Perspective: Why ‘Market Fundamentalism’ Has Failed

Very little has been discussed about the origins of the current crisis in a larger economic framework.  So, I went hunting for something that would offer an economic-political perspective and found an excellent article by a  professor of economics in the US, which I think is excellent as and overview.

Senior Scholar L. Randall Wray is a professor at the University of Missouri–
Kansas City and director of research at the Center for Full Employment and
Price Stability.  I think you will find his theory  very insightful , thought provoking  and most of all, more suitable that the outdated ‘free market model’.  The theory he applies comes from the work of economist Hyman Minsky

What We Learned from Minsky

Minsky argued that the Great Depression represented a failure of the small government, laissez-faire economic model, while the New Deal promoted a highly successful Big Government/Big Bank model for financial capitalism.

The current crisis just as convincingly represents a failure of the Big Government/Neoconservative (or, outside the United States, what is called“neoliberal”) model that promotes deregulation, reduced supervision and oversight, privatization, and consolidation of market power in the hands of money manager capitalists.

In the United States, there has been a long-run trend that favors relatively unregulated “markets” over regulated banks that has also played into the hands of neoconservatives. The current financial crisis is a prime example of the damage that can be done by what has been called the “post-regulatory environment” (Thomas 2008).

The New Deal reforms transformed housing finance into a very safe, protected business based on (mostly) small, local financial institutions that knew their markets and their borrowers. Home ownership was promoted through long-term, fixed-rate, self-amortizing mortgages. Communities benefited, and households built wealth that provided a path toward middle class lifestyles (including college education for baby boomers and secure retirement for their parents). This required oversight by regulators, deposit insurance courtesy of the FDIC and the Federal Savings and Loan Insurance Corporation, and a commitment to relatively stable interest rates. Other policies identified by Minsky as “paternalistic capitalism” also helped to build a robust economy: cooperation with unions to ensure rising wages and thus growing consumer demand; a social safety net that also encouraged consumption;student loans that enhanced earnings capacity; and a sense of shared responsibility to take care of the young, the old, and persons with disabilities. Together, these policies reduced insecurity, enhanced trust, and promoted economic stability. Over time, however, the economy gradually evolved toward fragility. The Cold War favored investment in the leading industries, where wages were already high. Inequality grew as other sectors and workers with less education fell behind. Social programs were cut, and trickle-down economics favored the growth of inequality. Policy increasingly turned to promotion of investment in particular, and business in general, to fuel growth—rather than relying on growing consumption fueled by growing household incomes.

Because a large portion of investment in our type of economy must be externally financed, this policy mix increased the importance of finance. At
the same time, the absence of a depression in the postwar period allowed
financial wealth to accumulate, albeit increasingly in the hands of an elite. A
formally “anti-government” bias led to the erosion of many of the New Deal
reforms. In practice, however, the rising conservative ideology never really
embraced a return to the prewar small-government form of capitalism, but
rather merely substituted a meaner “big government” for the paternalistic
government of the early postwar period. Hence, the Big Government/Neocon
model replaced the New Deal reforms with self-supervision of markets, with
greater reliance on“personal responsibility” as safety nets were shredded, and with monetary and fiscal policy that is biased against maintenance of full employment and adequate growth to generate rising living standards for
most Americans. In short, the government was neither smaller nor less interventionist. However, its constituency had shifted away from America’s middle class and toward Wall Street’s money managers.

The model is in trouble—and not just with respect to the mortgage mess, as the United States faces record inequality and destruction of the middle class, a health care crisis, an incarceration disaster, and other problems beyond the scope of this analysis (Wray 2000, 2005).We must return to a more sensible model, with enhanced oversight of financial institutions and with a housing finance structure that promotes stability rather than speculation.

We need policy that promotes rising wages for the bottom half (or even
three-quarters) of workers so that borrowing is less necessary to maintain
middle-class living standards, and policy that promotes employment, rather
than transfer payments—or worse, incarceration—for those left behind.

