Martin Wolf on the contained depression By Houses and Holes in Featured Article, Global Macroat 6:27 am on October 19, 2013 | 70 comments Find attached a recent speech by the FT’s Martin Wolf on the evolving context of the post-GFC world and the lessons we have and haven’t learned. Essential weekend viewing. Share on Facebook Share on Twitter Share on Reddit + - You may also be interested The Days of Easy Credit are NumberedBack in December, I wrote the following: In the If you are going to make up a story... Make it a good one.The world seems utterly unconvinced by Europe's fairy tale that their Bringing it HomeSince launching The Unconventional Economist in May, I have written Credit Cringe In mid-2006 the global financial crisis (GFC) began in inauspicious Comments Ortega October 19, 2013 at 7:58 am Great lecture to watch Sat morning with a coffee. Thank you very much. The writing is certainly on the wall for Australian property. Some fundamental insights at about 33min. Gunnamatta October 19, 2013 at 9:10 am 33.10 ‘The financial sector in the modern western world does not lend for business – business lending is almost insignificant. Its principle job is to leverage up property assets – mostly household but also commercial property – and in the process generate, when you think about it, a massive rise in real prices of this stuff, and massive increases in household debt.’ 35.30 ‘At this point intelligent economists would say ‘This wouldn’t have happened if they had used their money wisely.’ This is perfectly true. But as I have already told you, they didn’t, they put it into housing. And housing is really not a very good asset to back foreign borrowing against, because it’s completely non-tradable unless you intend to sell all the houses to Chinese people.’ 35.47 ‘There is a simple solution for the US housing problem – allow a hundred million Chinese people to come to America and buy the houses. And since they paid for them anyway, why not?’ 36.38 ‘And what we had was a situation in which the emerging world as a whole became huge net creditors of the developed world. We borrowed all this money – and we threw it away. Very very simple. Colossal wastage of this capital. And now they want their money back. And the answer of course is that they will get it back, in depreciated dollars.’ 41.03 ‘My basic rule is when the government tells you there is nothing to worry about, the thing you do is you take your money out.’ 41.50 ‘The Eurozone was created and the net flows across the Eurozone just exploded. And Germany was the dominant creditor. It went actually from a small deficit to a gigantic surplus, it’s the second largest surplus country in the world, by the way. And then there are a few other surplus countries of which the most important is the Netherlands. And down below you get these absolutely enormous deficits, by far the most important was Spain. But a number of countries, Spain, Portugal, Greece are the most important were running current account deficits of 10% of GDP for roughly a decade, their net external positions went to about 110-120% of GDP and all this stuff was invested wisely and sensibly in in overpriced houses. It is not surprising that we ended up in a very very large mess.’ 47.36 (of nations in Eurozone with net government debt of more than 100%) ‘And they are all going to default. We just don’t know when.’ 58.22 ‘In essence we have the same financial system as before, except that the banks are bigger and more concentrated, and more diverse, and they are very marginally less leveraged – but they are less leveraged, as I put it in one thing it is the difference between being unbelievably over-leveraged and merely being extraordinarily over-leveraged, so basically the leverage ratios have halved but they are still very very very high. The interconnections of the banking system are the same, and it is not at all clear that any of the underlying problems that have been revealed in risk management and so forth have been resolved. The second think which I would like to link with this. The other thing we have learned definitively, absolutely definitively, that the dominant dogma of central banking, which was that ‘if we stabilise prices’ – this brings us all the way back to Wicksell and Hayek, it brings us back 100 years of debate – ‘if we stabilise prices, or price expectations, in this case inflation expectations, the economy would be stable and we could assume the financial sector wouldn’t cause us problems’ that proposition has also I think been definitively disproved. And for that reason central banks are engaged in a desperate attempt to put together a coherent doctrine of what it is they are about when they get back to normal, if they get back to normal. Remember Japan hasn’t got back to normal for twenty years’ 1.00.10 ‘Our views about the financial sector and our views about monetary policy were, in my view, simply demolished, and we don’t yet have a coherent and agreed alternative.’ 1.00.28 ‘The third lesson I would draw, and it is controversial, but to a first approximation, a long period, to a first approximation, there are some exceptions, a very lengthy period of running very large current account deficits is likely to be a warning of a very significant financial macro crisis, unless ……….. the money is being invested. Because by definition some sector of the economy is a very large net borrower……..that the money is being invested in extremely valuable assets which have a particular property of being able to service foreign debt – they are tradables. And this is almost inconceivable because one of the consequences of a large current account deficit, a concomitant, is a huge appreciate of the real exchange rate, which has exactly the opposite effect. ’ Sometimes you get the impression that people can sit through a magnificent presentation and simply not get any of it. I think the guy who asked questions 1 was in that boat. 1.22.31 ‘On the other hand. If Canada and