as encouraging the development of Musharakah financing, but this is not an immediate way to reduce prices.

Personally, as a home owner, I am very happy with the situation.  I am just glad I got in a few years ago.

It is always interesting to see bankers, and in particular central bankers, lift their eyes from the day to day and have a look at the long term. Most of the time this is a view forward – which will hopefully be forgotten by the time that the predictions are meant to have come true by as they are frequently embarrassing to look back on.

Someone looking the other direction, which is a much safer option, is Ric Battellino (Deputy Governor of the RBA), in a speech given to the Finsia Banking Conference last week. Unfortunately, it glories in the really boring, almost Greenspanesque1, title of “Some observations on financial trends”. In it, Ric has a look at the long term growth patterns in the credit market over the last 30 years, with some glimpses further back to look at whether the growth in credit is sustainable.

The argument, backed up with a strong look at the statistics, is that credit growth to households has been artificially suppressed by bank regulation and that, far from being an unsustainable credit bubble, the current period of credit growth is simply a logical result of consumers and suppliers reacting to the relaxation of regulation and increase in financial innovation. It is therefore sustainable. Read the rest of this entry »

Glenn Stevens, Governor of the RBA, has had a speech distributed by the BIS in today’s email alert. It covers the Australian economy, with particular reference to the market waves last week.

The speech is here. It is worth a read but, to summarise, from my reading he agrees with everything I have said over the last few days – the credit problem arising from this is distributed through the system but is small in total. The problem is that no-one is sure where it is – causing liquidity to dry up.

The real economy is unaffected.

Oh – and if you know anyone wanting to move to Australia (and in particular Western Australia or Queensland) that has any marketable skills at all let them know that we need them. Look here.

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