Minsky always advocated job creation programs so that government would act as an employer of last resort—the only way to ensure that the supply of jobs would be adequate to maintain continuous full employment. Not only would this eliminate involuntary unemployment, but he also showed that it could be used to reduce inequality and poverty, while also ensuring that the government’s budget would swing countercyclically to offset recessionary forces as well as inflationary forces in a boom.

Monetary policy must be turned away from using rate hikes to preempt inflation and toward stabilizing interest rates, direct credit controls to prevent runaway speculation, and supervision and regulation—its proper role.

Minsky advocated support for small banks, and creation of a system of
community development banks—the latter only partially achieved under
President Clinton—as a viable alternative to the predatory lending practices
that did increase the supply of credit to low-income borrowers and
neighborhoods, but which is now resulting in foreclosures and vacancies.28
Unfortunately, we turned American home finance over to Wall Street, which
operated the industry as if it were a casino. The swing toward markets and
away from regulated banking greatly increased risk, while at the same time it
necessarily extended government assurance to the unregulated institutions
for the simple reason that the government cannot allow a financial crisis to
threaten the economy.What Bernanke called “The Great Moderation” is also
known as the “Greenspan put”—the belief that no activity is too risky
because the Fed will intervene if things go bad. Unfortunately, it is Chairman
Bernanke who is left to clean up the mess left by years of lax oversight and
deregulation that operated to the advantage of Wall Street.

Minsky insisted that “the creation of new economic institutions which constrain the impact of uncertainty is necessary,” arguing that the “aim of policy is to assure that the economic prerequisites for sustaining the civil and civilized standards of an open liberal society exist. . . . If amplified, uncertainty and extremes in income maldistribution and social inequality attenuate the economic underpinnings of democracy, then the market behavior that creates these conditions [has] to be constrained” (Minsky 1996). It is likely that the current crisis will make it politically feasible to devise and to put into place such institutions.


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44 Responses

  1. Ouch! Is the nightmare starting to unfold ?

    THE median house price in Perth has fallen 10 per cent since December last year, Western Australia’s real estate lobby group says.

    The Real Estate Institute of Western Australia (REIWA) said today it had recorded a four per cent drop in the value of established homes in Perth over the September quarter.

    The median house price in the capital is now $426,000 compared with $445,000 in June and $472,000 at its peak in December last year, REIWA says.

  2. There are prediciotns that our housing market could fall 20%. the thing that keeps our market stable at the moment is tghe lack of rentals, however if more people move in together to share costs as the economy shrinks then rentals will also come onto the market and this could have a negative effect on our market.

    While the rental market remains tight it will ensure our prices do not deflate like a balloon as they have in the US and the UK.

  3. Shane

    It will be very interesting to follow. I’m in two minds about exactly how hard the housing market is going to be hit simply because of the housing shortages. You’re probably close with the 20% estimate. I’d be more inclined to forecast between 20%-35%.

    This will obviously rely heavily on employment levels and the health of the housing and building industries ability to meet demands.

  4. John,

    A median house price of over 400K is in my mind ridiculous…where is the value?

    Increasing the first home owners grant will do nothing to the lowering of values I believe.

  5. John and Shane,

    I agree that there probably will be a drop in prices over the short term but I can’t see it lasting. The people selling now are the desperate ones and the mortgage foreclosures. Smart investors or those that are cashed up or can service increased debt levels are buying but most people are staying out. It is simple supply and demand and in areas where the supply is short but demand high (ie the sought after unique (location location) areas, prices will remain good. The economy will pick up and people will start to look for what they can afford again – if and when this quickly brings prices back to where they are now, this will be an apparent 25=-30 increase but is that really a bubble or simply a re-establishment of status quo.

    I mentioned on the other thread that prices will probably stagnate for a while and this is what I believe will occur as people avoid selling at a low point in the market for fear of coming out behind on the deal. If prices stay static for 3-5 years, this is an effective price drop in real terms of around 10%-15% due to inflation. You will get cases like the Perth example where median or mean prices go down, but this is simply statistics at work rather than a true reflection of the market based on unpressured sellers. Fair enough that the point I’m arguing is an artificial measure and that the ‘market’ is what the buyers are willing to pay, but am I really so far off the mark when the buyers are actually willing to pay more but the sellers a desperate and willing to settle for less (which is the market we are in at the moment).