Australia managed to really succeed in screwing up where they are it will be impressive’ 1.24.25 Supports MacroPrudential regulation Revert2Mean October 19, 2013 at 9:13 am Why can Wolf see what the RBA cannot? dumpling October 19, 2013 at 9:28 am In my view, as long as we view it as an “economic” problem, we will remain clueless. I think it must be viewed as a power struggle between the banking complex and the government – aka who the “real” boss is. I know that reality is uglier than one may wish to admit. I also understand that, in HnH’s words, it is hard to give up on Santa. But, sooner or later, one must. In fact, one would be better off the sooner he does that. Everything will just make so much more sense and hence become more predictable, I think. Ooops, the all-important NLCS Game 6 will start soon. See you later. innocent bystander October 19, 2013 at 10:59 am @dumpling “I think it must be viewed as a power struggle between the banking complex and the government “ and what if the banking complex and the government are the same thing? dumpling October 19, 2013 at 2:21 pm What a magnificent effort by Michael Wacha and the Cardinals now advance to the World Series. I can hardly wait. @innocent bystander You got me. I should have put “a power struggle within the government between those owned by the banking complex and the rest” – and you know who is winning (and who is outnumbered). dumpling October 19, 2013 at 9:25 am 33.10 ‘The financial sector in the modern western world does not lend for business – business lending is almost insignificant. Its principle job is to leverage up property assets – mostly household but also commercial property – and in the process generate, when you think about it, a massive rise in real prices of this stuff, and massive increases in household debt.’ Translation; we do not care about private businesses who can directly raise capital via IPO / capital raisings if we choose to charge too much. We will instead go after the most ignorant and vulnerable sector with money in the society, and help them part with their money in a hurry. 35.30 ‘At this point intelligent economists would say ‘This wouldn’t have happened if they had used their money wisely.’ This is perfectly true. But as I have already told you, they didn’t, they put it into housing. And housing is really not a very good asset to back foreign borrowing against, because it’s completely non-tradable unless you intend to sell all the houses to Chinese people.’ As I had stated numerous time, as long as we view it as an “economic” problem, we will remain clueless. It must be viewed as a power struggle between the banking complex and the government – aka who the “real” boss is. 35.47 ‘There is a simple solution for the US housing problem – allow a hundred million Chinese people to come to America and buy the houses. And since they paid for them anyway, why not?’ That is exactly what I have been stating regarding the Australian housing. 36.38 ‘And what we had was a situation in which the emerging world as a whole became huge net creditors of the developed world. We borrowed all this money – and we threw it away. Very very simple. Colossal wastage of this capital. And now they want their money back. And the answer of course is that they will get it back, in depreciated dollars.’ I have a theory on this. I think American’s line of defense will be along the lines of ; we helped you develop, so now is your turn to return your favour by holding onto the treasury notes which are diminishing in value by the day – or else. Alex Heyworth October 19, 2013 at 1:22 pm They cannot “get it back”. Both China and Japan own so many US Treasuries that any significant move by them to sell off their holdings will crash the price, thus drastically reducing the value of their remaining holdings. As Wolfe says, the end game is that what they get back will be significantly devalued dollars. And only when the Treasurys mature. 3d1k October 19, 2013 at 1:28 pm China’s holdings of US securities: Implications http://www.fas.org/sgp/crs/row/RL34314.pdf dumpling October 19, 2013 at 2:24 pm @Alex Heyworth Exactly. Without the “– or else” part it would not have worked this long. Now, even without that threat they cannot offload the massive holdings without destroying their own wealth…… So who won in these transactions? Darth Bernanke or Chinese / Japanese? Felixfrost October 20, 2013 at 12:56 pm He also adds re Australia and Canada screwing up – when people put their minds to screwing up they are remarkably good at it. As our new friend Chris Joye would agree, allowing this recent house price boom to gather steam is a perfect example of excellent screwing up. Junkyard October 19, 2013 at 10:18 am Fascinating, thanks for the link. Wolf has a engaging and easy to digest way of speaking for those with zero background in economics such as myself. darthbaeder October 19, 2013 at 1:06 pm The last 2 minutes are poetic. 3d1k October 19, 2013 at 1:16 pm ‘Australia and Canada are pretty good places to be economically’ Lol. That’s Wolf telling it like it is for all you ‘heads on stakes’ Zizek inspired armchair revolutionaries So we are left pondering what is the new normal; is there any immediate practical reform that can rival can kicking (surely now a designated Olympic sport). Too Big To Fail is indeed true it seems as global financial dislocation threat is so great, as someone said yesterday private debt becomes public debt ( fitting really given the redistributive bent of modern political economic theory, the other side of the equation) and consequent burden of public debt in turn threatens the financial viability of modern economies. All interwoven. I thought the question posed re the negative productivity of the better performing post crisis economies and unemployment and and impact on growth v the potential unleashing of pools of unemployed to bolster future growth (ie which had greater potential for future growth and I think Wolf felt the latter