Money, Power & Making The World A Better Place

Time To Tackle Property Prices With Tax Reform

We are increasingly a nation of landlords and renters rather than a nation of homeowners. With 22% of Australians owning 55% of the homes across our capital cities, the landed gentry are on the rise… As a nation, we can only be comfortable with these figures if we have lost sight of the core purpose of home ownership — providing homes.

Property has become a speculators picnic, with homes treated more like share portfolios than as a basic human need. This is how Australia has ended up with some of the worst housing affordability in the developed world and a dramatically falling home ownership rate.

Government-issued cash subsidies for first homeowners, while seemingly helpful, in fact do nothing but help push up house prices for existing homeowners. It’s a program that is good for some homeowners, but not for home ownership…

A series of tax settings – such as limiting negative gearing and replacing state-levied stamp duties with a broad-based land tax – were identified by the recent Henry Tax Review, but are considered politically difficult.

Yet new research by the Australian Housing and Urban Research Institute’s Professor Gavin Wood provides early evidence that the Henry Review’s recommendations would have a positive impact.


The crisis currently playing out on the world stage is a crisis of growth. Not, as we are regularly told, a crisis caused by too little growth, but by too much of it. Banks grew so big that their collapse would have brought down the entire global economy. To prevent this, they were bailed out with huge tranches of public money, which in turn is precipitating social crises on the streets of western nations. The European Union has grown so big, and so unaccountable, that it threatens to collapse in on itself. Corporations have grown so big that they are overwhelming democracies and building a global plutocracy to serve their own interests. The human economy as a whole has grown so big that it has been able to change the atmospheric composition of the planet and precipitate a mass extinction event.

This is so true that it’s scary… Whatever “solutions” Governments and central bankers try will fail because they have misdiagnosed the problem (or, perhaps more likely, cannot bring themselves to face the reality).

Stop trying to stimulate growth and start admitting that what we actually had was decades of unsustainable growth! It’s time to take our medicine…

This economic collapse is a ‘crisis of bigness’ The Guardian


The household savings rate is poorly named. It is in fact the ratio of household income that isn’t spent on consumption items. You cannot conclude from the ratio that people are actually “saving” the money. In fact the data suggests they are paying down debt, which in itself sounds positive but in the absence of an offsetting in-flow from another sector ( government and/or external ) it is actually deflationary when the private sector attempts this en masse. This issue is more apparent when there is already a high-level of household indebtedness and therefore no non-asset based savings buffer. With the government aiming for a surplus budget combined with Australia’s external sector deficit this “tightening of the belt” is actually having an adverse effect on the private sector. We have recently seen this manifesting in a number of areas including sluggish retail trade and house price deflation. The issue with that last point is that a large amount of household wealth is actually tied up in housing, which means that while the private sector is paying down debt in an attempt to secure its finances there is actually a risk that it is making itself poorer by doing so.

Delusional Economics debunks the RBA’s claims about Australia’s financial stability

Darwin, The Market Whiz

Who would have thought that a couple of head-butting animals could so accurately describe the folly of arms races and the woes afflicting developed world economies?! 

Who was the greater economist — Adam Smith or Charles Darwin?

Since Darwin, the pioneering naturalist, never thought of himself as an economist, the question seems absurd. Yet his understanding of competition describes economic reality far more accurately than Smith’s. Within the next century, I predict, Darwin will be seen by most economists as the intellectual founder of their discipline.

Smith is renowned for his “invisible hand” theory. According to his modern disciples, it holds that unbridled market forces harness self-interest to serve the common good. Darwin understood that individual and group interests sometimes coincide, as in Smith’s framework. But Darwin also saw that interests at the two levels often conflict sharply. In those cases, he said, individual interests trump.

A spectacular example from nature illustrates his point. The massive antlers of bull elk are often four feet across and weigh more than 40 pounds. Why so big? Darwin’s explanation began with the observation that bull elk, like males in most vertebrate species, take more than one mate if they can. If some succeed, others end up with no mate at all, making them the ultimate losers in the contest to pass along their genes. So bulls fight bitterly for females, and mutations coded for larger antler size help them win. That arms race has produced the gigantic antlers we see today.

As a group, bulls could better escape from wolves in densely wooded areas if their antlers were smaller, yet any individual bull with relatively small antlers would never win a mate. So bull elk are stuck with unwieldy antlers.

Many 19th-century social Darwinists mistook Darwin’s message to be that whatever emerges from the struggle to survive is morally praiseworthy. But Darwin believed no such thing. He understood that competition often favored traits that brought misery to all, and he knew animals like elk could do nothing about it. But human beings, who face similar conflicts, have better options.