    I don’t disagree that we are in a housing bubble, but the reality is, this bubble is created by credit. What wealth is in the economy is in the equity that people have in their property, not the full value of the house. If house prices drop, all that happens in that this wealth that has been created is wiped out and people are placed in a perilious situation if their economic situation changes. This is why it is critical to prop up the housing industry during a period of economic down turn to enable people forced out of their houses to at least leave with their shirt on their back.

    I realise that the high prices creates a problem for new entrants – I was stung by this myself and had to rely on help from my parents. But the solution may not be in reducing these prices but rather in increasing their affordability. I don’t agree with the first homebuyers grant but it is effective in getting people over a hurdle of market entry and giving them some equity to fall back on.

  6. Dave55
    ” I don’t disagree that we are in a housing bubble, but the reality is, this bubble is created by credit. What wealth is in the economy is in the equity that people have in their property, not the full value of the house. If house prices drop, all that happens in that this wealth that has been created is wiped out and people are placed in a perilious situation if their economic situation changes. This is why it is critical to prop up the housing industry during a period of economic down turn to enable people forced out of their houses to at least leave with their shirt on their back.”

    Very thoughtful analysis Dave, it certainly can’t be dismissed.

    On the one hand I’m concerned about the amount of foreclosures that will occur as ongoing affordability and tighter credit controls. All of this, of course, is dependent on how the real economy (inflation and employment) travels from here.

    Scaper

    “A median house price of over 400K is in my mind ridiculous…where is the value?

    Increasing the first home owners grant will do nothing to the lowering of values I believe.”

    And apparently around $430K is the median price of housing in Australia. The first homeowners grant certainly allowed many people to enter an over-heated market.

    I just can’t let go of the impression I get about a fairly major slump in housing prices. Let’s say we could increase the volume in housing tomorrow by 1 million and the starting price was around $350-$400K, how many people would be willing or able to take on the type of debt it would create. How many would be able to afford a down-payment?

    I’m just not confident that that many Australian’s are, or will be for some time to come, be in the position to afford to take on high priced mortgages.

    As was recently reported “Australia has some of the most expensive property in the world, relative to incomes, according to the Demographia International Housing Affordability Survey.

    It says the median Australian house price is 6.3 times median household income, higher than the US, Canada, New Zealand, Ireland and Britain. A median Sydney property will cost nine times the average Sydney income.

    Australia also has more debt per household than the US, with Australians owing 177 per cent of household income in mortgage and other debts compared to 138 per cent in the US.

    This is coupled with the fact Australians save an average of 0.5 per cent of their income compared to 2.6 per cent in the US.”

  7. Dave 55

    You make good points. the thing is that house prices have deviated too far from the average wage. For a few years there people were buying homes and selling them before even settling and making 10 to 20 grand in the deal. This drove prices to unrealistic levels compared to the average wage.

    Until that imbalance is rectified we do face real threats to our housing prices. I could be very wrong however even today most people are offering 10% less than the sale price of most homes and going from there.

    Real estate Agents will always talk up the market and never admit prices are falling, they are always stable or “not where we would like the market to be”. A lot of waffle for the price is going down.

    Lets see how it goes for the next 12 months.

  8. Didn’t pay any attention to the housing market prior to looking for & buying our first house about 6 yrs ago.
    From a personal perspective we have been incredibly lucky.
    We bought in Adelaide before prices skyrocketed & sold 3 yrs later when we moved back to the country where I was originally spawned. In 3 yrs the price of our house doubled (OMFG!?) so we walked away very providentially as our mortgage wasn’t severe to begin with.
    Due to house prices being considerably lower in the South East we were able to buy a much bigger house (a Buffalo Lodge in fact) on a gigantic block in the middle of town; unfknblvbl. When we bought down here I locked in the mortgage for 5 yrs at about 6.99% (I think?) & so it remains. I guess the slap in the face may come next year when we come off of our fixed rate…depending of course upon where rates then sit.