re the US) interesting – I would have liked more on that. Oh well at the end we’re left with little more than it remains a fine line we tread, risk of financial implosion muting the sound of boots on cans and really nobody knows where we go from here. Interesting times. Ps El-Erian from Pimco was the hedge fund dude that called his wife and told her to get as much cash from the ATM as possible as total collapse of processes of financial institutions was likely imminent. I’ve always kept a little cash handy ever since. aj. October 19, 2013 at 2:58 pm As you are paid to represent the Australian mining industry in these threads, it is no surprise that you always conveniently fail to note that that the Australian mining industry is now at least 80% foreign owned, and a great deal of the money for bidding up our housing has come from the sale of these assets. Future generations will pay the price for this, but you of course have no interest in the country, only your masters, that’s fine but at least have the dignity to declare it. 3d1k October 19, 2013 at 5:38 pm Your point is irrelevant. It is common knowledge that the resource sector has significant foreign ownership, I feel that an educated readership would be aware of this. What continues to perplex me is the failure of so many with a particular ideological framework to acknowledge the vital role our resource sector has played (courtesy China) in ensuring we are not among the list of nations in Wolf’s presentation so severely affected by the GFC. Foreign owned or not, our resources sector has been immensely beneficial to the economic well being of the nation. Back to Wolf. Some five to six years post GFC it is alarmingly apparent that we continue to have a globally unstable financial system, exacerbated global imbalances and grossly over-leveraged financial institutions and in Australia’s case, institutions highly exposed to the property sector. Risk abounds and to a very large extent is beyond our immediate control. There appears little constructive agreement as to measures to be deployed to circumvent financial dislocation globally apart from the ubiquitous and seemingly necessary can kicking. We don’t know what the end game is and collectively have participated in a financial experiment the likes of which, the extraordinary size of which and the outcome of which is both unprecedented and unknown. As I say, interesting times. A final point: I am not a collapsnik. I detest the multitude of ‘bring it on’ collapsnik desires of many of the commenters here at MB. I detest even more that they carry this fervent wish for no greater purpose than to purchase a property. dumb_non_economist October 19, 2013 at 5:52 pm 2d, And how much better would we have handled it if a resource tax had been in place. It’s not common knowledge that the resources sector is 80% foreign owned, the average person in the street would be surprised, and surprised by how little we extract from that wealth. You like the status quo as you benefit from it, a lot of the the younger ones here are punished by it, I’m sure you’re aware of that. aj. October 19, 2013 at 6:49 pm 3d – That is regrettably what you are paid to say. The money for our massive CAD had to come from somewhere, and it came from selling the farm (our mining sector) to your masters. In mho this is quite sad, and is a great loss to the nation from short sighted politicians and a greedy elite (and their lackeys) for whom too much is never enough. It is for the opportunity cost for the nation that Australians should sing songs of lament. The story of our massive private housing debt and associated financial instability is wound together inexorably with the story of our loss of these great assets to foreign interests. aj. October 19, 2013 at 7:45 pm @ DNE – the average person on the street would be even more shocked if they had a look at the transfer pricing arrangements of most multinationals. http://www.ato.gov.au/General/International-tax/In-detail/Transfer-pricing/International-transfer-pricing—introduction-to-concepts-and-risk-assessment/ The big mining houses being no exception here. 3d1k October 19, 2013 at 8:33 pm Dne – who knows? The RSPT was crap, we now have the MRRT in its infancy granted, but even then it is not intended we establish nor had any intention of establishing a SWF. More likely in typical Oz fashion we spend up big on entitlements. Aj – as Flawse would say the answer it lies back in time. No point dwelling on the fact, it can’t be undone. Better focus on future potential and working with what we have in an honest non sentimental manner. So much is beyond our control. The Way of the Tao For both of you, an oldie but a goodie – I’m sure you’ll love it http://m.truthdig.com/report/item/the_collapse_of_globalization_20110328 dumb_non_economist October 19, 2013 at 11:02 pm @aj, Yeah, have a mate employed by a Canadian company that buys all its spares part etc via a sub based in the Caymans at around 4 times off the shelf list price. 2d, Glad to see you agree on a resource tax for a SWF, I was beginning to think you were lost to all reason! I reckon your head will look good on pike (smiley). Revert2Mean October 20, 2013 at 9:24 am Dumb non economist, here are the smileys you can use: dumb_non_economist October 20, 2013 at 8:04 pm Thanks R2M, Mav October 19, 2013 at 7:56 pm LOL.. Are you watching the same video that the rest of us are watching? Note: To those who haven’t watched yet, ignore 3d1k’s alternative universe, watch the video and make up your own mind. Gunnamatta October 19, 2013 at 9:29 pm Ahh, what luck. A day out watching the agricultural sector, dinner with friends, some Hardy’s liqueur sauvignon blanc , King Island blue, and, to top it off, some lightly fried faux socio-economic indignation from a mining lobbyist, in a Torynuff jus, garnished with mock piety, on a bed of rentseeking turd. Let us have a look at 3d1ks contribution to the festivities … ‘Australia and Canada are pretty good