To recap, my last post was about my tribe of children being disillusioned. They all were very down on the future: the overblown housing market; job and earning prospects are crap to non-existent; foreigners are buying the country unabated; over-paid and corrupt bankers; and the appalling choices of leaders in politics everywhere. Whilst they haven’t paid much attention to my ramblings in the past, my last post to MB did get a reaction. Besides at least two now becoming members of political parties, the children wanted more explanation of my 14-point plan to address wealth inequity.
The plan is 14-points that I believe my children’s generations should implement after they seize power. It certainly is not a plan that I’d hold out any hope that the current group of pollies would implement no matter who is in power. I also point out that the plan is a package not a pick what you like. In the short term, everyone’s a loser from the 14-point plan. But longer-term, we are all winners – even the dumb arse elites and rent-seekers who have no idea what is good for them.
My original plan’s 14 points are in italics.
- Asset values must be crunched and debt written off. This must be a political act. Nothing can be expected of bureaucrats or central banks. The independence and non-accountability of the RBA must end. The people or parliament must decide monetary policy. Over-inflated asset prices caused by policy mismanagement that distort and strangle the economy should be hit with a shock, not some attempt at a managed deflation. The shock if deliberately undertaken educates people about the importance of policy and risk. It also has the liberating effect of cleaning the slate for a reboot. Now I understand how some bright spark(s) thought that having independent central banks stopped monetary policy being dictated by politics and not rationale economic theory. Two problems here: our RBA is clearly not independent with the board stacked with vested interests and little accountability, whilst economics continues to prove itself a failed discipline. Better that the people take back control of monetary policy, at least we get to vote the policy makers in or out based on their record and accountability.
- Drop interest rates hard into real and nominal negative territory and make it clear that the next moves are up and up. This is not about increasing credit creation, it’s about actually destroying both money and debt in non-productive assets, a redistribution. It’s also about encouraging productive investment and not asset investment. Whilst on the face of it this may seem in conflict with point 1, it’s not. Dropping rates into negative whilst dropping house prices is giving borrowers assistance in repairing their balance sheets as losses mount on their beloved asset. However, it must be known that this will not last and rates will ultimately rise and rise so be frugal with any debt creation. For those with bank deposits funding those mega mortgages, they will and need to suffer capital losses. Money created by asset bubbles needs to be destroyed as much as debt reduction for borrowers, and losses for banks. For those bank depositors who want to protest against negative rates, then investment in productive businesses with perhaps an emphasis on valuing effort and labour would finally seem a good option rather than investing in asset values.
- The RBA can replace the ensuing capital flight from the banks due to the collapse of interest rates with our own form of mortgage QE to fund the banks. At this stage the AAA rating is history but banks are liquid. Dropping interest rates and house prices at the same time will certainly result in debt capital flight from both government bonds and bank issued securities, which in turn will drop the $A. Sale of these securities by offshore sellers to domestic buyers will result in hundreds of billions of dollars being extracted from the economy. Well, the banks could not cope without the RBA which would take residential mortgage backed securities as collateral to fund the banks at domestic interest rates. The RBA in effect prints to fill the funding gap and keep the system afloat. Australia wont be junk status but no more AAA for quite some time and because of the abuse by both government supported private banks and the Government using the AAA to over borrow, good riddance. The net effect of dropping the $A is positive for tradeable sector.
- No bank rescues must be made clear, with equity and bond holders taking losses from mortgage defaults as house prices fall. This will flow through to losses in almost everyone’s super funds as just about everyone will have bank share and bond exposures, but it’s the way its gotta be. Implied government guarantees for financial institutions or too big to fail ensures that bankers exploit the unpaid taxpayer support making the system fragile. System resilience is built on accountability which means no bailouts for share holders and bond holders. Unfortunately in Australia the financial system has been built to such a size (approx. 25% of ASX) that almost everyone through super has an exposure to the banks, but that’s where losses must occur to match the losses on mortgages. Fortunately the biggest losses will likely be with those that have taken the most advantage of the tax rort which is superannuation.
- Banks must increase capital against residential mortgages and overall so they are unquestionably strong on a non-risk adjusted basis. If they can’t they are nationalised with management held responsible. Any bank with only the smallest government support must have management salaries capped at say 8 X average wages. Those banks which determine their own capital requirements using internal risk based methodology are under capitalised and misrepresent comparisons with international counter parts. To be in the top quartile of global banks, Australia’s major banks need to raise another 2-3% Tier 1 equity capital and any implied government support clearly removed. The increase in Tier 1 capital will likely increase relative mortgage rates but also make it much more difficult for banks to expand credit due to the increased capital on a per mortgage basis. Banks need to be much more risk averse on their unsupported balance sheets. This also has the effect of stopping bankers from paying themselves massive salaries whilst relying on taxpayers. Aren’t we, as a society, totally sick of this rort?
- Serviceability of mortgage loans provided by banks must be based on a normalised rate of at least 8% and mortgage terms set at a maximum of 20 years. Failure to comply is a criminal offence. This won’t improve affordability in the short term, but it will once the system is recalibrated. Serviceability determines the amount borrowers are loaned on their mortgage so increasing serviceability requirements decreases lending. Serviceability requirements should be the same for owner-occupiers and investors – i.e. rental income is not included and no interest only. This, in turn, will severely dampen house prices even as interest rates are lowered. Ensuring that serviceability is calculated on normalised interest rates and short-terms will, in turn, have the effect of ensuring no rampant house price growth in the future. Breaches of this basic system requirement must be severely punished or we can guarantee that bankers will find a way to game it.