    Pure luck, not good management on my part. A huge break though, not to be underestimated in the big scheme of things. I doubt that many others have been as fortunate at my age.
    Contrast this with my brother & his wife who started looking at buying in Adelaide (in the same area) about 12 months later & things were already getting out of reach.

  9. I’ve said it once, and I’ll say it again; have you ever heard a real estate agent say: “Now is not a good time to buy”

    Not in my lifetime…

  10. Shane and John Mc,

    I’m not saying that our housing prices aren’t high – they are, but we can’t discount the fact that Australia has very high rates of saving in the form of super which many other countries don’t. When we do housing v wage salary comparisons, super isn’t generally included and this levels the playing field a little. It’s still bloody high though.

    Our housing bubble isn’t really that bad when you consider the actual cost of building a place these days. I did a rebuild quote on my place and the land value was less than $80K – that’s in a good area in Newcastle, 5 mins from the beach and less than 10 from the CBD – and that was being conservative with construction costs (of course I good a good deal from a very anxious seller). Building companies aren’t making massive profits on each house they build, rather they rely on volume for their profits. Things like council fees and sales tax also push up the price of housing but if these costs weren’t exacted here, we would have to pay for them elsewhere. Given the cost of construction, I can’t see housing prices drop by more than 10% for any sustained period – if they do, we will have a lot of builders out of work and some serious economic problems.

    The situation in WA is a little different and the prices are inflated due to excessive demand from the mining boom – the lower prices now do not so much reflect a busting bubble as opposed to supply starting to catch up with the demand. Sure some people paid too much, but this wasn’t caused by cheap credit, but rather higher wages and short supply.

    I agree that the price has probably been artificially inflated by around 10% due to the increased purchasing power for first home buyers but if these prices come off, all that has been lost by the first home buyers is the equity they received for free. A tough gig for those that payed a premium for their second house but don’t forget that they probably sold their first house for an inflated amount as well so don’t feel too much for them.

  11. Dave

    I don’t know whether you recall Mark Davis’s guest blog (still haven’t received the free copy yet LOL – many thanks to the Academy), he wrote the following:

    “Australia’s ‘age of prosperity’, as Peter Costello calls it in his memoirs, has been underwritten by the mining boom (even as manufactured exports stagnated during his tenure) and massive increases in household debt (now more than $1 trillion — about the same as the annual national output), even as the government has wound down its own debt. The national debt has in effect been privatised while, at the same time, risk has been shifted away from government and business onto the shoulders of ordinary people, in the shape of long working hours, casualisation, and the sort of uncertainty that is written in the fact that Australians take the least holidays of any western nation.”

    I, too, am concerned about the transfer of overall debt on to the shoulders of ordinary Australians. Hence the reason I argue the point I do about the levels of personal debt. The risk has been transferred in such a way that I believe will have ramifications for years to come. Homeownership being an obvious one.

  12. Yep – I remember the post and agree absolutely. This was part of my justification for applying principles of generational equity to decision making.

    I guess my points about housing above and on an earlier post were really in support of the Government’s increase in the first home buyers grant. Ordinarily I wouldn’t have supported it and I had to think about it a bit before I posted on it, but I can see how it will prop up the housing industry and keep prices higher, at least in the short term. Whether this is a good thing in the long run is yet to be seen but if it keeps prices above the mortgage threshold while the economy is down then I think it will be ok so long as prices remain down and nobody makes much money on houses for the years following (as long as they don’t make much of a loss). – the last thing we need now is for house prices to crash and all that risk that you pointed out crashing down on the ordinary Australian rather than those that profited out of it.

    Don’t forget – this 10.8Bn is a stimulus package, not fiscal reform – it is supposed to inject wealth back into the economy and give aspects of it a jolt. In so far as the housing industry is concerned, the increase in FHBG might just do this.

  13. but I can see how it will prop up the housing industry and keep prices higher, at least in the short term.

    Dave, surely lower house prices (based upon supply and demand) is better than falsely inflated prices for first home buyers – if prices came down (to where they should be) then more people could buy (not just first home buyers) and we stimulate the market as it should be…not as we would like it to be.

