patrick.net

the Federal Reserve Bank (’the Fed’) is clearly a prime cuplrit behind the current huge run-up in mortgage liquidity and erosion of lending standards

i would have thought that the lenders actually offering the products would have been the prime culprits, as well as the specuvestors and other actors in the market. no-one is making them take the products, nor stopping the banks from offering them. it's like saying if there is a loaded gun in front of me, i can't resist the urge to pick it up and kill someone, so the gun manufacturer is at fault, and then the person that placed it on the table.

it's at best a complicated interaction of govt involvement and private sector practices and market outcomes. altho, yes, the idea of the fed is to maintain a stable economy and increase wellbeing across the board for people, so they are failing in that aim if their policies and practices ultimately result in a painful housing boom.

in the same vein, too, i disagree with tax deduction allowances on housing investment losses and reducing capital gains tax, so there are plenty of things govts are doing wrong from country to country. these have also helped fuel the boom, so wrong-headed govt actions can certainly be a factor. all the more need to elect the right people, or else keep agitating...

in the history of banking and the original prudential need to create central banks, apart from issuers of currency, see also the run of banking panics in the late 19th century, e.g.
http://en.wikipedia.org/wiki/Panic_of_1907

The 'mission statement' of the RBA reads as follows:

The Reserve Bank of Australia (RBA) is responsible for formulating and implementing monetary policy. The Board's obligations with respect to monetary policy are laid out in the Reserve Bank Act. Section 10(2) of the Act, which is often referred to as the Bank's 'charter', says:

"It is the duty of the Reserve Bank Board, within the limits of its powers, to ensure that the monetary and banking policy of the Bank is directed to the greatest advantage of the people of Australia and that the powers of the Bank ... are exercised in such a manner as, in the opinion of the Reserve Bank Board, will best contribute to:

(a) the stability of the currency of Australia;
(b) the maintenance of full employment in Australia; and
(c) the economic prosperity and welfare of the people of Australia."

How well they're carrying that out, and how you measure it, is a matter of opinion. (APRA has been pushed out of the RBA at arms length to regulate the lending institutions.)

Increasing supply is the only way.

I broadly disagree - I think there is plenty of supply, In fact, 10,000 people leave Sydney every year for affordability reasons, and everyone who is here could be comfortably housed with what's available. Although there could be a small supply/demand effect taking place. (Neoclassical economics pretty much says that all overpricing is a result of undersupply, I suppose.)

The problem to me is the inherent price-fixing nature and 'ratchet effect' of the market. Prices in housing tend to be inherently inelastic, except at bust time.

I believe the best approach is for an enlightened govt to step in and start regulating land prices to avoid booms. If they learned from the lessons of history, they would take price-setting out of the free market and peg prices to earnings and CPI. They're too laissez-faire. They should cut off the noses and ears of specuvestors, real estate agents and bank managers. That would bring the prices down in a hurry...

it’s like saying if there is a loaded gun in front of me, i can’t resist the urge to pick it up and kill someone, so the gun manufacturer is at fault, and then the person that placed it on the table.

Huh? Hey, are you trying to get another cheap dig at me for for being pro-gun again? ;-)

Gun control aside, if the Fed hands a banker tons of free money to lend, at virtually no risk to the bank, what do you think is going to happen? Lending money for profit isn't just something banks occasionally do, it's what they're SUPPOSED to do. Their shareholders would hold any bank officer responsible for failing to lend money on favorable terms.

The Fed is *well* aware of this fact, and were fully cognizant of the possible consequences of lending money to member banks at negative real rates. Greenspan may well go down in history as the most irresponsible Fed chief in history --if Bernanke doesn't top him.

Government-sponsored “affordable” housing measures, whether of the direct kind (government “projects”, a-la Cabrini Green), or indirect (forcing developers to sell X-% of units at below-market price) have historically proven to be consistently miserable failures. Ditto for rent “control”.

How have they proven to be miserable failures? Did not someone get an affordable house, which was the desired outcome? How are they doing it wrong, and how could they therefore correct any mistakes they may have made? I went to a housing affordability conference here with a guest speaker from CA which showed very good results for affordable housing projects - i'll send you a link to the powerpoint presentation...

CA indeed has some of the most stringent “afforable housing” measures in the country (not to mention the worst anti-development NIMBY laws), but –surprise, surprise– also has the LEAST affordable housing of any state in the country.

but some people must therefore be getting an affordable house out of it? no? isn't the idea of such a program to offset or ameliorate the actions of the private market? no-one said it would offset the market completely, regrettably there's usually a tiny number of affordable places as a % of the whole...

This is what happens when you have government trying to decide winners and losers in the marketplace, and trying to dictate what kind & how much housing gets built.