Lending Standards And The CAD Curse

Australian banks’ reliance on foreign funding has lead to the alarming situation whereby we (as a nation of households) have borrowed from the rest of the world to buy existing houses from each other at inflated prices.


There Are No Rogue Traders, Only Rogue Banks

The $2 billion hit of UBS is being called the work of a “Rogue” Trader. This is a false and misleading statement. Why?  Because there are no rogue traders — just as there are no predatory borrowers —there are only rogue banks.

Here’s a news flash: If you issue credit, your working assumption MUST BE that there will be people who are not qualified who will try to borrow money. Your job each day is to separate qualified borrowers with the capacity to service that debt from the unqualified borrowers who do not have that ability.

Similarly, if your are in the business of using leveraged capital to speculate, then you MUST KNOW there are some people who are not competent to do so. Some of your employees (traders) will take losses, and in some cases enormous (but manageable) losses before moving on to other professions. A small few, however, may try to hide their inabilities. YOUR JOB is to separate the qualified from the unqualified, and to watch over the full lot. Thus, you establish trading limitations, leverage constraints, risk parameters.  Traders have to stay within their money lines, maximum draw downs, loss limits, etc.

A rogue trader with massive losses is a sign of complete and utter failure BY THE BANK’S MANAGEMENT.


Does The Euro Have a Future?

Unfortunately the Euro crisis is more intractable. In 2008 the US financial authorities that were needed to respond to the crisis were in place; at present in the eurozone one of these authorities, the common treasury, has yet to be brought into existence. This requires a political process involving a number of sovereign states. That is what has made the problem so severe. The political will to create a common European treasury was absent in the first place; and since the time when the euro was created the political cohesion of the European Union has greatly deteriorated. As a result there is no clearly visible solution to the euro crisis. In its absence the authorities have been trying to buy time.

In an ordinary financial crisis this tactic works: with the passage of time the panic subsides and confidence returns. But in this case time has been working against the authorities. Since the political will is missing, the problems continue to grow larger while the politics are also becoming more poisonous.

It takes a crisis to make the politically impossible possible. Under the pressure of a financial crisis the authorities take whatever steps are necessary to hold the system together, but they only do the minimum and that is soon perceived by the financial markets as inadequate. That is how one crisis leads to another. So Europe is condemned to a seemingly unending series of crises. Measures that would have worked if they had been adopted earlier turn out to be inadequate by the time they become politically possible. This is the key to understanding the euro crisis.


There is some similarity between the euro crisis and the subprime crisis that caused the crash of 2008. In each case a supposedly riskless asset—collateralized debt obligations (CDOs), based largely on mortgages, in 2008, and European government bonds now—lost some or all of their value.

George Soros asks Does The Euro Have A Future?

Ummmm… Does a page in history count as having a future?


From 2001 to 2008 we basked in the illusion of wealth creation delivered by 15 per cent per annum credit growth and the wealth effect of asset price inflation. As a nation we over-invested in real estate and corporate executives were deflected into financial engineering rather than building businesses with an efficiency focus. With oligopolistic market shares, negligible global competition in several industries and the ability to pass on cost increases; until recently there has been no sustained pressure for business to innovate, enhance skills, invest in technology nor drive down costs.

…The collapse in credit growth, a significant shift by households to save rather than spend and the high dollar has dramatically elevated the need for efficiency, restructuring and investment in technology. Sadly, but ultimately positively for productivity growth, there will be continuing job losses in the banking, retail and manufacturing industries.

Resources Not Enough To Sustain Prosperity

Well said, Mr Orgill. Well said!


The Great Bank Robbery

“
For the American economy – and for many other developed economies – the elephant in the room is the amount of money paid to bankers over the last five years. In the United States, the sum stands at an astounding $2.2 trillion for banks that have filings with the US Securities and Exchange Commission. Extrapolating over the coming decade, the numbers would approach $5 trillion, an amount vastly larger than what both President Barack Obama’s administration and his Republican opponents seem willing to cut from further government deficits.

That $5 trillion dollars is not money invested in building roads, schools, and other long-term projects, but is directly transferred from the American economy to the personal accounts of bank executives and employees. Such transfers represent as cunning a tax on everyone else as one can imagine.
”

The Great Bank Robbery

For the American economy – and for many other developed economies – the elephant in the room is the amount of money paid to bankers over the last five years. In the United States, the sum stands at an astounding $2.2 trillion for banks that have filings with the US Securities and Exchange Commission. Extrapolating over the coming decade, the numbers would approach $5 trillion, an amount vastly larger than what both President Barack Obama’s administration and his Republican opponents seem willing to cut from further government deficits.

That $5 trillion dollars is not money invested in building roads, schools, and other long-term projects, but is directly transferred from the American economy to the personal accounts of bank executives and employees. Such transfers represent as cunning a tax on everyone else as one can imagine.