As the property bubble is nationalised, it only gets worse

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.

David Llewellyn-Smith
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Comments

  1. The solution to draining this puss filled sore on the body politic is to end the private bank monopoly on operating deposit accounts at the RBA.

    Start slowly by increasing the classes of folk who will be permitted to open and operate a RBA deposit account.

    There will be plenty of non- bank organisations who will love having direct access to a 100% liquid and 100% safe financial asset.

    The early adopter individuals are likely to be few in number and will allow time for the RBA to ramp up their capacity.

    The accounts will pay no interest.

    And the RBA will not be making loans as its job is the monetary system and not debt peddling. If people want a public sector debt peddling option they can set up something up to do that but it is not the job of the RBA.

    Sure, ending the banker monopoly will require changes to some bank regulations but nothing dramatic.

    Planning the required reform beats the usual “we can’t do nothing but wait for a bust” mentality that is sadly all too common around here.

      • It fixes the problem of the banks having a monopoly of easily transferrable and stored central bank liabilities.

        They do not have a monopoly over central bank liabilities in the form of notes and coins.

        But they have been given a monopoly over central bank liabilities in the form of an account at the RBA.

        It is a useful exercise to ask yourself how is this monopoly in the public interest and why the banks are so interested in preserving this monopoly?

        If the monopoly was not important it should be no issue to end it and allow everyone to operate deposit accounts at the RBA. Why not allow non banks access to the most risk free financial asset available – liabilities of the central bank?

        If you give some thought to the implications of this monopoly you will see that most of the other problems we spend so much time talking about are linked to this completely unnecessary and out of date monopoly. Especially the issue you mention – excessive bank credit. Bank credit is effectively money in our economy and the only reason banks are allowed to create it so freely and so unproductively is closely linked to their monopoly on operating central bank deposit accounts.

        Think about what government bonds are and what the demand for bonds might be like if everyone is able to maintain a deposit account at the RBA.

        Of course there are plenty of other economic problems that require solutions but getting rid of one dysfunctional monopoly at the core of the economy is close to the top of the list.

    • RBA is the problem. One of the only developed countries to come out of the GFC with a high cash rate, the perfect opportunity to acknowledge high levels of debt and fix the issue without crashing house prices. But no, instead we get 12 years of pumping up house prices with a narrow-minded Wealth Effect policy. And now we have the idiots attempting to cover their own stupidity with “we don’t know what a high level of debt is” and “house prices are not our problem”.

      • The RBA as it presently operates is definitely the problem because effectively all it is now doing is serving the interests of the private banks and not the public interest.

        However, if the bank monopoly over accounts at the RBA is ended and everyone who wants to is able to operate a central bank deposit, the role of the RBA changes fundamentally and will definitely be in the public interest. The RBA will no longer be interested in protecting the interests of one privileged industry.

        Instead the RBA will be interested in the stability and confidence in the public money in all its forms:

        Coins
        Notes
        Deposit account balances at the RBA.

          • The RBA’s policies and methods are the result of how the monetary system currently operates.

            The general public and non-banks are not permitted to operate deposit accounts at the RBA so the only way the RBA can try to increase money in the hands of the non banks and the general public is VIA the private banks.

            The private banks create money when they create loans.

            Which means the only way the RBA can encourage the creation of money is by encouraging the debt peddling activities of the private banks.

            The wealth effect is definitely one effect of private bank debt as money creation but there is also the actual money that is created.

            If you don’t like this crazy mechanism the only really effective solution is to allow non-banks and the general public to operate deposit accounts at the RBA as that will constitute a growing source of money in the economy that is independent of private bank debt peddling.

            Here I explain the process of money creation after the bank monopoly of the RBA is ended.

            https://theglass-pyramid.com/2020/08/13/money-creation-after-myrba/

          • “If you don’t like this crazy mechanism the only really effective solution is to allow non-banks and the general public to operate deposit accounts at the RBA as that will constitute a growing source of money in the economy”
            This is a sink of money out of the economy, unless the Reserve bank is lending it out again.

            Quoting from your page:
            “MyRBA is introduced money creation will be limited to an expansion of the RBA balance sheet. Thefter MyRBA is introduced money creation will be limited to an expansion of the RBA balance sheet. The private banks will be unable to expand their balance sheet by creating bank credit from thin air (even if the process is technically limited by capital adequacy requirements etc).(even if the process is technically limited by capital adequacy requirements etc).”
            These two are unrelated. “private banks will be unable to expand their balance sheet by creating bank credit from thin air” is a function controlled by regulation that is completely independent of accounts being held or not by non banks at the RBA. The fact that banks are allowed to do this while other companies are not is a regulatory thing and could easily be changed without anything else being changed.

          • bjw678,

            “..These two are unrelated. “private banks will be unable to expand their balance sheet by creating bank credit from thin air” is a function controlled by regulation that is completely independent of accounts being held or not by non banks at the RBA. The fact that banks are allowed to do this while other companies are not is a regulatory thing and could easily be changed without anything else being changed….”

            What do you mean is a regulatory thing and could be easily changed?

            What changes are you talking about?