    BTW we own our home – it is not as asset to be used as equity – it is our home and security – we have owned just two homes. This one we rented for 12 months in 1988 when we went to PNG and the tenants (who I knew – I had worked with the husband) practically destroyed the place!

    The wife was on the local Catholic Church fete committee and stole about $250 plants out of our garden – just left holes – best pot plant stand they ever had we were informed by our friend and neighbour of 25 years!

  14. TB

    ” surely lower house prices (based upon supply and demand) is better than falsely inflated prices for first home buyers – if prices came down (to where they should be) then more people could buy (not just first home buyers) and we stimulate the market as it should be…not as we would like it to be.”

    I agree but we can’t afford a crash right now – that would be disasterous, that’s why giving larger handouts in the next 6 month period will help these people get into a market when the prices are actually down a bit. The extra cash will mean they have some more buying power and this will push up the prices meaning that those forced to sell aren’t losing out big time.

    As I pointed out above, the cost of building now is much higher than it was 5 years, or even 12 months ago – the price of steel has doubled in the past 24 mths for example. And everyone focusses on the median house prices when there are houses available for much less than this (in fact half the houses must be by definition). I’m not saying that the situation doesn’t suck, just that the response actually makes some sense at this time – what Rudd and co do in the next financial year to stabilise the housing situation is the biggest question and this may be much more difficult to deal with than the immediate threat, simply because this will require a long term solution to a situation that has been f@#ked up by short term populism for so long.

  15. Dave

    Back in March SMH reported the following, and since then conditions have deteriorated somewhat, although a reduction in interest rates help relieve the pressure additional cost associated with credit card debt and costs of living tend wo work against the benefits that lower interest rates bring:

    “THE number of families unable to pay their mortgages on time is rising as higher interest rates bite.

    The percentage of borrowers more than 30 days late in making home loan repayments increased in the December quarter, says the ratings agency Moody’s Investor Services.

    Mortgage delinquencies – late payments – reached a historic high in December, the agency’s review of residential mortgage-backed securities shows. “With the deflation of the housing bubble and higher interest rates, [an] increasing number of borrowers are running into financial difficulties as reflected by the delinquency numbers,” the report says.

    “Consequently, some weaker borrowers will lose their homes.”

    There has already been an increase in mortgagee sales in south-western Sydney, according to Moody’s. The Reserve Bank lifted interest rates three times last year. The last increase, a 0.25 percentage point increase in November, pushed the official rate to the equal highest level for a decade.

    “While Australia’s mortgage delinquency rates are below international standards, Moody’s expects the proportion of borrowers behind on their repayments to rise. “Delinquency rates will rise at a measured pace in 2007,” the Moody’s report said.

    Household debt, as a proportion of household income, has risen above 150 per cent, an all time high, Reserve Bank figures show. The percentage of household income being devoted to paying interest has also reached a record 11.3 per cent. Debt repayments are now soaking up a larger proportion of household income than when mortgage rates reached 17 per cent in 1989.

    Household debt has doubled in the past five years to $960 billion. About 85 per cent of household debt is for housing, but credit card debt also reached a record $39 billion at the end of last year.”

  16. John McP

    This household debt level really just accentuates why we can’t afford to have major falls in housing prices in the present economic conditions.

    The situation really isn’t pretty and the Government needs to look at housing affordability generally and how to ween people off their debt addiction (although I think that the RBA gave them a bit of a scare with the rate rises. As I kept saying in the lead up to the last election, as long as debt levels remain as high as they are and people as leveraged as they currently are, there was never any chance that interest rates would reach the levels they did in the early 80s and 90s; the simple reason being that the rates wouldn’t need to get that high to have the same effect. This might actually be the conundrum we have to face, moderate or low interest rates but high housing prices and debt levels, or low debt levels and cheaper houses but much higher interest rates when inflation becomes a problem.

  17. The major problem is we still have debt, whether the country has government or private debt it is still debt owed by our country to overseas interests. Moving debt from public to private really does nothing as if we do not pay for the costs in taxes, we pay for the costs in interest, fees, charges, tolls, levies, you name it.

    Debt is debt. The problem is our public debt was used for infrastructure for our future. Our private debt is being used for a lifestyle which in the end ( as is now being evidenced) is not sustainable. Private debt benefits Banks. Public debt benefits all provided it is used correctly.