places to be economically’ 3d1k obviously missed Wolf’s initial warning about the impact on Canada ‘when commodity prices collapse’ Lol. That’s Wolf telling it like it is for all you ‘heads on stakes’ Zizek inspired armchair revolutionaries Obviously 3d1k missed circa 90 minutes of Wolf, ‘telling it like it is’ on massive debt, spending that on economically marginal assets like real estate and having banks who are so large, doubtfully capitalised and imbalanced that they pose a threat to the financial system. That would leave Australia with the large debts, spent on RE, and banks reliant on the government umbilical cord. I am starting to wonder if 3d listened to much at all. So we are left pondering what is the new normal; is there any immediate practical reform that can rival can kicking (surely now a designated Olympic sport). But 3d1k , as he questions, when he notes that reforms to the system have been noticeably absent, where does can kicking take us? It certainly isn’t taking us to anything that looks like growth in the developed world. A Eurozone which will (he indicates certainty) see default, a developed world with vastly inflated public debt levels, leaving it in a weaker position to face whatever new threat materialises. Like all beneficiaries of any ancient regime you seem to assume that that which is, is the best which could conceivably be, and, well, I for one am on the side of those that view the future as being but a door kicked in on a rotted old building away. I would also note that seeing as the can kicking in Australia’s heavily real estate reliant case, makes sense only if planning to import large numbers of Chinese to inhabit them – maybe you missed that bit Too Big To Fail is indeed true it seems as global financial dislocation threat is so great, If I may stick with a Chinese theme I would observe that you sound like an official from the late Manchu period telling an emperor not to have anything to do with foreigners. A conceptual bogeyman to stridently espouse doing nothing. Sloth is firstly an intellectual failing – I certainly hope you don’t have an opium habit as someone said yesterday private debt becomes public debt ( fitting really given the redistributive bent of modern political economic theory, the other side of the equation) and consequent burden of public debt in turn threatens the financial viability of modern economies. All interwoven. Atta boy! Defence of yesterdays regime again old coq! Spoken just like an early Pope softening up the masses for a whip round to buy off the Goths. A bit of a squeal about contemporary politics [come now, you won an election just weeks ago, has it soured that quickly? Please don’t tell me you too think the Toynuffs are frauds. ] But I can’t help but wonder if, if we are to assume that all that private debt becomes public somehow, someone might get it into their thick skulls to ‘manage’ the process with a view to either minimising the need to socialise private debt, or, at the risk of sounding Marxist, to maximise the asset base coming across with the debt in order to get on song with the tax paying base of today, or, say, tomorrow, lest that tax paying base become somewhat churlish. Now at this point I hear the neocon political strategist in you saying ‘let ‘em try’ and I would grant you that my view of Australian politics would hold true to that. But this is also a nation which has been softened up by 23 years of economic expansion, has amongst the world’s most impressively indebted punting masses and been spoon fed a credit binge and mining capex boom. As the people here at MB often point out there is an adjustment ahead one way or the other, and it’s the adjustees of history who sometimes have a habit of recrudescing more basic blame and benefit allocation processes. Do we want to be dragged kicking and screaming there? Do we want to get there first and manage the arrival? Or do we want to just wake up there one morning and hope that the drums, smoke, and shrieking savages have no implications for us ……………………….Sorry I forgot, you are an eternal can kicking man aren’t you. Do we just continue on as is in expectation that nary a question would ever be asked by a population of adjustees so devoid of sentience as to be free from ennui? I thought the question posed re the negative productivity of the better performing post crisis economies and unemployment and and impact on growth v the potential unleashing of pools of unemployed to bolster future growth (ie which had greater potential for future growth and I think Wolf felt the latter re the US) interesting – I would have liked more on that. I’ll be you would have. Anything to avoid observing the present, and if it alludes to some potentially glorious future – or one at least employing more in other parts of the world, then so much the better. Discussions of people working harder or going the way of the unemployed also may have a motivating effect somewhere – although many would argue, like those German defenders in Stalingrad 70 odd years ago about now – that the here and the now, and possible means of escape may be even more motivating. Oh well at the end we’re left with little more than it remains a fine line we tread, risk of financial implosion muting the sound of boots on cans and really nobody knows where we go from here. Geez you make it sound like a choice between reruns of ‘Here’s Lucy’ or reruns of ‘I dream of Jeannie’. Does ‘vision’ really have such little place in the Torynuff mind? Ultimately Groundhog day wears thin, offers more scope for mistakes with each passing day for those in power (particularly if they are Liberals with a travel allowance history it would seem) and will ultimately offer adjustees the scope to point at those in power and say ‘time wasting’ – You get some pretty fierce screams of ‘ball’ at the MCG on a good day when the ump is a tad slow to ping those caught with the ball and no idea what to do with it. Mav October 19, 2013 at 9:57 pm +17 trillion.. made my day. spleenblatt October 19, 2013 at 10:12 pm Oh, how I wish such mealy mouthed conservatives as 3d1k had one head only, so I could decapitate it with a single stroke. 