Myth Busting: Australia’s Economic Superheroes.

Recently whilst browsing through a local bookshop I came across a title that caught my attention, probably because it had a cartoon of Peter Costello dressed in a tight fitting super-hero costume. Its title was also very catchy Ozonomics: Inside the Myth of Australia’s Economic Superheroes.

The Author Andrew Charlton is an economist  and his thesis seems to describe an ongoing debate here at Blogocrats.  Last year in an opinion piece published by SMH Charlton asserts:

In Australia the battle for the title of “better economic manager” has become one of competing narratives. Howard and Peter Costello, backlit by the conspicuous boom, have an obvious advantage over the Labor story which is unflatteringly silhouetted against the recession they presided over.

Labor says its macro framework in the 1980s and micro reform in the 1990s created the bedrock for later success and that the recession was the price to be paid for progress.

In contrast, the conservatives say the Howard Government’s decisions to pay down the national debt and deliver budget surpluses have directly produced the long boom. Howard has taken credit for the prosperity and used it to position himself as an economic superhero deserving of complete trust from the electorate.

The Liberal and Labor claims deserve thorough scrutiny because what we believe about the foundation of our wealth makes a great deal of difference to how we should pursue our future.

If, as our economic superheroes would have us believe, Australia’s prosperity has been due to the superior performance of our leaders, then our job as citizens is merely to continue to passively re-elect those leaders.

But if our success is a complex combination of long-term policies and global circumstances, then our challenge is to ensure we continue constant public debate with a view to finding the right policies to sustain our position in a changing world.

Given that Australia is the beneficiary of a strong global economy and a resources boom, you would expect the economy to be creating jobs, whether the recent industrial relations reforms have helped or hindered is difficult to say.

It’s obvious in hindsight that Charlton’s comments came just before major cracks finally appeared in global financial markets and economies as well as our own misplaced belief that a strong resources boom would help us avoid any calamities that would befall other major economies.

The comment  I find most interesting is “the conservatives say the Howard Government’s decisions to pay down the national debt and deliver budget surpluses have directly produced the long boom. Howard has taken credit for the prosperity and used it to position himself as an economic superhero deserving of complete trust from the electorate.”  These claims, as many would have to agree, really get up the nose of anyone with even a modicum of commonsense and a basic understanding of economic reality.

The central point Charlton makes is valid, in my opinion: “The economy is much like a little boat on Sydney Harbour on Boxing Day. Whether the trip is calm or rocky depends much more on the weather and the wash from the bigger boats than anything that might be done internally. If the weather is bad, you cannot blame the skipper for the bumpy ride. In fact, unless you know a lot about sailing, it is hard to know whether the skipper is doing a good job in bad circumstances, or whether he’s making it worse.

The same is true of skippering the economy. If you ask Australians about the economy in the decade or so of John Howard’s prime ministership they will remember the low unemployment rates, the low inflation, low interest rates and the general mood of affluence which suffused the nation. Howard turned this prosperity into stunning electoral success.”

Tell us something we don’t know.

Author of the Land of Plenty Mark Davis counters Howard and Costello’s economic management credentials when he wrote:

“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.”

It just doesn’t get anymore succinct and to the point than that. In fact, we now know that our economy is just as vulnerable to a major economic downturn than the struggling US, leaving us facing the spectre of soaring unemployment, falling house prices and a long-drawn out economic slump.

And that, I suppose, will be all Kevin’s fault?

Charlton is right on one very important central fact that shouldn’t be lost to politicians and their egotistical whims: our success is a complex combination of long-term policies and global circumstances, and our challenge is to ensure we continue constant public debate with a view to finding the right policies to sustain our position in a changing world.”

Over to you

J Mc

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79 Responses

  1. John,

    To a large extent, our resources will still prevent us from suffering as badlyas some of the other countries, esp the US.

    Here in the Hunter, the predominant export is thermal coal and bottle necks in transport system have prevented exports from meeting demand. While demand may weaken a little, people will still need electricity in China, Japan, India etc and we will continue to supply a lot of that coal at pretty much the same rate as present. Wollongong on the other hand is predominately coking coal and demand will stagnate as global demand for steel weakens. The big question will be how much demand is created by China’s earthquake rebuilding efforts – this alone could drive much of the global economy for much of 2009 (although at no where near the rates pre Olympics).

