Legalised fraud (letter)by Chris HilderNews 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,