3d1k October 20, 2013 at 12:58 am Gunna, I’m flattered by your forensic-like attention to detail. More so after a night on the town – me, I could hardly hit the keyboard! Watch out – the makers of NDIS Whatever may seek you out…no doubt you too shall enjoy the Chris Hedges link above. Spleen, I am the Hydra. You are not Hercules. But I enjoy your delusion. Mav, you are like a serpent rising from its hessian bag to the siren call of an amateur piper, obedient alas misguided, easily swayed by tawdry trinkets, forever captured, forever spited. Sympathies. To each of you a challenge: what did you discern from the Wolf presentation that as (granting considerable leeway) thinking engaged individuals, you were not aware of? PhilBest October 20, 2013 at 6:25 am I have not had time to watch the Wolf presentation yet but intend to do so, and I appreciate the discussions of it that are already happening on here. What I can’t understand is why the mining sector has to be regarded by anyone as a kind of “culprit”. Australia’s problem is an unbalanced economy. Do we want a balanced economy with no sector at all doing well? I repeatedly point out that a balanced economy, as represented by southern and heartland USA, has booming resource extraction, AND a manufacturing sector, AND affordable housing, AND low debt, AND productive, self liquidating debt, AND healthy discretionary incomes, AND real economic growth. If it were not for the distortions in the Aussie economy, the resources sector would be merely regarded as a good team member. I don’t understand why we need these squabbles between resources boosters and housing bubble bears – we should be on the same side against the housing bubble bunnies. dumpling October 20, 2013 at 7:54 am +10 for Phil again Mav October 20, 2013 at 8:28 am Mav, you are like a serpent rising from its hessian bag to the siren call of an amateur piper, obedient alas misguided, easily swayed by tawdry trinkets, forever captured, forever spited. Wow.. So much anger and hatred directed towards me, for merely suggesting that people watch the video and make up their own mind! I”ll emulate the Franklin Roosevelt maxim about grifters and their astroturfer underlings – I welcome your hatred. We had to struggle with the old enemies of peace—business and financial monopoly, speculation, reckless banking, class antagonism, sectionalism, war profiteering. They had begun to consider the Government of the United States as a mere appendage to their own affairs. We know now that Government by organized money is just as dangerous as Government by organized mob. Never before in all our history have these forces been so united against one candidate as they stand today. They are unanimous in their hate for me—and I welcome their hatred Delusional Economics October 20, 2013 at 5:38 pm Have to agree with Phil on this. Certainly not claiming the mining sector isn’t culpable , but outright blame misses the point. Something I have talked about previously. http://www.macrobusiness.com.au/2012/03/an-adult-conversation-about-the-economy-please/ 3d1k October 20, 2013 at 7:39 pm Mav I forgot the emoticon DE/Phil my view is that the resource sector boomed at a time politics of division was the only game in town; that and the difficulty many had understanding the role resource investment on such scale and commensurate export volumes played underpinning the economy particularly post GFC. DE – still of the view the series you linked to above and the sectoral primer warrant Essential Reading on the sidebar, some of the best of MB. dumpling October 20, 2013 at 8:04 pm DE/Phil/3d My view is simple. A large chunk of Australian businesses (i.e., the share market), mining or otherwise, are owned by foreign investors. The mining boom was once in a century golden opportunity for us to buy back some of these businesses. Of course, we knew better use of the mining boom, and used the proceeds for RE speculation. Who could have possibly known a better use? Let us go back to minding our own business of strengthening / fastening of our seatbelts, shall we? dumb_non_economist October 20, 2013 at 8:08 pm I don’t think that many here actually blame the resource sector, I think it just rankles with them the behaviour and attitude of the industry and its supporters. aj. October 19, 2013 at 2:45 pm Instead of smart arse and indulgent comments from the RBA like this one MB noted yesterday: ‘‘I think there are a lot of people, the minute housing prices start to pick up they say, ‘Oh my goodness, we’ll all be rooned’’’, Ellis said. ‘‘The minute housing prices start to pick up they imagine it’s a bubble.’’ Housing prices have been picking up recently but, taking a longer view, they have been ‘‘cycling around’’ the trend in household income, she said. How about they start earning their money and engaging with the community on the myriad of issues that Martin Wolf raises. Specifically, why is there any banker getting more than minimum wage, given that we the taxpayer needed to socialise all the bets they had used in the great ‘leverage up on property’ game. The RBA has well and truly lost its magic powers, it’s just another captured organisation that does the bidding of the finance masters. There is a reason that many bang on about the finacialisation of housing – and that is because at Martin Wolf notes at 33.10 “The financial sector in the modern western world does not lend for business – business lending is almost insignificant. Its principle job is to leverage up property assets – mostly household but also commercial property – and in the process generate, when you think about it, a massive rise in real prices of this stuff, and massive increases in household debt.” The financialisation of housing is, despite the childlike mocking of selfish bankers like