Wednesday, November 4, 2009


Steve Keen has long been the dangerman of Australian economic debate. I think Keen may have got a bit carried away with the time frames of his concerns about debt and about the immediate severity of any debt damage. Despite some arguments that Keen has been ignored in Australia in my estimation he's been given a fairly wide scope and got carried away with an 'end is nigh' message. It's more likely that debt damage in Australia will be slow moving rather than a rapid rupture. Australia may be vulnerable but it is not facing catastrophe.

Anyway, the following is a fairly humorous episode in Australian economic debate.

MARK COLVIN: Dr Steve Keen of the University of Western Sydney was one of the doomsayers of the global credit crisis. He argued for years that the Western world was running up an unsustainable bubble of debt and asset-price inflation which was bound eventually to cause a crash.
He might have got that right, but he's lost another bet. He made the wager about house prices with another economist, Macquarie Bank's Rory Robertson. The loser has to walk 220 kilometres - from Parliament House in Canberra to the peak of Mt Kosciuszko.
And he has to do it in a shirt with the words: "I was hopelessly wrong on house prices, ask me how."
Steve Keen spoke to economics correspondent Stephen Long.
STEVE KEEN: Well it's intriguing how governments around the world really realise we're in an incredibly serious crisis and the scale of expenditure governments have gone into has been simply unprecedented.
There's reasonable estimates to say that the level of spending that's been put in the last year and a half to fight this crisis is equivalent to the inflation-adjusted cost of the entire World War II campaign and as a result what would have been a 5 or six 6 cent fall in our output for a lot of countries, has ended up being between a 0 per cent and a 2 per cent rise.
But we can't keep on spending at the rate of World War II every year for the rest of the century.
STEPHEN LONG: Do you concede though that policy made a difference and perhaps you under estimated that the impact that policy could make in combating the situation?
STEVE KEEN: Yeah I did. I think the scale of reaction was greater than I expected. The stimulus is certainly papered over the beginning of the downturn but it's not a long-term solution.
STEPHEN LONG: Well can you tease that out for me. Why don't you see it as a long-term solution?
STEVE KEEN: Because we have a Government which has given an enormous stimulus to the economy and yet at the same time, you have a credit system which has been stimulating the economy for the previous 40 years by increasing debt levels.
And we are suddenly going to have an economy where rather than increasing debt, adding to demand, we're going to have an economy where people's attempt to reduce it is going to subtract from demand so the Government's going to be pushing against a headwind of private sector deleveraging from now on.
STEPHEN LONG: So your argument is that if America and Europe can't continue with debt-fuelled consumption and they don't have export markets that can make up the difference, there's really no way for their economies to spark a genuine recovery?
STEVE KEEN: If you look in America, you've got a business sector with the biggest level of debt its ever had in its history, a household sector with three times as much that it had back in the 1990s crisis, the biggest in its history as well, and a financial system again with the biggest level of debt its ever had. Who can there be left lend to? The only people, group they haven't lent to in America so far are already behind bars.
Now in Australia, there's a couple of differences and that scares me because I can now see a lot of property spruikers pushing for access to superannuation funds so they can lend to the superannuation funds. If that happened, we'd restore lending here but it would be a recipe for the biggest Ponzi crash in the future after a short period of apparent prosperity.
STEPHEN LONG: OK, well speaking of Australia and property, one of your predictions was that we would see a 40 per cent fall in house prices, it hasn't happened. Why not?
STEVE KEEN: Because I said over 10 to 15 years. This is one of those things where sometimes you'd like to bite your tongue afterwards for saying things like this because it's always taken out of context.
I was asked what would happen to Australian property prices in a crash and I said, I see no reason why we won't go through the same fate Japan has gone through where prices have fallen 40 per cent over a 10 to 15 year period. The statute of limitations of that prediction is 2025. We're still a few years away from then.
STEPHEN LONG: Now Steve Keen, you've got a bet with a market economist, Rory Robertson of Macquarie, involving house prices, men and mountains. Do you want to explain that bet and how it works?
STEVE KEEN: OK. Now this was sprung on me by Rory to talk at parliament house. The basic details are that if I'm wrong, I have to walk from parliament house to Mt Kosciuszko, if Rory's wrong he's got to do the walk. The conditions that Rory put forward were that if prices fall by less than 20 per cent, I have to walk. If they fall by more than 40 per cent, he has to walk, and there's a dead band in the middle.
The bet from my point of view was always peak to trough. Whatever the peak ends up being, to whatever the trough is over a 10 to 15 year period I expect it to be at a 40 per cent fall. For the sake of closure, we also agreed that the house price index was 131 on the ABS since September 2008. If it breaks that level before 2010, then I will take that as me having lost the second stage of the bet.
STEPHEN LONG: In plain and simple terms then, if house prices have gone up by the end of this year, then you have to walk from Canberra to Mt Kosciusko?
STEVE KEEN: That's right and if they then end up falling later than that stage by 40 per cent from whatever their peak is to whatever the trough ends up being, then Rory has to do a walk and he's a slightly older man than he is now.
STEPHEN LONG: And what do you reckon your prospects are at the moment?
STEVE KEEN: Virtually 100 per cent certain I'll be walking and I'd say exactly the same for him in about 10 years time. The boost to house prices courtesy of what I call the First Home Vendors Grant has been substantial.

It hasn't only pushed up lower level prices below the $500,000 mark, it's also boosted prices up to $1 million or more because when those vendors sold the houses to the first home buyers, they got an extra $30,000 or $40,000 in cash which they leveraged up to an extra $200,000 to go and buy houses in the medium to high price range.

So it's boosted prices right up and that's why I'm going to be wearing a walk to Kosciusko next year. But as the old joke line says "the harder they come, the harder they fall". We'll hit a higher peak and I think we're going to have a larger fall courtesy of that.

MARK COLVIN: The debt doomsayer Steve Keen, with Stephen Long.

No comments:

Post a Comment

Please be civil ...