These are two separate issues, handled by separate authorities and tiers of govt. without planning controls, someone could otherwise build a 40 storey glass tower next to your bungalow on a suburban block...

Like Peter P says, just let the developers build whatever they want wherever they want and we will have affordable housing in no time.

Developers here are like the mafia. They're all driving Mercedes Maybachs and bribing councils and the govt. (Obviously paid from money out of the sheeple buyers' pockets.)

The problem to me is the inherent price-fixing nature and ‘ratchet effect’ of the market. Prices in housing tend to be inherently inelastic, except at bust time.

I agree, but increasing supply and guaranteeing future supply will kill off any price-fixing scheme very quickly.

The Fed is *well* aware of this fact, and were fully cognizant of the possible consequences of lending money to member banks at negative real rates. Greenspan may well go down in history as the most irresponsible Fed chief in history – if Bernanke doesn’t top him.

well, there you go. bad governance is bad. i agree.

you should write to the newspaper with those concerns, and get people interested. then they might pressure the govt to do something about it. try writing to congressmen. they are supposed to be your democratic representatives. you could even apply for bernanke's job on that ticket ;) altho you'd have to move to DC...

put simply, greenspan tried to head off the share market collapse with lower interest rates, thus creating a housing bubble. altho it may be more complex than that. is it a case of mission impossible with the single lever of interest rates?

the gun example is exactly analagous, altho it might be a bad one to choose. historically low interest rates tend to induce people to pay more and borrow more, altho even the recent history of the 80s with 18% interest rates should inform people they can rise again over time... who out of the Fed, greenspan, bernanke, the banks, and the sheeple is failing to learn the lessons of history?

I think it lies government adding in incentives for small unit, high density housing.

That can work too, I guess.

We do not even need to have small units. All we need is higher density. If we build more highrises, we can even free up more green open space without reducing housing supply.

Artifically forcing prices down will just discourage more building, leading to even greater housing shortage.

not at all. house prices were much lower before the boom, they can be low again. everyone in agreement that the land price boom is a disaster, so why not address it directly? the only other possibility is that the whole population has doubled overnight, in 12 different OECD countries, and that simply hasn't happened, so forget the supply/demand driver. no need to build appreciably more houses.

this boom is entirely artificial and entirely economic.

i predict that if you build trillions of new houses you will have a lot of empty houses. the developers will have bought the land at sky-high 'market price' as well. you think that if i start buying up 5 acre farms on the outskirts of sydney that the owners who bought for chickenfeed 30 years ago aren't going to hold out for the highest possible price? (which is what's happening.) based on developer offers and their own calculation of what the final housing price will be. if i start making offers on derelict warehouse districts properties for redevelopment the owners won't try to gouge me for the highest possible sum?

put simply, there are very many manifest failures of conventional markets to deliver affordable housing, or even to provide minimum decent housing for all. 1 in 13 american families lives in a trailer... why keep fetishing something that doesn't work? if you rub the 'market voodoo' just one more time, it will finally bring you luck and auspicious weather?

I think it lies government adding in incentives for small unit, high density housing.

there are environmental benefits in having clustered housing and smaller units to heat and cool. public transport and laying infrastructure becomes easier. sprawling suburbia probably isn't sustainable at current rates, and much arable farmland can be consumed by subdivisions, so there is a balance of the common good. although i think reasonable concessions need to be made when doing high or medium density multi-residential development for privacy, dignity and personal space concerns.

however, i have a scheme that suggests that govt should be buying up the 5 acre farms virtually by a process of resumption, offering a fair price over what was paid 30 years ago on original purchase, and controlling the land with covenants and discouraging developer profiteering by doing PPP cost-controlled developments. And repeat that model everywhere, with infill, with inner urban redevelopment, etc. Stop developer and land-owner profiteering. if someone bought a 5 acre farm a year ago to speculate that it will become a new suburb, tough luck. the system won't reward speculators and profiteers.

some form of calamity? isn't this whole website devoted to 'some form of calamity' from the operation of the market?

the trouble is that govts are nowadays afraid to intervene meaningfully, and they've forgotten what they are for...

I see the government overcoming collective action problems and tweak around to make things a bit more efficient.

this viewpoint is mainly due to a conditioning effect. and it has nothing much to do with efficiency, it has more to do with social justice outcomes, keeping the voters happy (if they had a brain), etc.

some form of calamity? isn’t this whole website devoted to ’some form of calamity’ from the operation of the market?

Personally, I see the Bubble primarily as a direct result of irresponsible policies of the central banks (who are appointed by and acting on behalf of politicians after all) and federally sponsored (and implicity taxpayer insured) GSEs. Peter P may disagree with me here, but I see the psychological greed/fear feedback loop developing as a (possibly unintended) RESULT of lousy government policies.

the trouble is that govts are nowadays afraid to intervene meaningfully, and they’ve forgotten what they are for…

I disagree. The U.S. government is all TOO eager to jump in an intervene in plenty of areas it has no damned business sticking its nose into --like banning gay marriage, soft drugs, trying to ban abortion, subsidizing inefficient industries, setting arbitrary minimum/maximum prices, invading the privacy of non-criminals, pre-emptively invading a country that hasn't attacked us, etc.

