Economic deja vu all over again
|December 3, 2008||Posted by Staff under Progress Report, The Progress Report|
Economic deja vu all over again
Powers that be play same old tune
Australias main daily, The Age, ran this 2008 op-ed on Nov 20. To put it in context, here are the latest US indicators: (1) Home prices in 20 major cities dropped 1.8% in September from the prior month, and they fell a record 17.4% on a year-over-year basis, according to the Case-Shiller home price index (MarketWatch, Nov 25); (2) Sales of new homes fell an estimated 5.3% in October from September to the lowest level since 1991 and were down 40.1% compared with 2007 October; the median sales price was $218,000, down 7% in the past year (MarketWatch, Nov 26); (3) Manufacturing in November shrank the most in 26 years; the US officially entered a recession a year ago this month, its 11th postwar recession, according to the National Bureau of Economic Research (Bloomberg, Dec 1); And (4) the yield on US Treasury 10-year bonds was 2.73% — a record low — as investors, trying to shelter their wealth, pushed up demand (Washington Post, Dec 2). Todays author is a real estate valuer and honorary director of the Land Values Research Group.
by Bryan Kavanagh
Nothing changes. In the 1970s, the collapse of Mainline Corporation and Cambridge Credit heralded a recession after the 1973 real estate bust. In the early 1990s it was Pyramid Building Society, Tricontinental, and the State Savings Bank of Victoria after the 1989 real estate bust.
We will no doubt learn shortly which building developer or bank will come to be seen as the harbinger of this particular financial collapse.
Why don’t we simply end these damaging real estate bubbles? As recent US experience confirms, bubble-affected mortgages offer lenders no real security, so why didn’t the Australian Prudential Regulation Authority and the Reserve Bank act to protect Australians and their banks?
If they and other economic analysts fail to respond to cause and effect, are we simply to emerge from this financial mess in a few years, only to be put through it all again in the next recession due about 2026?
It seems everybody except those responsible for protecting us from these financial disasters can write this repetitive script.
In an article (“Resource rents hold the property key”, The Age, June 2005) I wrote that “economic growth is primed to tank into a major deflation”, so we shouldn’t be considering interest rate rises.
The RBA then increased rates by 25 basis points seven times over the next three years, because it curiously espied inflation to be the threat to the economy. The bank took cash rates from 5.5% to 7.25% and put many individuals and businesses under significant financial pressure.
Now that the RBA has finally recognized that the real risk to the economy is a price drop in assets, it has belatedly reduced the interbank overnight rate to 5.25%, a remarkable decline of 2 percentage points in two months.
But it is all too late, because the problem with an asset deflation is that people will not be conned into spending now that they see they will be able to buy things cheaper in six months or a year.
So what’s the answer? It’s clearly not in conventional economics texts. Nor will it come from those economists advocating bailouts and Keynesian pump-priming techniques “to restore confidence in the system”. As the problem is deeper than a crisis in confidence, a fundamental structural change is needed to free ourselves from the crisis that will arise when, as with the US and Britain, our real estate bubble finally bursts.
As our authorities have failed to tackle asset bubbles, we now have to allow real estate and share markets to find their real levels, without Federal Government interference.
The updated first-home owner’s grant towards the purchase of an existing home is a senseless waste of money. An image springs to mind: Housing Minister Tanya Plibersek trying to pump up the housing bubble with a bicycle pump on the one side as air escapes from a gigantic hole in the other.
It appears the Government, like some sort of tout, is trying to entrap young buyers into purchasing in a collapsing real estate market, where they could be left seriously exposed after the decline in prices. It’s business as usual, folks.
The Land Values Research Group has long advocated greater capture of publicly generated annual land values, both as a way to keep the lid on real estate bubbles and reduce taxes on people endeavoring to do things more productive than real estate speculation.
If this were done on a large enough scale to secure the results, it would put dollars in people’s pockets and get the real economy back to work. People usually acknowledge the principle, but then venture the ironic addendum, “Good luck with that one”, knowing it’s a difficult program to get up politically because policymakers can’t be educated to the stimulus that the tax system now provides to generate land price bubbles.
Political denial plays a part, too. Peter Costello congratulated himself for running surplus budgets while he presided over inflating the greatest real estate bubble in our history. Perhaps denial and political inertia on boom-bust connotes that some people believe it’s more important to retain the cycle than to tackle and eliminate it?
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