    There is a similar story in relation to Iron Ore where demand prior to the GFC well outstripped supply. Sure demand may now be slightly below supply but this may not be as bad as it sounds. What the GFC and reduced growth has done is stop new projects and reduce the demand for labour in the mining industry. Do not underestimate the increased cost on the mining industry due to the shortages of labor and equipment. These problems have now been reduced which has actually reduced the overheads of many mining companies. This coupled with the reduced $A has meant that many mines are still quite profitable. This ‘lull’ will also allow infrastructure to catch up with the demand that will flow in 2010-2011. Provided companies can get funds to invest in these projects, I believe many will try position themselves for when things pick up- the lower costs of steel and other inputs will make these projects cheaper now as well.

    All in all, the resources sector will be a little less hectic in the coming 12-24 months, particularly the Zinc and Iron ore sectors, but it will still drive regional and State economies quite strongly. There may not be much growth in the sector but there is unlikely to be a contraction either.

  2. That’s a very interesting post John. The economy is very complex and much of its performance has nothing to do with government.

  3. I love the analogy of the boat on the harbour. Just perfect.

  4. What I love about our alleged politicians is how their statures grow in their published memoirs. Howard is working on his and it is sure to join those of Hawke and Keating in the fantasy and fiction section of your local bookseller. In Hawke’s memoirs the reader has to wait until page 13 to find out how Hawke saved the world. Ahhhhh…my hero.

    Here in beautiful downtown Parramatta we have ample supplies of toilet paper so I have not found it necessary to buy any bood authored by our alleged politicians.

  5. Sorry, Should have linked the above back into the key topic which is, of course, the role of the Government how well we sail the seas of the global economy:

    It is probably in there but our success in the resources boom was unrealted to anything we did here. Ironically, it was out innaction at a government level on skills and infrastructure that led to much of the supply constraints that pushed up the prices – had we more supply capacity at the time, the pirces for coal and iron ore would almost certainly been lower. Now that the prices are dropping back to where they probably should be (or perhaps a little lower), we have an opportunity to invest in the supply side constraints to allow us to respond once the economy picks up. This will be in part public investment (through university and infrasture spending) but also private expenditure. If we do it well now, the next boom may not be as big simply because our ability to supply the demand means that supply constraints don’t push the prices up. Query what this means for profitability though because costs of production will also be restrained through increased supply.

    What I guess I’m saying is that it was Howard’s innaction on skills and public investment in infrastructure that contributed to the ‘boom’ at least as far as resource prices go. This was however unsustainable and contributed significantly to inflation in the rest of the economy and globally. Skills training and infrastructure investment would not have prevented the GFC or reduced our exposure to it (in fact it may actually have increased it as global demand slowed) but it would have reduced the resources bubble that led to companies like Rio and Oz Mineral overextending themselves and now being in a precarious position.

  6. A great post John. Food for thought.

    I think one of the main reasons developed economies like ours, the US and Europe moreso than other economies is that our manufacturing industries have been shifted offshore.

    The reality is that other than the mining industry the majority of jobs growth in our economies has been in the sales services areas. These position do not create anything, they simple sell products and offer services.

    In addition the growth of these sectors has been a direct result of increased borrowings against property assets with people living a lifestyle from borrowings.

    When an economy starts to slow it is the sales and service industries that shrink first and this is why our unemployment rate will increase more than it would if our manufacturing industry had remained in our country.

    So watch the retail, banking,finance,broker, insurance, hospitality and accommodation sectors shed staff.

    I am not being judgemental, simply observing the actual happenings over the last 15 years. It will now all come home to roost and maybe jolt things back into a better equilibrium.

  7. Had another IT contractor mate lose his contract yesterday. Asked to leave the building immediately when his contract still had months to run.

    I still think this trickle is just the preview. When the dam breaks it is going to get very bad in IT.

  8. I am hopeful that one day the Howard years will gain it’s rightful place in history, that of the wasted years; when Australia was so prosperous that the country could have been set up to weather any storms for the next several decades. But instead the $$$$s were spent on advertising.

  9. HMMM, Costello

    The little Tugboat?

    I think you are correct in your comments Dave55, the real great contribution that howard/costello made was nothing.