Different Sean,

I know you don't believe this, but there *is* a difference between being FISCALLY conservative and SOCIALLY conservative. Libertarian doesn't necessarily = culture war neo-con.

This gets to the foundation of western property based economy. Easy to get into a slippery slope and start appropriating other forms of property ownership in the name of greater good.

oh well, bad luck. as long as it is demonstrably for the greater good. what we currently have is selfish, unenlightened self-interest.

you have to consider that the entire continent of australia was misappropriated from the native title holders only 200 years ago, only a few generations really, that's 6 million square miles for free. land was then parcelled out to favourites, sweeping land grants given to anyone with a title, whose descendants now have the luxury of selling it off in chunks. Freed convicts and settlers were granted tiny unworkable plots called 'selections' by way of contrast, as the soil was far poorer than European soils with lower yields. not to mention preventing the indigenous people from using the land in traditional ways for hunting and foraging.

similarly, in the US and the New World in general, the entire US was misappropriated from the indigenous peoples 400 years ago, who were ignominiously put onto reservations. now do you feel guilty?

note that the US govt retains 'eminent domain' over all lands, as the highest form of title. your 'freehold title', or 'fee simple' transfer, is only illusory control as the next strongest claim to title. similarly, all lands in oz, UK etc are owned by the Crown.

e.g. the state govt here was recently going to resume land for a $2bn desalination plant to solve the water shortage problem. they eventually shelved the whole project under environmental pressure, but they were quite prepared to do it. my message to the same govt is that if you are prepared to talk tough about land resumption for industry, you should do the same for housing, clearly for the public benefit.

40% of the planet's uranium holdings are in oz. proceeds from the 'wealth of the nation' should be returned to the nation, not to a couple of claim jumping miners. saddam hussein nationalised the oil industry on gaining power in iraq years ago, for the benefit of iraqis. (he nearly went broke waging war on iran with the proceeds, but never mind. using funds this way has to be informed by ethics as well.) presumably chavez is doing the same in venezuela.

Thus, unemployment benefits, some level of pension, healthcare, etc, makes perfect sense and overcome private sector inefficiencies.

well, yes and no. Unemployment benefits, pensions, free schooling, hospitals, roads, etc aren't really about 'inefficiency' under any definition of the word - more about omissions, oversight or couldn't-care-less by the market - i.e. meeting rights of citizenship. e.g. sometimes govt has to mandate that companies provide utility services to rural and remote areas altho that's not very profitable, but guarantees universal access to services at the same cost, sometimes using subsidies - so there is a SLA with the govt... for instance, dubya is trying to 'outsource' welfare to lockheed martin in texas - that is, the govt retains policy control over welfare, but services are delivered by an outsourced arrangement rather than by a 'bloated bureaucracy' (which implies all govt offices are held to be inefficient compared with a lean, mean corporate approach.)

i think the market is generally efficient at delivering goods and services to people that they genuinely want, and 'the invisible hand' works inasmuch as a company producing something no-one wants will go out of business.

anyway, adam smith was an apologist for the prevailing social order and a bit of a wanker...

I see the psychological greed/fear feedback loop developing as a (possibly unintended) RESULT of lousy government policies.

I still can't agree with this. it's as though the govt is expected to be responsible for holding people back and stopping them from exercising unenlightened self-interest and greed, and only by setting the magical interest rates. thousands and thousands of unenlightened micro-economic transactions are leading to a macro-ecomic disaster - as per tulip and dotcom booms - they arguably should have seen this coming, but it's as though they've created market-dominated rules limiting their response and then insisted they can only play by those rules foreverafter regardless of the outcome. it's almost like a giant laissez-faire laboratory experiment to see just how stupid people can be and how dysfunctional things will become - proving that self-interest does not guarantee good results in the community, and ultimately not for the planet vis-a-vis sustainability issues.

if they only have interest rates to play with, and it's important to keep them low to stimulate business post 9/11, then that leads to a housing bubble, so then you raise them top slow the bubble, which hurts business (and new mortgagors on ARMs for that matter), then you have inflation and wage demands, which also hurts business, so you should lower them again, etc etc. one lever is inadequate to 'manage' the whole economy. you need further policy responses by govt at all tiers to contain potential disasters when the market goes haywire.

HARM Says: April 5th, 2006 at 8:15 pm
Different Sean,
I know you don’t believe this, but there *is* a difference between being FISCALLY conservative and SOCIALLY conservative. Libertarian doesn’t necessarily = culture war neo-con.

i'm not sure i even appreciate what all the distinctions really mean.

