Tag Archives: Ross Garnaut

View From The Couch – 06/Sep/2014

Lessons For A Saturated Economy

I found this commentary about the impact of the property bubble in the Sydney Morning Tabloid this week. it’s written from the perspective of the younger people who cannot get into the market. A lot of people seem to think it’ young people whining, but there are lessons in history from all this property bubble business (that all these banks are denying exists here). The experience in Japan in the late 1980s through to earl 1990s was pretty instructive. The Bubble and the aftermath of the Pop created economic havoc on the Japanese Gen-X who were coming into the workforce at the time. This resulted in high youth unemployment as well as low rates of marriage and birthrates – and effectively brought forward the peak population date of Japan. The resulting impact of that event was that all the projections the government had made about pension plans and how the labour force was going to support the retiring Baby Boomers went out the window. Much of the low growth and sluggish economy of Japan in the aftermath of The Bubble can be put down to a generation of working people essentially placed out of options and never finding the traction that earlier generations had.

I have friends who are basically economic refugees from Japan. They got out because there were no immediate options that were rewarding or befit their education. Many ended up without kids, others delayed having kids. The 90s and early 2000s saw a remarkable exodus of young, educated Japanese people, who are now not over there contributing to economic growth.

The process of writing off and paying down debts in Japan has been grueling, and worse still government intervention into what they called PKOs – price keeping operations for assets – has distorted the markets leaving what can only be called zombie companies.

The PKO money came out of the government to shore up the asset values of shares and property which is to say, they socialised the debts. The Japanese government under Ryutaro Hashimoto argued that this was necessary to stop a disorderly exit, which is to say, it allowed some investors to keep their bubble profits to pay off the bubble debts instead of getting wiped out. You wonder how those parties got to enjoy such favourable treatment, but then if you see how entwined Japanese heavy industry, banking and the old MITI was in its day, it was one of those things that people acknowledged tacitly without putting up a big fight. After all, what happens to Japan should Mistubishi or Sumitomo should fail? The option cost of bailing out those companies essentially ate the future of Japan.  And that’s just Japan. The GFC has exposed the same problem in advanced economies across Europe and North America as well as Australia and New Zealand.

The point of all this is to say, private sector debt has a way of becoming public sector debt, and “too big to fail” essentially eats the future. A few things are very clear from the property bubble in Australia is that the private sector debt is bigger than it has ever been, and should it get called in, it would wipe out our four major banks (BASEL II and III notwithstanding). Because those banks are still in the TBTF category, the government will socialise those losses by bailing them out, and then we’ll see our future spending go up in smoke to preserve the inflated prices everybody paid for their houses.

The finer point of all this is, if you don’t think there’s a housing bubble, then that’s one problem. If you do thing that there is a housing bubble but think it’s just a matter of the market correcting itself, then you’ll be in for a surprise.

Ross Garnaut Says There Is a Bubble – But So What? Cut Rates

This one‘s related but really interesting. Ross Garnaut thinks there is indeed a bubble going on in the housing market, and that the Reserve Bank of Australia is keeping a close eye on it. Basically, Garnaut is saying the rest of the economy outside of housing could do with the lowering of rates. The rates being as they are keeps the Australian Dollar too high, and makes Australia’s economy less  competitive. The only thing keeping the rates where they are, is this deep concern that there is a housing bubble going on, so the rates need to sit at as high a place a possible given the parameters. Instead Garnaut is saying if the RBA cuts rates, then the rest of economy would be able to compete and grow, and the housing bubble should be dealt with specific measures. He also says governments should stop favouring housing for the purposes of capital adequacy.

“It is ludicrous to be worried about lending risks in the housing sector on the one hand while at the same time requiring banks to put more capital aside when they are lending to BHP,” he said.

“And there are several reasons to do something about negative gearing. There are budget reasons, and reasons to do with keeping within reach the old Australian dream of widespread home ownership.

“It would also contribute to putting a lid on the housing bubble so we could reduce interest rates and the exchange rate as required by the rest of the Australian economy.

“But the problems can’t be solved by the Reserve Bank alone. It requires co-ordination of prudential regulation, monetary policy and fiscal policy.”

It’s an interesting idea that evokes the old definition of inflation. Inflation, is essentially too much money chasing too few assets. This explains exactly why housing bubbles happen. Given that housing is given a privileged position in measuring capital adequacy, banks are better off lending out mortgages than lending out business loans for capital expenditure. The money headed to mortgages become much easier money by dint of a definitions for capital adqaucy. This devalues businesses against property ownership, even though property ownership in of itself – especially home ownership – can’t contribute to the economy in the way that a productive business can. Things like negative gearing simply make it worse. So all the money goes into the property market but of course the overall supply side of the property market itself can only grow at a certain rate. As more money gushes into the property market, it can do nothing but create a condition where the prices of homes inflates. Too much money chasing too few assets.