  10. Tom R

    I think you are correct in your comments Dave55, the real great contribution that howard/costello made was nothing.

    Or ironically, that thier incompetence actually prevented the mining sector from growing too much which has lessened the fallout from the GFC in that sector. Somehow I don’t think they are going to take credit for that though :mrgreen:

    little Tugboat

    LOL, That works at several levels!

  11. But instead the $$$$s were spent on advertising.

    Hi min
    But the advertising was really important for the ‘weathering of the storms ahead’. Remember workchoices was going to have us all work long and hard for next to nothing so that employers could maintain the profits that they desire!

  12. Tugboat eh? Is that the real reason that Costello was always drifting around Kirribilli house? On the harbour but never allowed inside?

  13. Hi Kittyl..isn’t it difficult to believe how much things can change in only a few short months. I remember well the justifications for the squillion dollar bonuses for the elite.

    Me being of a wee bit of a suspicious mind now wonders whether these people/Howard government could foresee the storm ahead and so introduced WorkChoices in order to as you say ‘maintain the profits’.

  14. joni @ 12

    It looks like it works on more levels than I thought lol

  15. joni @ 7

    Having recently lost my job in IT just weeks before Christmas, I certainly hope that you are not correct in your feelings about the decline in IT placements, however, I think that you will be spot on.

    Many IT firms have over capitilised in my opinion, believing the spin that came out of the conservative lines that everything will keep growing indefinitely.

    Perhaps it is time for me to look elsewhere again, already 😦

    I was looking into contracting, but have heard several similar stories to yours. Unfortunately, everyone is contracting, as nobody is certain of anything.

    Things might pick up, time will tell.

  16. Tom

    Things will pick up – I have been through a few of these downturns and the fact is that businesses need to change for market and legislative reasons, and for that they need IT resources. I just hope that we can survive this downturn without too much pain.

  17. John McP,

    In reference to your launch post.

    The Australian Financial Review published an interesting article on 22-23 November 2008 p 30 titled: “Economic Heroes Beware: Revisionism is Nigh”. It was a critique of the complacency and policy laziness of Howard-Costello.

    Unfortunately AFR don’t publish most of their articles online, so if you want to see this article, your State Library should have it on microfilm.

    Following are some excerpts (experts quoted in the artilce) …

    University of Melbourne professor of economics, John Freebairn:

    “We squandered [the boom] and had a Treasurer … fiddling with the tax rate’ like Costello did.

    “It’s quite clear the things that are on the Henry tax review’s terms of reference could and should have been done four or five years ago.”

    […]

    Access Economics says the former government spent too much money … rather than implementing policies that passed the “prosperity and fairness test”.

    […]

    Business Council of Australia:

    “While Australia’s economy has expanded and changed significantly in recent years, the role and performance of government in sustaining growth, in areas such as federal-states relations, regulation, and fiscal policy, has not kept pace.”

    The article makes the point that the best and easiest time for a government to make economic reforms is during a time of prosperity when the government has money to throw around. This opportunity Howard & Costello certainly had, but their reform record was poor. It now falls to Mr Rudd and Swan to play catch-up … during a time when global conditions make the job so much more difficult.

    Thanks Johnny and Tip for nothing!

  18. Join the rest of the crew. For the past 5 years hubby has been laid off prior to Xmas..all savings gone..then they want to rehire in February. Saves a stack of $s in holiday pay etc.

  19. Conservative writer, Michael Duffy, Sydney Morning Herald , 21 December 2007:

    “The main claim made for the [Howard] government is that it managed the economy well for 11 years, but the notion on which this is based … is largely false. …

    “The main influences on the economy are various national and international trends, plus the hard work and ingenuity of the Australian people.

    “The Howard government deserves little credit for these. It demonstrated the competence required in the circumstances that arose, and for that we’re grateful, but a Labor government would probably have performed similarly.

    “Other important influences on the economy are the relevant legal and institutional arrangements, and here the Howard government was the fortunate inheritor of Hawke’s and Paul Keating’s reforms.”

    Duffy also notes that “the intellectual right did not criticise [Howard] sufficiently.”

  20. Foreign Debt June 1995 $180 billion

    John Howard, Doorstop interview, Debt Truck Launch, 20 September 1995

    “I can promise you that we will follow policies which will, over a period of time, bring down the foreign debt . . . our first priority in Government economically will be to tackle the current account deficit.”