Ellis, at the very heart of the leverage issues the world now faces. dumpling October 19, 2013 at 3:34 pm Aj, As I was preparing for Episode 23, a thought occurred to me. You may be aware that I earlier noted in an Episode along the lines of “Who would have thought that Darth Stevens will not care about Lando?” Come to think of it, could it be that Luke Joye’s recent turnaround stemmed from the realization that Lando will be cut loose by Darth Stevens? If so, the end game may be nearer than I originally thought…… aj. October 19, 2013 at 3:52 pm The amazing thing about economic uncertainty is that, despite the enormous energy put in by serious intellectual minds, it persists. Any knowledge that may amount to certainty is immediately absorbed by the system and changes the parameters and leads to uncertainty. As the world comes to better understand the vast leverage all hanging on the financialisation of housing the parameters will necessarily change. Darth Stevens will cut loose all in the end. dumpling October 19, 2013 at 5:14 pm I agree that I will never get bored from lack of “amazing thing”, I mean for materials for my psychology study. Just imagine how boring the world would be if everybody were like me? Ortega October 19, 2013 at 3:22 pm Ellis and the like will have their portraits painted by history – looking beautifully with a giant fried egg on their face. dumpling October 19, 2013 at 3:30 pm I think Darth Ellis is just a robot (or a droid if you follow the star wars tradition), who can be easily replaced by Darth Stevens (with another Dark side apprentice who can do a better job of spruiking). http://www.macrobusiness.com.au/2013/10/in-praise-of-housing-hanrahans/#comment-289011 fitzroy October 19, 2013 at 3:30 pm Given the over exposure of the big 4 to RE, the government has no choice but to keep the ponzi going or risk systemic failure. aj. October 19, 2013 at 3:39 pm Deep T’s comments on the aussie big four banks: http://www.macrobusiness.com.au/2013/10/rba-blows-smoke-for-banks/#comment-288758 “Implied leverage ratio 73.1x 82.2x 62.5x 86.1x 76.4x Implied capital held per $ exposure $0.014 $0.012 $0.016 $0.012 $0.013″ There is no capital in the banking system, the models as to risk are based on recent history and are deeply flawed. Delusional Economics October 19, 2013 at 3:48 pm You only need to look at the capital ratios of the LMIs to realise any significant downturn in the Australian economy is a brown spray from the fan event. Taxpayers will own genworth and QBE in a second. http://www.macrobusiness.com.au/2012/12/the-lmi-canary/ Alex Heyworth October 19, 2013 at 4:23 pm How much of Genworth and QBE’s exposure is reinsured? Who with? dumpling October 19, 2013 at 4:59 pm +1 Alex Heyworth I also thought that the liability of QBE is limited to what it already put into its subsidiaries (which is peanuts for them). If their subsidiaries go belly up, the counter party risks are concentrated to the banks. As for banks, my views are; http://www.macrobusiness.com.au/2013/08/the-bloated-business-of-banking/#comment-271230 and http://www.macrobusiness.com.au/2013/08/why-investors-should-not-buy-aussie-banks/#comment-269669 If the leverage ratio is as high as what DeepT showed, then what can you expect? Disclaimer; I do not have any exposure to either QBE / insurance industries or the banks. The counter party risks are simply too much for me….. Nudge October 19, 2013 at 3:52 pm Disco Stu, I’m not sure how you want to present your site, but you might consider sidebars with informative clips like this one in them….. Educating the mob on the why & wherefors is a must. They’re going to need a lot of stepping stones to get to a depth of knowledge like those on MB & the more informed they are, the stronger & more persuasive your base. fitzroy October 19, 2013 at 4:16 pm Thanks for the links and numbers AJ, DT and DE – big deep breath! Lori October 19, 2013 at 5:22 pm Thanks for the very good wise lecture. I realized why RBA wants to inflate house prices – THEY EXPECT THE CHINESE TO BUY EVERYTHING AUSTRALIANS OWN. This is unbelievable, shocking and disgusting. Our politicians are traitors. aj. October 19, 2013 at 7:17 pm Yes Lori – even for a cynical guy like me this was a slap in the chops. We need to turn our housing into a tradable to survive, and this is exactly what our politicians and the RBA are facilitating. It is actually incredibly sad. dumpling October 19, 2013 at 7:43 pm Lori, you are a little bit slow in your thinking today (just kidding). Actually, I agree with flawse that, ultimately, the Australian public is the problem. We just cannot accept a lower living standard and live within our means. Therefore, we keep voting for whoever tells us what we want to hear – aka populism in its most appalling extreme. Then, predictably, those who get elected go on to (1) “sell the farms” to demonstrate (at least for some time) that we indeed “deserve” the inflated living standards they promised, and (2) try everything they can to make the Australian public even more stupid so that they can get re-elected with increasingly more comfortable margin (not to mention its effects on usury) – aka “anti intellectual conspiracy”. I would be really surprised if the recent HECS stuff, the scrapping of the science ministry, etc., were unrelated to the banking masters’ hidden art of usury. I think reusachtige was right on the money the other day. http://www.macrobusiness.com.au/2013/10/joe-hockey-ponzi-lord/#comment-287524 Just suppose; if you start preaching the Australian public with messages that make sense, e.g., work hard, do not cut corners, live within your means, discard your attitude of “I want this now”, etc., do you think they will like you or hate you? Sorry, a stupid question. Everybody who tried to tell an average Australian that it is not a good idea to buy a bubble already knows the answer. I therefore think we should concentrate on how best to protect ourselves from the coming shock (aka how