Is China Finally Wobbling (Just A Little bit?)

It’s been like five and a half years since the market bottom following the Lehmann Shock which triggered the GFC. Since then the world has looked on… make that Australia… Australia has looked on to China to keep its economy afloat. China in turn obliged by doing massive stimulus spending, which resulted in it sustaining its 7%+ annual GDP growth rate. There are some who think China has been inflating its GDP figures for years to get more investment, and think there is a 30%discrepancy between what China’s real size as an economy is and what the stated size is. That would explain the vast lack of growth in consumer spending that China has so needed to move from an export-driven economy to a consumer driven economy.

China subsequently pushed all levels of government to take on debt and give stimulus to the market and that has resulted in a massive ballooning of debt in China to fund this 7+% growth. Since the GFC, year after year, economists, investors, traders ad analysts of all persuasions have pointed at China and said it is unsustainable. Somehow China never imploded or popped or collapsed. All those ghost cities built in the middle of nowhere with speculation money? No problem. All that re-hypothecated collateral minerals that went missing? No problem. All those companies that started going sour and failed to pay their bonds? Government intervention has saved the day. If you had bet on China to unravel in the last few years, you would have lost money on all those bets.  It would’ve been hard losses to take too, because rationally speaking, China had every reason to come unstuck. The proof was in the pudding, and the pudding’s been magic so far.

Now, there are signs the magic pudding isn’t going to hold up. I don’t know how China is going to kick the can down the road next time, but they may yet have a way of doing so. After all, one of the interesting aspects of the great recession has been the way things just keep going on in spite of the numbers. If China can’t kick the can down the road, this is going to be it for the 23 long years of economic growth in Australia. The cracks are already showing up in commodity prices. Iron ore – the biggest corollary to the health of Chinese industry has sunk to a five year low. This is going to hit our export figures. Falling commodity prices should bring the value of Australian Dollar down. Things are about to get very bumpy.

I can report to you that the money-go-around in Sydney has stopped to a snail’s pace. There are a lot of companies sitting on unpaid bills, the companies themselves waiting to receive payment to pay those bills. I have to say it hasn’t been this slow since August 2007, which was exactly the peak of the market before the GFC. I’d start selling shares this month if I had any to sell.


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What Prof. Ross Garnaut Has To Say About The Carbon Price

And The Charcoal On The Wall Says…

Pleiades sent me this link today. Professor Ross Garnaut had a few words to say about the way the big end of town is conducting itself in the carbon pricing debate.

Garnaut takes particular aim at BCA chairman Graham Bradley, Bluescope Steel chairman Graeme Kraehe and AWU boss Paul Howes, as well as BHP Billiton chairman Jac Nasser. He accuses them of elevating the cause of narrow business interests over the national interest.

He is also nauseated by the claims of the mining industry and its “hue and cry” against a market-based carbon price. He notes that the huge amount of money flowing into the country for the mining boom is displacing investment, and jobs, elsewhere in the country – a situation that is rarely appreciated in public debate. He accuses Bluescope and the AWU, who have been among the loudest opponents, of using the carbon price as a “scapegoat  …to duck the consequences of the resources boom.”

He reserves special condemnation for the BCA, the peak business lobby group, which has been riven by internal dissent over a carbon price, including from many members who do not accept the science of climate change. Just this week the BCA has recommended a starting carbon price of just $10 a tonne, and asked that most emissions-intensive industries be shielded completely from the carbon price – a proposal that has since been echoed by the Australian Industry Group.

Garnaut recalls the BCA’s rejection of a consumption tax at Bob Hawke’s National Taxation Summit in 1985 – the first “big outing” for the then newly formed council. “What emerged that day in Parliament House was a lesson in how vested interests can make the perfect the enemy of the good. In overreaching for an ideal outcome for themselves if not for the community, the business Council destroyed a central pillar of tax reform for two decades. They shot themselves squarely in the foot, with the country as collateral damage.”

Now, Garnaut says, the BCA has “returned to old type” in discussions about climate change policy. He recalls an anecdote about a visit to China by BCA chairman Graham Bradley in April this year, with a delegation led by the Prime Minister, Julia Gillard. “During high-level discussions with senior government and business leaders, Mr Bradley said that the Business Council would not support any carbon tax that would ‘discourage investment’ in Australia. And there should be no carbon tax on natural gas,” Garnaut writes.