    Foreign Debt March 2007 $521 billion

  21. Caney..the intellectual right did not criticise Howard at all. Just a few guffaw noises which were quickly buried under the tablecloth.

  22. Min, he had them totally in thrall, and still does … as we will see again when the right-wing apologists around here come out of the woodwork to defend his economic “honour”.

    Their mindset reminds me of a starstruck swooning adolescent. Quite sad, given that these people are grown-up and supposedly capable of independent thought and analysis. All we get is inane hero-worship.

  23. Me being of a wee bit of a suspicious mind now wonders whether these people/Howard government could foresee the storm ahead and so introduced WorkChoices in order to as you say ‘maintain the profits’.

    I’m sure of it min, no proof of course!

    For the past 5 years hubby has been laid off prior to Xmas..all savings gone..then they want to rehire in February. Saves a stack of $s in holiday pay etc.

    That is just plain nasty, is it five examples of an unscrupulous employer or just the one?
    My own son was interested in an electrical apprenticeship a few years ago. He was accepted by a firm and signed apprentice papers etc. He thought he was going to have a great future, then promptly got sacked when the regular workers came back from their usual Xmas holidays – they only wanted cheap labour over Xmas.

  24. Just to make us all feel better, Howard has another 6 months max and then people will be saying Howard Who??

    I cannot believe how the media have attempted to spin it and spin it..

    I would be very interested to know how many clicks the latest about the Hero Medal awarded by George Bush received. Sweet B/a me thinks as the story seems to have disappeared very quickly.

    For historical value..(archives The Age, Sept ’07)..US President George W Bush used a speech to a summit of business leaders in Sydney to again heap praise on his close friend, the “battler” Prime Minister John Howard.

    Ah yes, JWH the little Aussie battler. Now who could have fed GWB this phrase and would GWB even know what the Australian-ism ‘a battler’ meant?

  25. Caney@17

    “Business Council of Australia:

    “While Australia’s economy has expanded and changed significantly in recent years, the role and performance of government in sustaining growth, in areas such as federal-states relations, regulation, and fiscal policy, has not kept pace.””

    Hence, part of the reason that I’ll come to resent politicians who blatantly play with the facts in order to try and make themselves look good.

  26. Joni@3

    “I love the analogy of the boat on the harbour. Just perfect.”

    From now on joni, we can refer to this anology because it is a perfect description of how the economy really works

  27. JMc

    Hence, part of the reason that I’ll come to resent politicians who blatantly play with the facts in order to try and make themselves look good.

    John, do you seriously believe there are any who don’t?

  28. 20. Caney

    A great chunk of Howard’s 96 campaign and his win was premised on the debt truck (it was hardly out of the headlines during the election), and it has irked me ever since that nothing was ever made of this great broken promise. I lost count of the amount of times Howard stated he will bring down the Foreign Account as a matter of highest priority but immediately on being elected he bought in policies that increased it, and continued to incease it until he was ousted.

    I’m just glad that this is yet another thing that history will damn Howard with.

    ——————-
    24. Min

    Several media pieces (including UK on Blair) are calling this awarding of medals to those complicit in allowing Bush to get away with one of the greatest crimes committed in modern times for what it really is, the master on his last legs throwing his faithful and mindlessly loyal lapdogs a bone.

    What upset me most about Howard’s acceptance was his statement that the medal wasn’t his but for all Australians because of their support. Well sorry Howard, most Australians, in fact a large proportion of them, didn’t support your sycophancy with George W Bush, so the medal belongs exclusively to you, and it’s a medal of shame not of valour, to go with your Irving Kristol award of shame from the extreme right wing American Enterprise Institute.

  29. Touche Tony – you got me! Tragic state of affairs isn’t it?

  30. Adrian, and this was always Howard’s modus operandi.

    I wonder how many people know about Howard stuffing up all the troops and their families and making them wait an additional 2 days just so that he could have his photo opportunity. Mind you the families had to pay for their own accommodation and additional transport costing mega per family.

  31. John @ 26,

    So the theme song for the economy in the first part of 2009 is by Split Enz – Six Months in a Leaky Boat?

    Do we have any others?

  32. Do we have any others?

    Perhaps for the Howard era: The Rime of the Ancyent Marinere?