I personally find all the categories a tad unhelpful and confusing, especially when used loosely. neocon, even in the current sense, can mean different things, e.g. in the context of US foreign policy, neocon tends to mean self-interestedly interventionist with hawkish views, operating unilaterally if necessary, which competes with ideas of liberal internationalism, realism, and non-interventionism. i could argue they are inappropriately insular, nationalistic and 'patriotic' in an unenlightened sense. but they tend to be advocates of larger govt and social spending as necessary.

i could argue very well that libertarians are philosophically the closest thing to a communist in the true sense as defined by Marx et al as you will find - supporting the withering away of the state, etc. - if not that, then an anarchist - so there is some ideological confusion there as well.

i am 'liberal' on a range of social issues, but not libertarian. does that make me socially conservative then? for instance, a 'liberal' may encourage gun control, because they think it's ultimately very harmful to a large society. but they may not mind soft drugs, unless they are independently and unbiasedly proven to do serious material damage to the person. they may dislike the effects of smoking for its costs and suffering. the ideological libertarian says it's ok to smoke and possess firearms. the neocon is ok with owning and bearing arms because it's a kind of socially and culturally cool and conservative thing to do in one particular culture.

this is not even to get into the history of thought on the matter, dating back centuries, and mostly forgotten and unconsidered in the mainstream.

i could then pull in left-right Marxist class theory, tough-minded vs tender-minded psychological theory, kohlberg's hierarchy of ethical development, the ability to take the part of the other, feminist studies and gendered power relations, etc etc. you can have a great old time...

i think it's necessary to formulate a grounded ethical position when dealing with 'being in the world' rather than a logical one, which hopefully then dispenses with the need for categories or rigidity, and can even be used to critique or expose those categories as being perhaps inconsistent, leading to unworkable outcomes or unnecessarily cruel.

this review of Collapse is quite interesting. like Guns and Steel, i might wait for the TV series, heh. i'm still trying to finish The Third Chimpanzee...

http://www.grist.org/advice/books/2005/02/08/kavanagh-collapse/index.html

the case of Easter Island is a chilling metaphor for the world, particularly if everyone does act in a self-interested and unenlightened way without regard for the wider environment - single-mindedly obssessed with gaining material 'success' to meet their esteem needs and to gain the esteem of others...

I loath Dubya. Hated him even before he was elected to his first term. Knew he would be a horrible president. Watch him fall through my low expectations, adjusted my expections lower, repeat…

hmm, the chimp who smirks - selected, not elected - by rigging the elections in 10 ways...

the Republicans have repeatedly put forward candidates that are an insult to the American people - Reagan, Quayle, Bush Sr, Bush Jr. Questions of election rigging aside, they seem to have worked out the formula that putting up an inarticulate but amiable idiot will win an election by presenting a folksy impression that will hook the voters...and leave the real backroom political maneuverings to the usual bunch of unpleasant sharpies whom no-one likes...

anyone know any good haikus?

I disagree. The U.S. government is all TOO eager to jump in an intervene in plenty of areas it has no damned business sticking its nose into –like banning gay marriage, soft drugs, ...

that's a good point. the Republicans have invaded the bedroom. what is it, god, gays and guns?

interestingly, pollies here are far too diffident to really engage in those issues. australians are either morally indifferent or just tolerant, and a pretty secular culture overall. so there's no god, no guns, that just leaves the gays, and nobody is too fussed there, either...

the big issues here seem to be about industrial relations, mostly...

Actually, Australia is already cutting a deal to export Uranium to China. So I don’t think democracy is much of a concern anyway.

PS

cool. we're going to sell uranium to china and india and all the other NPT signatories... actually, india hasn't even signed the NPT, but never mind... as long as they're good payers...

no democracy? no problem... poor democracy rating is no obstacle, as long as you can make the repayments...

testing

Courtesy of "Rainman18"at Ben's blog:

Bubblefucius say:
Man who carry risky loan sure to suffer broken ARM.

And...
Bubblefucius say:
Condo flipping like swift kick in the scrotum. Both painful and you left holding the bag.

And...
Bubblefucius say:
Low-ball offer today look higher tomorrow when you are on knees.

And...
Bubblefucius say:
Housing comps like instant coffee; both good until the last drop.

And...
Bubblefucius say:
Man use stated income to buy two story house; one story before and one after.

Not Haiku or poetry, but here's one of my all-time favorite REIC bullshit filters that resurfaces from time to time:

RE.Agent Says:

This asset bubble is different than all of the others - it will never slow down, or pop. The gains are permanent.

Also not Hailu, but worthy of remembrance:

‹^›_‹(ô¿ô)›_‹^›

(c/o Surfer-X)