to strengthen and fasten our seatbelts). We can worry about the others later (they would not care about our prescriptions anyway). Bluebird October 19, 2013 at 8:03 pm +1. It’s the people as well though. I’m pretty sure most people must know that this is happening, and they rabidly voted for it last election. Australians just aren’t humans anymore. You can’t call yourself a human if you’re wilfully and smugly cannibalising your children. If I could go back in time I’d get a job at an investment bank, load up on debt, and feel zero guilt. flyingfox October 19, 2013 at 8:37 pm @Bluebird. You give the average ozzie way to much credit. Most can’t understand how a piece of policy etc impacts them let along the whole nation. Moreover their temporal perception is non existent. Edit: Re investment bank job. I have thought about that on many occasion, still do. just can’t get myself to do it … Bluebird October 20, 2013 at 9:42 am I dunno Flyingfox. I see it and hear about it all the time, people thinking that they’re Gordan Gecko because they bought before the boom and acting just like him. They dead set think they’re on par with brain surgeons. Also the amount of crap heaped on gen y, admittedly a lot of it was deserved, but little to no talk of how they are facing $1m for a basic house, that boomers got for $300-$500k in real terms. Sometimes even less. In Sydney there’s been this mentality that it doesn’t matter how you got your money, as long as you’ve got it, for a long time now. Very nasty. I think it’s been amazing to see how people like to bash bankers and all those types, but they act exactly like them if they can. Even the so call left! I don’t know if I would have had the brains and the character to be a big time IB guy. But hell, you could have just worked at Coles and loaded up on debt and have done much the same. dumpling October 20, 2013 at 1:04 pm Haha. Anybody who bought an RE after 1999 will be in for a bumpy ride. But who cares? As for investment banking, I have no doubt that I am more than capable. But, then again, I do not like the idea of people telling me to sell when it is not time to sell and/or people telling me to buy when it is not time to buy….. Let me put it this way; there is nothing I hate more than somebody grabbing my hand to force a silly move when I am playing chess…… so no thanks! PhilBest October 20, 2013 at 6:33 am Yes, this is a shocking end game to perpetual bubble propping up – even pricing out your own young, to the extent of favouring foreign investors over them. All to keep the vested interests in the bubble happy. The whole thing was immoral enough anyway, and this shows the extent of the moral bankruptcy. Even worse, the Chinese investor class are themselves getting rich on a racket in their own country where the poorest are kept poor and hence a source of cheap labour in perpetuity. It is madness to do deals of free trade and free capital flows with a country like this. All we do is import their conditions – an asset ownership elite, and defrauded masses. dumpling October 20, 2013 at 7:22 am “Even worse, the Chinese investor class are themselves getting rich on a racket in their own country where the poorest are kept poor and hence a source of cheap labour in perpetuity. It is madness to do deals of free trade and free capital flows with a country like this. All we do is import their conditions – an asset ownership elite, and defrauded masses” +10 I could not have expressed it better – except I would not call it “madness”. Rather, it is a well-calculated and crafty (albeit short-sighted) move by the banking complex. Could anybody please remind me; when was the last time in history in which a move toward “globalization” was in the best interest of the people (and NOT in the best interest of the bankers)? BotRot October 20, 2013 at 7:47 am PlilBest, is it a possibility as a result of this, in Australia, some or many people may become cashed up by selling their house(s), to a foreign buyer? And, despite being supercharged cashed up, not being able to afford to buy a house again? I’m trying to an end-game, if there is one, in all of this. dumpling October 20, 2013 at 8:07 am @ BotRot I know your question is directed to Phil, but if I may, I think I have answers to your questions. For the first part, I thought at one stage that it might be possible to “bail out” local punters from the gigantic mortgage debt by selling all the RE stock to cashed up Chinese. But, after I looked at relevant numbers, I concluded that that is not possible (I mean, not possible to bail ALL of them out). Our debt hole is simply too large for that trick to work (and remember, from the Chinese point of view, we are just one of their many possible destinations; is there any reason to think that they will direct all their available capital to us and not to anybody else?). As for the end-game, I think it is nearer than I had thought. The leverage ratios of the banks are insane (see above; aj/DeepT posts). Moreover, the lack of transparency over the counterparty risks is appalling, to say the least (I do not worry too much as I do not have any exposure; I just hope those who do had done their homework). There are signs of panic from housing spruikers which I interpret as their realization that they would be cut loose by the banking sector when the time comes (I mean, who can blame them? The banks will be too busy trying to save themselves). I have no idea as to how much you already know. If necessary, you can read my posts from the last few months (or from the last few years!). BotRot October 20, 2013 at 8:23 am Thanks dumpling, I know many Aussies are in super-mega debt. I had a suspicion that what is happening (in light of this video lecture), Aussies may have an opportunity to kick their own debt off to a foreigner, and come out with a bit of cash for themselves. Boy! There are enough Forsale signs up around Sydney again. There are already tears before bedtime for many. Looks like there