    We borrowed for the Sydney Harbour Bridge, Snowy Mountains Hydro Scheme, Opera House and many other infrastructure projects. So public debt used for the correct purpose is just as good as a home loan as it is building an asset for the future good.

  18. Public + Private Debt = ? in the long term?

    Yes, debt is debt, but that depends and how well it is allocated and the long term returns it helps generate..

  19. Public + Private Debt = ? in the long term?

    The US will be a very expensive experiment … I shudder to think how the US will repay it’s debts if China loses faith in the dollar and stops propping it up. If the internal Chinese demand and increased demand from Brazil and India show China that it can survive quite well without the US, they could decide to take a bath of their loans to the US and let the dollar slide. If this happens, I think we will do OK and won’t be hit too much by the fall-out but Europe will.

  20. I actually think it is of more concern when the massive debt is private.

    If the debt is public we can raise taxes or in the worst case secnario simply refuse to pay ( i know banana republic language but bear with me)

    If it is private debt and the companies or perons do not repay the debt then the assets become owned by a foreign government.

    If China recalls its loans it will own a hell of a lot of assets and infrastructure in the most capitalist country on earth Does their population know that a communist country ( the idealism republicans especially loath) will possess most of their businesses and assets in the event of a true meltdown via repossession of their security.

  21. If China recalls its loans it will own a hell of a lot of assets and infrastructure in the most capitalist country on earth Does their population know that a communist country ( the idealism republicans especially loath) will possess most of their businesses and assets in the event of a true meltdown via repossession of their security.

    Shane, I doubt any of them have really thought about it – the majority probably don’t even realise that all of the bail-out money is all coming from foreign loans and the Government is spending money that it doesn’t have.

  22. All well and truly good, a very lucid article with many home truths and even gives the solution in going back to what used to be before market at all cost madness took over, but the thing that utterly shits me and has me deeply angry is the US who is the main cause of this has not learnt at all.

    I posted it in the other thread by people really should get hold of Bush’s and Paulson’s latest speeches they delivered on the back of partially nationalising their financial institutions. Take particular note of the words “Americans do not believe in nationalisation and it is only done because of a crisis”, and “Nationalisation is only being done as a last resort and only for the short term until the crisis is over.”

    If America still really believes this and goes back to its previous ways but with even more deregulation, as is being hinted, then standby for another burst in 15 – 20 years that make this one seem like the amount of Monopoly money in a single game. My only hope and belief is that the US will be marginalised in this so the next big fall will mostly be borne by them, also the fact that now over 60% of America is foreign owned so these other countries with such huge stakes in the US will put great pressure on it to reform and not go back to the old ways of greed.

  23. Amazing isn’t it. Americans deplore Nationalisation but fall back to is as a means of saving Capitalism.

    Am I stupid or is there unbelievable hypocrisy in their belief.

    I also think the only ones spruking this type of rubbish are politicians and CEOs. I would like ot know what the real people of the US think about all this and nationalisation, maybe they are more sensible over all this.

  24. “My only hope and belief is that the US will be marginalised in this so the next big fall will mostly be borne by them, also the fact that now over 60% of America is foreign owned so these other countries with such huge stakes in the US will put great pressure on it to reform and not go back to the old ways of greed.”

    I think you’ve nailed it Adrian. Fundamental changes have to occur. Anyway, who on earth would listen to clowns like Bush and Paulson?

  25. Okay, “Amazing isn’t it. Americans deplore Nationalisation but fall back to is as a means of saving Capitalism.

    Am I stupid or is there unbelievable hypocrisy in their belief.

    I also think the only ones spruking this type of rubbish are politicians and CEOs. I would like ot know what the real people of the US think about all this and nationalisation, maybe they are more sensible over all this.”

    You guys are on a roll. I firmly believe the sentiment has changed as a result of this crisis. In fact, it’s been brewing for a number of years and it’s finally reached a tipping point.

