Uncovering covered bonds
Uncovering covered bonds

The proposed government changes to the financial services are terrible policy. They will increase the weight of money going into housing compared to what would otherwise be the case. This effect may not manifest itself immediately, but it will when a bubble next gets going. Investment banks will get fees structuring products, some lucky people will exit the market at the right time (turning points are not predictable, so the best timing will result from luck). Most will find themselves in a similar spot to Americans, but without the option of sending in the keys. They will enter bankruptcy or spend much of the rest of their life with a crushing debt load. Nice.

Politically it could delay the Australian downturn. There is a lot of money in superannuation and it could replace Chinese demand for our housing. Because the super investments will be going into unproductive assets, the economy will not generate sufficient wealth for the retired people to live the life they are expecting, as per America. No matter what nominal balances may suggest in the interim. Super should go toward digging holes, growing or processing things. It would be nice if we could make something as well. We will not be a wealthy country on the back of flipping houses to each other, no matter how high a proportion of each flip is captured by the financial sector.

Of course on the political side, if they can’t inflate housing enough to counteract the effects of the Chinese purchase slow down, they are gone. It’s a bit like Bush kicking the can down the road. But at some point the debt burden gets too big. I’d rather our government learnt the lessons from around the world, rather than repeating them. Thus far we avoided covered bonds, no longer. When things get messy, they will be very messy. And they will get messy. Can’t predict exactly when, and how horrible it is partly depends on what we do between now and then. This is the opposite of what we should do. It is standing at the bottom of a hole and deciding to dig madly rather than climb.

The government solutions are destined to fail because they bring the wrong conceptual framework to the problem. They are too influenced by Keynesian economics. They discount the fact that we have endured a credit expansion induced bubble in multiple asset classes. The excess debt created has to be cleared, as does the mal-investment associated with the boom:

When there is a credit-inflated boom that results in your working at a job in which you produce goods that no one wants, needs, or can obtain financing to buy, and which your employer consequently cannot sell, it naturally follows that neither you nor your co-workers are going to be employed in the near future”. Source Vox Day cited in Why Keynesians and Krugman are Wrong

The Australian experience may yet come to reflect that of America:

(US 2005) Full employment was accompanied not only by an unsustainable external deficit, but also unsustainable asset prices, private debt levels and levels of consumption (and savings) relative to income as well as higher public debt levels. When the public’s willingness to increase its debt load waned as real estate prices fell, consumption, economic activity and employment fell along with it. We are now experiencing balance sheet recession and existing debt levels appear to be a barrier to increased private and public sector debt-financed demand.

Most troubling, but not surprising, the trade deficit is growing again and is unsustainable at about 3.7% of GDP. The external imbalance is not a temporary phenomenon. The simple and sad fact is that an unsustainable trade deficit implies that full employment levels of GDP are also unsustainable”. Source: Richard Alford cited in Why US stimulus can’t fix unemployment

Analysis demonstrating the beneficial effects of government stimulus’s are flawed. The models can’t fail but to attribute growth in GDP to them:

“If government spends a dollar; this will always be shown as contributing to GDP in the period it is spent. And, it would be shown this way even if the whole dollar were spent on imports and did not, in fact, contribute to GDP… If the government spends taxpayers’ money to build, say, a school library, at a reasonable cost, this will be shown dollar for dollar as contributing to GDP. If the same library were built at an inflated cost, this would be shown dollar for dollar as contributing to GDP. If the same library were then immediately demolished at government expense even more would be added to GDP. And this is not the end of the matter. If government takes resources away from the private sector to build a school library, this will be recorded, and probably written up, as the economy being saved from a decline in private sector activity by government spending” Source: Peter Smith cited in Keynesians are so wrong

Thanks to Chinese demand for Australian commodities Australia had the chance of a gentle landing. Almost everything economically significant that I can think of that the Government has done will make the economic downturn worse. Thank you Mr Rudd, Ms Gillard and the media sycophants who played a part in their election.