November 8th 2008

  Buy Issue 2792

Articles from this issue:

EDITORIAL: Economic crisis: predicted and predictable

COVER STORY: A third way? Allan Carlson's vision of a family-centred economy

CANBERRA OBSERVED: Little room to manoeuvre for Rudd Government

ECONOMIC AFFAIRS: Market failure and the difficult path ahead

SUPERANNUATION: Development bank needed for Rudd's nation-building

RURAL AFFAIRS: Minister confronted by drought's human toll

POPULATION: 'A gigantic, costly and inhumane fraud ...'

RUSSIA: Moscow's campaign of kidnapping and murder

SOUTH-EAST ASIA: Thailand, land of smiles, convulses

HUMAN RIGHTS: Sakharov Prize awarded to Chinese dissident Hu Jia

STRAWS IN THE WIND: Prologue / Just a friend of the family / Epilogue

AS THE WORLD TURNS - Quotes for our Times

OBITUARY - Vale Pat Dunne

Doctor to an aborted boy - a poem

Legalised fraud (letter)

Christian Democrats' role in WA election (letter)

BOOKS: THE BIG SQUEEZE: Tough Times for the American Worker, by Steven Greenhouse

BOOKS: EMPIRES OF THE SEA: The Final Battle for the Mediterranean, 1521-1580, by Roger Crowley

Books promotion page

Legalised fraud (letter)

by Chris Hilder

News Weekly, November 8, 2008

I think it is fair to describe the current worldwide economic mess as a prime example of legalised fraud.

The fraud was perpetrated on the United States and the world by US investment banks passing off high-risk loans as AAA quality, aided and abetted by the credit-rating agencies, the issuing of cheap credit by the US Federal Reserve and failure by politicians to appropriately regulate.

This led to completely overvalued assets (i.e., the housing and equity bubbles), which in turn led to debt-financed consumption.

The inevitable result was the eventual collapse in the value of assets and debt-financed consumption, the freezing up of credit and an economic slowdown.

The solution is to accept that the entire worldwide economy must now reset itself to a realistic valuation of assets. There must be a structural transition from consumption in the West being so reliant on credit to being more income- and savings-based.

The quicker the transition occurs, the shorter will be the economic slowdown. Governments need to facilitate the transition through fiscal policy supporting jobs and therefore income.

Ironically, lower house prices are a helpful component of the solution because this will free up a greater proportion of income for non-housing consumption, which is needed in order to compensate for the fall in debt-financed consumption. The losers, of course, are the investors in overvalued assets.

The foundation for the solution is to quarantine failed parts of the financial system via partial or complete nationalisation and to crystallise investor losses over time.

If house prices do not fall in Australia, this will interrupt the transition to more income- and savings-based consumption, although this may be masked in the short term by greater scope for interest rate cuts and fiscal stimulus.

It must be understood that, in economic terms, houses are never meant to be investments that grow in value (net of inflation) over the long term. If they do, then housing becomes unaffordable for ordinary wage-earners.

The fundamental reason why housing has become unaffordable has been bad government policies (at all levels) that have turned the supply and construction of houses into a profit- and tax-raising enterprise, rather than recognising that housing is a necessity and ensuring that supply matches demand and reflects the cost of building (with a premium for location).

This has been aided and abetted by dual-income families and first home-owner subsidies bidding up prices, and banks providing excessive credit.

The Australian government, despite all its rhetoric on housing affordability, seems intent on preventing the housing market from resetting to realistic valuations. This will undermine efforts to get housing construction moving.

Such a policy will only be "sustainable" to the extent that creditors (both domestic and overseas) continue to provide funds, and debtors borrow funds, for what would be, in international terms, a glaringly overvalued housing market.

(Mr) Chris Hilder,
Queanbeyan, NSW

Join email list

Join e-newsletter list

Your cart has 0 items

Subscribe to NewsWeekly

Research Papers

Trending articles

COVER STORY Don't grieve dumped TPP; rather, thank Trump

ENVIRONMENT U.S. Congress to investigate shonky climate report

COVER STORY Money flows freely to fuel anti-coal campaign

ENVIRONMENT Ignore claims that Antarctic ice sheet will melt away

EDITORIAL What future has Senator Cory Bernardi?

EDITORIAL Commission report demonstrates old saying about statistics

ELECTRICITY Green policies threaten energy security and jobs

News and views from around the world

Scientists criticise "hottest year on record" hype (James Varney)

States, territories slash school funding by $100 million (Stephanie Balogh)

Confirm Judge Gorsuch to the Supreme Court (Stephen Mosher)

Rescuing Governor Ahok (Bob Lowry)

Future shock: What happens when robots take our jobs? (Adam Creighton)

President Trump: Protect religious freedom (Ryan Anderson)

China to crack down further on "cult" activities (Ben Blanchard)

Polish president rules out gay marriage (Radio Poland)

U.S. state legislatures sign 334 laws in five years to restrict abortion (Micaiah Bilger)

Clinton, Trump and the politics of the English language (Ben Reinhard)

© Copyright 2017
Last Modified:
March 16, 2017, 10:40 am