  26. Hopefully a major rethink is on the way and it catches on here.

    How to rebuild America
    By Jeffrey D. Sachs, contributor

    (Fortune Magazine) — “It’s certainly not morning in America.
    Yet it doesn’t have to be twilight either. America can pull through the current economic crisis with a dose of political maturity and a bit of luck. Success will mean the end of the Reagan era, of an ideology that has brought the country to its knees.

    Ronald Reagan told us that government was the problem, and that low taxes and deregulation were the solutions. The result, even more than Americans recognize, is a government so shrunken in skill and mandate that our gravest problems – financial collapse, natural hazards like Hurricane Katrina, broken health care and education, unsustainable energy systems, and growing global instability – are left without a serious response.

    Either we once again invest in our future, notably through an expanded public sector, or we will lose our future. “

  27. OUCH! What did I say about tipping point

    “I fear the government has passed the point of no return,” said Ron Chernow, a leading American financial historian. “We have the irony of a free-market administration doing things that the most liberal Democratic administration would never have been doing in its wildest dreams.”

    The bailout package for A.I.G., on top of earlier government support for Bear Stearns, Fannie Mae and Freddie Mac, has stunned even European policy makers accustomed to government intervention — even as they acknowledge the shock of the collapse of Lehman Brothers.

    “For opponents of free markets in Europe and elsewhere, this is a wonderful opportunity to invoke the American example,” said Mario Monti, the former antitrust chief at the European Commission. “They will say that even the standard-bearer of the market economy, the United States, negates its fundamental principles in its behavior.”

    Mr. Monti said that past financial crises in Asia, Russia and Mexico brought government to the fore, “but this is the first time it’s in the heart of capitalism, which is enormously more damaging in terms of the credibility of the market economy.”

  28. Ouch!

    “A prominent economist has rubbished the federal government’s $1.5 billion boost for first-home buyers announced yesterday.

    University of Western Sydney associate professor of economics and finance Steve Keen said the increase in the first-home owners grant scheme continued the same policy that initially placed many mortgage holders into debt trouble.

    “It is nonsense,” Dr Keen said.

    Dr Keen said house prices were artificially inflated when the previous Howard government lifted the first-home owners grant earlier this decade.

    “That added fuel to the speculative fire of finance,” Dr Keen said. “This may not have the same impact this time around because the economic circumstances and expectations are drastically different.”

    Keeping the dream alive by trying to fuel the housing bubble seems a little counter-productive to me. All we need now is for people to get sucked into the scheme, re-inflate the bubble and wait for it to burst at a later date. Or, more sensibly, first homeowners will wait until housing prices decline to more sensible and sustainable levels.

  29. Dr Keen is dead right!

  30. Totally agree John.

    Increasing the home-owners’ grant is just delaying the inevitable, although people keep saying that there’s a housing shortage so who knows….

  31. Reb

    Now if tomorrow enough houses were made available and offered at current prices my bet is that many first homeowners would remain reluctance to enter the market simply because of all the uncertainty in the economy – especially their own job security as well as potential future hikes in interest rates and costs of living.

    I’d be questioning my own ability to afford the level of debt by taking on a large mortgage .

  32. Yes John, exactly right. Why would anyone in their right mind want to take on a half million dollar mortgage in today’s uncertain environment…

    Especially a “first” home buyer…

    Maybe it will encourage buying at the low-medium range? Which may mean that top end properties may still experience price slippage…?

  33. I don’t like the rise in the FHOG either…it’s going to put more money in the developers pockets in the long run.

    I’ve scaped over a dozen developers’ houses and was actually in management of a high profile company over the years and I have a good understanding of their mindset…I dare say a few bottles of champaigne were popped last night!

    I’m sorry, but I believe this will possibly lead to the’ business as usual’ mentality that has not only brought us to where we are, but is only delaying the inevitable.

    In fact, apart from the support of the pensioners and the low income families, I think this handout scheme sucks!

  34. Back to the old ‘greed is good’ for developers you think?

    I’m just not sure that that many people would be foolish enough to take on potentially high (even with the first homeowners grant) mortgage debt under current conditions.

    I am not at all sure the Rudd Government, and I’ve mentioned this on a number of occasions, have the wherewithal to steer us through what are rough waters ahead.