But Garnaut says this approach has no logic. “There can be no carbon pricing without structural change. Structural change removes some jobs and discourages some investment. It is not logical to be in favour of a market-based mechanism for reducing emissions, as the (BCA) professes to be, and simultaneously be against a carbon price that discourages any investment. It would be as illogical as favouring productivity-raising reform but being against any policy change that discourages any investment.”

So take that, Business Council of Australia! There’s more in that link, so do have a read.

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Banks Had Backs To The Wall

Garnaut Says Australian Banks Were Insolvent

It’s Ross Garnaut talking about his new book on the 2008 crash. I think it’s probably accurate. He was on the 7:30 Report tonight but the interview isn’t up on the site yet. I would have linked to it, but the ABC hasn’t done their bit… yet

Garnaut’s new book, The Great Crash of 2008, marks the first rejection of Kevin Rudd’s interventionist tendencies from the intellectual architects of the Hawke-Keating government’s pro-market reforms of the 1980s.

It comes as Reserve Bank governor Glenn Stevens effectively shifted the central policy challenge to managing a rekindled export demand boom from China for the next half decade and beyond. This is the upshot of Stevens’s decision to press the button on a series of interest rate hikes that will likely take the official cash rate back to “normal” 5-6 per cent levels during the next 18 months.

It’s a declaration of confidence that Australia is hitched to a China-driven Asian growth engine that has decoupled from the financially crippled US and European economies. China’s economy, Stevens said, was “very strong”. In Australia, economic confidence had recovered. The high level of business investment was not weakening as much as feared.

Moreover, a medium-term investment wave in mining and energy projects was “strengthening”.

Worryingly, underlying inflation remained above the bank’s 2-3 per cent target zone and housing prices were rising “appreciably”. Investors were becoming more prepared to take risks and sharemarkets had “recovered significant ground”. Stevens confirmed that the Reserve Bank was about to revise up its two-month-old economic forecasts. These predict growth will recover to 2.25 per cent by the end of next year. The new forecasts will tip “close to trend” growth by then. That means at least 3 per cent and a V-shaped downturn and recovery much shallower than the Treasury’s budget forecast in May, let alone what it reckoned would have happened without the budget stimulus.

The more the fall out continues from the GFC, the more we’re told two different versions of what is wrong with the way it was handled. One school says ‘moral hazard’ and thinks the stimulus packages funded out of government debt were grossly wrong. The other side thinks that we’re barely in any kind of economic shape, thanks to the speed and quantity of the money spent and that we should at least see through the administration of the stimulus packages as originally planned.

It’s a quandary of sorts because it depends on how important you think the long term is over the short term, and governments being governments, they looked after the short term at the probable expense of the long term. The ‘moral hazards’ for having bailed out these bank are now with us. All these banks except Lehman Brothers essentially didn’t have to take their punishment for the bad debts they laid. In the long term, you don’t know what this is going to do to the banking sector because they might all equally think, “hey, the government will bail us ALL out if we ALL fuck up together, because collectively, we’re too important to fail.

And there’s more than some truth to that. Even though we got to avoid the mass collapse of various industries at once together with the cessation of international trade and death of service sectors and tertiary industries outright – all thanks to the stimulus packages – you also get the feeling that it was strictly to preserve the status quo at all costs because the alternative was a replay of the Great Depression.

Which, in passing, brings me to Third World Debt. One of the things that was being argued in the late 1990s and early parts of this decade was that we should cancel third World Debt. The argument against has always been the ‘moral hazard’ argument. Yet today it occurs to me that if we’re willing to wade into ‘moral hazards’ ourselves in order to get ourselves of the hook, we no longer have any kind of moral high ground to be preaching about ‘moral hazards’ to these poorer countries. Seriously.

Going back to the Four Big Banks, and I have to say I’m looking at all this with a bit of alarm. As I noted last week, the shares in the banks are almost back up to where they were in 2007 before things went topsy-turvy. Yet, Ross Garnaut is saying these banks were insolvent on the day the GFC kicked in with full effect.

Doesn’t it seem a little odd to you that people are rushing to buy these shares? Maybe they’re the ones thinking, “these banks are TOO BIG to fail! I can’t lose.” Isn’t that  exactly the ‘moral hazards’ galore Ross Garnaut was warning us about? And with all the acquisitions these banks are now making, isn’t it possible that these Big Four Banks are repeating their folly having waved goodbye to deep risk?

If the Government is willing to break up Telstra because it’s a monopoly, there’s something to be said for breaking up the Big Four, exactly because they’re the Big Four.

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