In Australia’s scab grab political economy, history (even recent history ) plays no role. It’s a shame because there are, in fact, three distinct phases of the development in the great Australian property bubble. If we understood each then we might end it. So ignorance must be manufactured such that vested interests can continue their control frauds.
The first phase – “innocence” we shall call it – began in the late nineties when the Howard Government unfettered banking and taxation rules in the name of market efficiency. This was supported by a solid academic chorus of support. It held that private debt decisions were fine in the hands of consenting adults and that markets were always perfectly priced. This innocence phase ended a decade later in the worst financial crisis in nearly a century. Of course, banks borrowed hundreds of billions offshore and lent with no regard to standards, blowing up a housing bubble. The monetary regime of the time was rising interest rates as the central bank sought to contain the exuberance. That lifted the currency and hollowed out tradeable sectors, leaving the nation ever more dependent upon the bubble to grow.
The second phase of bubble expansion began with the crisis. We shall call this the “corruption” phase. As the unwieldy edifice threatened to topple via a cataclysmic rise in yields for the offshore debt, fiscal authorities stepped in and the taxpayer guaranteed all bank liabilities, as well as providing direct cash support to indebted households. These were enough to stabilise the system. But moral hazard was the price paid and banks went back to easy money mortgages with the backing of the taxpayer. There was no reckoning for the bankers that had broken the system. They were too big to fail and knew it so were bailed out. Monetary policy was now forced to fall relentlessly to stretch ruined household balance sheets ever further to keep the bubble inflating. At least the currency began to fall and we saw some repair in tradeable sectors.
The corruption phase met its end as well, this time in the pandemic of 2020. To keep the bubble from imploding, fiscal and monetary authorities were forced into direct nationalisation of the banks and household cash flow. Let’s call this the “cynical” phase. The rules of capitalism were suspended. Banking guarantees gave way to free, printed money for the banks to lend by the central bank. Household salaries were fiscally substituted for a full year. Nothing was asked of the bankers in return. They were simply told to lend on the taxpayer’s dime. The system of an independent central bank, hands-off fiscal authorities and privately held banks that were responsible for the quality of liabilities and assets devolved into an indistinguishable scrummage of private gains and public losses.
This brings us to today. In effect, the Morrison Government now owns all of the bank’s risk with none of the returns. Put another way, former glorified realtor, ScoMo, today owns and runs the bubble directly. One might think that this would raise a few alarm bells and inject some national interest animus. But no, what it has done instead is bring the idiocy of government to bear on bubble support. There is no academic and economic literature to support this outcome. Pragmatism and expediency has simply forced it.
Thus, instead of intelligent inquiry into, and reform of, the broken and bastardised version of the banking system envisioned in the 1990s, we have greedy politicians doing whatever they can to blow the bubble bigger for short term gain.
Hence we come to this:
In Australia’s scab grab political economy, history (even recent history ) plays no role. It’s a shame because there are, in fact, three distinct phases of the development in the great Australian property bubble. If we understood each then we might end it. So ignorance must be manufactured such that vested interests can continue their control frauds.