    There are a number of potential and very challenging factors that will need to be addressed.

    1. Personal debt and poor savings record: It’s claimed that AUSTRALIANS are the world’s worst when it comes to saving, an Investment and Financial Services Association report said.

    The IFSA report, released last year, showed that on average Australian households have $160 in debt for every $100 they earn.

    In fact, only recently it has been reported that bad debt and household interest servicing levels have reached historic records, even before the major banks raised their lending rates independently of the RBA.

    2. China’s inflation factor:. Ben Simpfendorfer, China strategist for the Royal Bank of Scotland, puts it succinctly: “Where China was a deflationary influence over the last 10 years, it will be an inflationary influence over the next 10 years.”

    3. Is our financial sector as solid as it claim to be?: Our banks assure us that we are in a stronger position than the US to cope with any fallout, I tend to be more skeptical. Our banks have surely been aided in earning record profits off the back of complex and risky debt arrangements with other lending institutions, businesses, and individuals in recent years? This has been a global issue not just one relating to the US alone.

  35. I still stick by my sanity saving approach which has led me to look at the whole problem in more general terms, simply because there is no avoiding the pain brought about by our addiction to debt:

    We will, in my opinion, continue getting ‘snapshots’ that are aimed at providing greater hope and optimism about the economy and our wealth status. I’m just hoping people take a more realistic view of what is really happening. Nobody wants to see a major panic or excessive pessimism, however, we’ve had well over a decade where it seems nothing could stand in our way.I personally think that our average wealth will decrease (taking away previous gains through heated housing and stock markets), credit card spending will have to slow significantly and therefore consumer spending will decline, and housing prices will continue to fall. For how long? anywhere from between 18 months to 5 years – seriously (and the 5 years is a conservative guess). The problem that some people are not seeing clearly is that many of us are leveraged to the hilt with debt and we now need to start shedding much of the excess debt we’ve been carrying – this could be a lengthy process.

  36. John,

    The problem I see with the population weaning themselves from a buy now, pay later mentality is comparable with heroin withdrawal.

    First there has to be a stop to supply then a harsh readjustment to a different lifestyle…this package is just encouraging more abuse by prolonging supply.

    Nothing will be learnt.

  37. “The problem I see with the population weaning themselves from a buy now, pay later mentality is comparable with heroin withdrawal.

    First there has to be a stop to supply then a harsh readjustment to a different lifestyle…this package is just encouraging more abuse by prolonging supply.

    Nothing will be learnt.”

    Exactly Scaper, it’s simply delaying the inevitable need to get cleaned up. Detox = De-leverage

  38. Here’s another concern – Credit Default Swap
    https://blogocrats.wordpress.com/2008/10/14/the-55-trillion-question-will-this-be-the-next-disaster/

    We don’t even know whether this thing will explode just yet, and what the potential fallout will be.

  39. John Mac, do you know of Stephen Keane of the University of NSW.

    Heard an interview with him on the way back to Nowra from the airport. He’s made more sense than just about anyone else I’ve heard on this matter.

  40. Adrian

    I’ve heard of a Michael Keane at UTS

  41. Wonder article. It really helped me a lot. This post clears lots of my doubts and concepts. Thanks for sharing the information.

  42. # 40. John McPhilbin | October 16, 2008 at 7:48 pm

    Adrian

    I’ve heard of a Michael Keane at UTS

    And the record for the longest time to reply goes to…. me!

    That must have been him I heard in a Radio National interview. Apart from your good self, nobody I have heard on this matter made more sense than this bloke.

  43. […] Perspective: Why ‘Market Fundamentalism’ Has Failed The current crisis just as convincingly represents a failure of the Big Government/Neoconservative (or, outside the United States, what is called“neoliberal”) model that promotes deregulation, reduced supervision and oversight, privatization, and consolidation of market power in the hands of money manager capitalists. […]

  44. […] Perspective: Why ‘Market Fundamentalism’ Has Failed Minsky argued that the Great Depression represented a failure of the small government, laissez-faire economic model, while the New Deal promoted a highly successful Big Government/Big Bank model for financial capitalism. […]

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