maybe more to come. seanrace October 19, 2013 at 7:34 pm Interesting…. The elephant in the room is the aging population…. But no mention China-Bob October 20, 2013 at 1:18 pm “The elephant in the room is the aging population” Actually I dont the aging population is anywhere near the problem that it is made out to be, for the simple reason that we just wont need real people for many of the job’s they currently do. Automation and robotics will advance so much in the next 15 to 30 years that the very concept of manual work will in all likelihood disappear. Honestly this sector is advancing that quickly, industrial robots that cost $200K only a few years ago are now available at about 1/10 that price. Chinese automation firms are springing up and taking market share from the traditional European/US automation players, the new price points are creating opportunities for robotics to displace even the lowest paid worker, so long-term even the $1/day workers job is not safe. Sure businesses will remain that are “customer focused” and provide the “personal touch” but the point is that this labor will be functionally unnecessary (we could eliminate it completely…but we choose not to) IMHO all of Australia’s other problems pale in comparison to simple socioeconomic problem of defining “work” in the forth and fifth decades and of the 21st century. Our very concept of “work” and the payment for it carries with it all the baggage of protestant ethics, which simply become irrelevant when cheap personal robotics exist, (Is any job too disgusting for your robot to do?) To give you some idea of the magnitude of the change that awaits, cast your mind back to 1990. Almost nobody had a PC, the Internet hardly existed Intel386 laptops cost $3K to $5k and were barely portable, smartphones weren’t even imaginable. The list goes on and on and ALL this happened because semiconductors and electronics in general got 30% cheaper every year (year in year out, every year) Robotics is at the same inflection point today that the PC was at 20 years ago. The major difference is that these robots will be capable of doing real-world work. Unfortunately for Australia it is the high-labor-cost countries that will get the greatest benefit from low cost personal robotics, so you can expect this change to rip through Australian labor-market like a tsunami. Mav October 20, 2013 at 1:26 pm CB, if all the work is done by robots, how will the already heavily indebted and by now unemployed workers buy the products made by these robots? This is where the rubber hits the road and futurologists disappear into fantasyland. Hope you can provide a better answer. China-Bob October 20, 2013 at 2:15 pm Mav, You know what you’re absolutely right. Our least capable workers will be competing for employment with very low cost robotics and loosing out. They will have neither a job nor a personal robot, all that will be left for them is the debt/mortgage…..I’m not sure how they’ll get rid of that! You can call it Futurology or whatever makes you comfortable but mark my words this change is coming. I remember pre year 2000 there was a low cost PC initiative to get a laptop into every Indian kids hands. The project was aimed to take ten years and achieve a price point of $100 (from memory). Guess what today fully featured Android tablets are 10 times more capable than the Indian initiative and available at this price point. So never underestimate what the electronics industry can deliver when a marketable capability emerges. Mav October 20, 2013 at 2:20 pm I am not saying you are wrong. Just that the consequences of these “innovations” are not rosy at all.. Hope we don’t end up with a Mad Max style world with the robotically challenged mass of former workers turning to a life of petty and violent crime in order to eat. davidjwalsh October 22, 2013 at 1:42 pm on the money china bob (as expected) sitting here in Houston evaluating next RE investment here – watching a fascinating program on H2 on automation in the US while reading this thread……..you want to see the effect of technology / computers / robotics – look at netflix growth and business model and their incredible capacity to turn around dvd rentals via the US postal system. the world has changed and will leave behind those who don’t want to see it Explorer October 20, 2013 at 7:51 pm @Dumpling Many companies used to sign cross guarantees so that they could avoid reduce their accounting/auditing. In the early 90’s a group of banks were in litigation over this issue, with one group relying on the cross guarantees to defeat the creditor to the group company with the main tangible assets of the group. My recollection is that the cross guarantees were upheld. So if the QBE group companies have all signed such cross guarantees, it won’t matter which subsidiary is the one insuring high LVR mortgages for the banks. dumpling October 20, 2013 at 8:25 pm Thank you for your info, explorer. Sorry I did not realize that you had posted a comment addressed to me here at the bottom. So, in short, if they kept the same practice as before then QBE will find itself in deep shit. On the other hand, if they changed the practice then the banks will find themselves in deep shit. If the matter goes to the court again, it will become a survival game against time. A winning verdict in a court case would be of little value unless you are one of the last financial institutions left standing. Wonderful. I guess it will be quite a sight to behold. interested party October 20, 2013 at 9:19 pm Henley has the whole attitude captured in this video and lyrics. It has a US bent….but much is valid here in OZ. enjoy. http://www.youtube.com/watch?v=A3WoIW-s3_Y Mitch October 20, 2013 at 10:20 pm Well one thing is for sure, the debt fuelled acceleration in property prices is over the Banks just can’t expand their balance sheets any further. Anyone spruiking that property prices double every 7 years should be taken as the ravings of the insane.