- Net immigration is reduced to a manageable 0.4% of population pa. Australia needs manageable predictable levels of immigration. Whilst it would seem obvious that high and unpredictable levels of immigration have significant detrimental effects on the existing population due to the cost of infrastructure including housing. What’s less discussed or understood is the effect on the cost of labour. Sure immigrants take jobs but they also create jobs (its not equal of course) but more than anything they create a pool of eager job seekers at the margin which effectively bids down the cost of labour or wages to the detriment of existing workers. It’s the inverse of housing (See point 11 below).
- Any tax concessions that favour housing investors over owner-occupiers – i.e. negative gearing and CGT discount – are to be removed. No grandfathering, just one big bang, gone. These selective tax benefits have turned into an abomination. There is absolutely zero evidence that for the last 20 odd years giving negative gearing, capital write-offs and CGT advantages to owners of investment properties increases the available housing or makes rental housing more affordable. It’s pork barrelling for a section of the population which must be removed. A swift kill is called for. As interest rates and taxes can rise, so can tax benefits be removed. That’s the risk a property investor takes. Banks are not supposed to consider tax benefits when assessing serviceability, so removing those benefits shouldn’t increase the risk of the mortgage book. Let’s see if that’s correct.
- Tax benefits for the wealthy through superannuation concessions to be removed immediately leaving only a small flat capped tax benefit for all. Currently superannuation is nothing more than a tax dodge for the rich. Superannuation does not of itself create wealth, it redistributes it. The theory of superannuation as a pool of savings to pay for people’s retirement appears sound on the surface but structurally its just another neo-liberal policy failure. Superannuation is not extra money – it just takes savings or money which would be in circulation and puts it in the hands of money managers that extract large rents and misdirect investment mostly away from the benefit of a large part of the populace. To argue that its necessary to damage the budget by giving large tax benefits for super when the budget is in a structural deficit and borrowing to keep afloat seems ludicrous. Whilst people should be encouraged to save for retirement, equally for Australia to have had a policy of putting aside future pension liabilities at least partially from current tax collections over the last 25 years, would have meant that younger generations would now be much better off.
- A Death and Gift tax of 20% to be introduced. Due to wealth inequity, much of accumulated wealth is unearned and needs to be clawed back to balance the ledger. Wealth inequity makes these taxes fair and must haves. Australia has $1 Trillion of foreign debt on the government’s and private bank balance sheets and the bank’s have $1.6 Trillion of mortgage assets. Money created through offshore borrowing and mortgages has been pumped into the economy and created large pockets of wealth mostly in housing but not exclusively. Certainly much of that debt cannot be repaid by Australia selling production. To save future generations from being taxed into the poor house, some relief can at least be had from Death and Gift taxes on those that benefited by borrowing and leaving that debt for future generations to deal with.
- Abolish stamp duty and replace with an annual land tax, higher for vacant property and land. Special tax for land bankers. Australia does not have a housing shortage. We don’t have tent towns and have large amounts of vacant houses. What we have is a system which allows land banking and the uncompetitive slow release of land which allows prices to be bid up at the margin whilst still meeting demand even from inflated migration levels. Whilst the cost to the buyer of transferring land must be reduced, the cost of land banking and basically allowing rent seekers to manipulate the market must be significantly increased.
- Enforce Australia’s foreign buyers of housing laws and international money laundering laws. Are we that shallow and greedy that we want to allow illegal activity and criminal money to distort our housing markets to the benefit of a few and the cost of many?
- The RBA and APRA merge with a broader mandate which includes overseeing a balance between corporate, SME and household lending, which encourages the growth of productive businesses. Management of the financial system includes no taxpayer support for any individual bank failure, but protection of the financial system as a whole as a priority along with inflation and employment. Creating APRA and breaking it away from the RBA was a big mistake. Australia followed the UK doing this in the late 1990s. The UK have now realised their mistake and remerged their PRA with the Bank of England. APRA are more accountable to the major banks than the taxpayer. APRA, even as they deny it, is incentivised to encourage too big to fail government support for banks so that they can point to system stability even though its based on the taxpayer. This suits the banks of course as they pay themselves huge bonuses enabled by taxpayer support denied by APRA. This must change and banks must be accountable and left to fail or if bailed out management is punished for offences. The RBA/APRA must be mandated for system protection without taxpayer support. Under this mandate sustainable capital levels for all banks will be a major focus.
- If the budget is still not balanced, which it won’t be, the real pain needs to start. Although commodities may assist with budget repair for a while yet, Government debt levels must at least stabilise. We must find added value stuff to sell to the world. Stuff that values labour. The government must directly support these initiatives and provide the infrastructure where the creation of stuff that values labour flourishes. Australia cannot continue to sell or mortgage our property to the rest of the world to fund our life styles. The immorality of such a strategy to future generations is not smart, it’s criminally irresponsible. We can relieve the burden by doing all the things listed above which will decrease current perceived wealth but perhaps increase our self-worth. The future needs more. We need to produce and sell valuable stuff to the rest of the world, not just property or resources. The really hard bit is finding or inventing that stuff and we sure won’t do that without major policy reform and a change of attitude about what we as the current occupiers and beneficiaries of this country are responsible for.