            Do you mean you want to remove/restrict the private banks ability to create credit AND still maintain their monopoly over deposit accounts at the RBA?

            In other words allow the banks to keep their monopoly over RBA deposit accounts and just closely regulate how they create credit.

            You certainly could try the just regulate bank credit creation approach but we have been watching the failure of attempts to do just that for the last few years.

            MPLOL
            Hayne’s ignored recommendations
            APRA-LOL

            The difficulty with the approach you recommend is that it is now very hard to impose regulations on credit creation without the regulator copping the blame for a deflating housing bubble. The banks will be running back to back ads just as they did over the last few years arguing that the government is “restricting” the supply of credit and that is hurting Australians.

            What we need is a serious alternative to debt peddler credit as money and allowing everyone to operate accounts at the RBA is that alternative.

            Tilting the monetary system towards central bank liabilities and away from debt peddler credit is the best way of dealing with the problems associated with the debt peddler credit approach.

            In other words, why try to cure a problem that has persisted for decades with regulation when there is a much simpler, practical and technically feasible alternative available.

            Ending the banker monopoly of deposit accounts at the RBA.

          • “The difficulty with the approach you recommend is that it is now very hard to impose regulations on credit creation without the regulator copping the blame for a deflating housing bubble. ”
            Your approach does nothing to avoid this, in fact it becomes guaranteed as the RBA is the sole source of new credit/money.
            Your approach is also completely feasible without anyone other than banks requiring deposits within the RBA, simply mandate that all funds loaned out must be 1 for 1 backed by a banks deposit at the RBA and voila, you are at the same point with the RBA again in complete control of money creation as money can only be lent after being created and given to the banks.

            But as you point out there is no interest in fixing the problem at all so either way won’t be implemented.

          • pfh007.comMEMBER

            bjw678,

            You are not giving enough attention to the implications of ending the bankers monopoly.

            When central bank liabilities are the basis of the monetary system and everyone can operate a deposit account at the RBA the concentration of lending is broken. All the non bank lenders are now on exactly the same level playing field as the banks when it comes to lending.

            Increasing the money available for lending is straightforward. Run a larger deficit or just make a direct deposit to all accounts. Let market allocate capital without the goosing of house lending we see now.

            If the govt wants to direct additional capital to housing it can just build or pay people to build or buy RMBS issued by home lenders.

            https://theglass-pyramid.com/2020/08/20/investment-manager-special-edition-myrba-superior-for-productive-capital-allocation/

            Banker credit as money is fundamentally different to central bank liabilities as money.

            I suggest you focus on the differences and you will start to see why the bankers hate any discussion of central bank deposit accounts for everyone. Arguably the reason they call them ‘reserves’ rather than deposits and call unsecured investments at a bank a “deposit” is not an accident. It is to ensure the public thinks of banks as the only deposit option.

            Why would anyone prefer an unsecured bank investment that pays no interest when they could have a genuine central bank deposit. The banks certainly understand the fundamental different quality of central bank deposits.

    • Goldstandard1MEMBER

      Sorry, what is crypto based on? Oh that’s right, thin air probably like cash at the moment.
      Maybe Gold and Silver are the ultimate smart play afterall…….

        • After the gold standard was removed in 1971, basically nothing. Only what people are willing to pay for it. Crypto is the same.

          The utility value will matter more as time goes on for all mediums of exchange/commodities.

          Cannot buy my groceries with either of them in Australia. Both are speculative investments.

          • “After the gold standard was removed in 1971”
            Didn’t that go the other way, USD was based on gold which was based on nothing so they just skipped the middle man.

      • Crypto is based on solid algorithms where everybody knows what the monetary policy is and what the supply is at any given time. Crypto is an accurate measuring tool that the economy has needed, but been without for too long now.

        As yields in the crypto financial sector are already far better than anything in the non-crypto financial world it will put more and more pressure on the non-crypto sector as capital begins to flee.

          • If you are implying its great for criminals, I don’t really think you understand the blockchain. In fact, I think most criminals these days would prefer to keep their activities off the public blockchain.

    • Holy sh!t! My old girlfriend used to live in the house next door to that pink fibro shack in Caringbah! 😀
      That was over 20 years ago now but I remember ol’ pinky. I also remember my girlfriend being a bit nuts (but good at BJ’s).

      This single level, two bedroom home is ideal for first home buyers, investors or for those looking to renovate/build their dream home STCA. Offering a sunny north facing aspect and located within easy access to fantastic schools, transport cafes and shops.

      $1.7M ideal for FHB? Faaark me!

      • My mate went to the Caringbah auction, he said there was 60 people bidding!

        Not sure if any of you are familiar with area but its pretty much the duplex mecca of Australia and this block is to small to build one on which makes the price even more unbelievable.

      • It’s just provides further proof that interest rates can’t rise without destruction of the entire economy and therefore won’t. Hasn’t the last 12 months taught you anything? The fiscally responsible liberal party have blown the biggest budget deficit ever to prevent that reckoning.

  2. I dispute that the rules of capitalism were in place in the previous phases, even from the late nineties. Claiming the rules of capitalism were suspended from last year sounds like post the fact rationalisation of past errors.

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