    Hmm, but who would play the albatross.

  33. What flavour albatross?

  34. Ryan Adams: sinking ship

    While looking up that I also stumbled across this:
    http://au.youtube.com/watch?v=dnUHGT8OO3g

  35. What flavour albatross?

    “It’s bleedin’ albatross flavor!”

  36. Tony – careful!

  37. Yes, but, but…. 😳

    You just censored John Cleese:

    http://www.experiencefestival.com/a/Albatross_Monty_Python_sketch/id/1906799

  38. I know mate… which is why I am giggling

  39. LOL. Thanks anyway – you probably saved my skin.

  40. Bad move. Do not kill the albatross.
    http://etext.virginia.edu/stc/Coleridge/poems/Rime_Ancient_Mariner.html

    The ancient Mariner inhospitably killeth the pious bird of good omen.
    `God save thee, ancient Mariner !
    From the fiends, that plague thee thus !–
    Why look’st thou so ?’–With my cross-bow
    I shot the ALBATROSS.

    And it was all downhill thereon.

  41. Min @ 40

    All downhill until this 🙂

  42. What worries me most about the credit crunch is that if one of my cheques is returned stamped ‘insufficient funds’, I won’t know whether that refers to mine or the bank’s.

  43. What this post by Charlton shows is how careful we need to be about what people say and from what political group people come from. I read Charlton’s article and at the bottom on page 2 it said this

    “Andrew Charlton is an economist. His new book Ozonomics: Inside the Myth of Australia’s Economic Superheroes will be launched by Kevin Rudd on Wednesday.”

    So Showpony launched the book!!!!! How independent is this economist????? He is obviously a Howard hater in complete denial about how good the Howard/Costello govt was.

    Furthermore I believe Andrew Charlton is now working for Showpony. He could even be the “brains” behind blowing the budget surplus and encourging Australians to recklessly spend the surplus on overseas consumer goods

  44. Joni@31Before the last election ‘Ship of Fools’ by World Party was the song theme song I had for the Howard Government.

  45. Neil of Sydney

    Lol Charlton has been critical of both Labor and Liberals. The issue is that both parties and the Australian public need to know that in the scheme of things (like the global economy)” The economy is much like a little boat on Sydney Harbour on Boxing Day. Whether the trip is calm or rocky depends much more on the weather and the wash from the bigger boats than anything that might be done internally. If the weather is bad, you cannot blame the skipper for the bumpy ride. In fact, unless you know a lot about sailing, it is hard to know whether the skipper is doing a good job in bad circumstances, or whether he’s making it worse.”

    However, it’s the Liberals who got the free ride on the back of a booming economy. Now, had the Labor Government remained in power they to would have got the free ride.

    I’ve always said that Howard had been kissed on the dick by the economic fairies.

  46. You do know that Howard also launched many books Neil?

    So by your measure that makes him a show pony.

    ———————
    Difference is Mac that yes, Labor would have gotten a free ride, but first it was their economic reforms that set it up, and which Howard rode on the back of, and secondly they would have invested in skills and infrastructure, the two areas Howard failed on big time.

  47. All the attention shouldn’t be the Showrodent’s. His torpid sidekick deserves mention too.

    This is how a former Treasury secretary, describes him at “work”:

    His policy approach was nailed by John Stone years ago: “Lazy … almost entirely lacking in either courage or genuine philosophical conviction.”

    Christian Kerr, The Australian , 5 August 2008

  48. Adrian

    “Difference is Mac that yes, Labor would have gotten a free ride, but first it was their economic reforms that set it up, and which Howard rode on the back of, and secondly they would have invested in skills and infrastructure, the two areas Howard failed on big time”

    I think where the Howard Government really failed was in their obsession with economic growth at all costs they ignored the inherent dangers that go with an economy that is experiencing an extended period of good times and they bought into the concept that we’d entered a ‘new era of permanent prosperity and that it was as a result of his government’s hands off policy as far regulations were concerned.

    Take for instance the rapid increase in private debt over the Howard years which has been directly responsible for the increasing fragility of our economy and ability to weather the currently global financial crisis..

    In fact, was used to pass as safe and sensible housing investment has quickly moved to a level where the lending practicing in Australia moved increasingly towards speculative and eventually to where we are now in many cases. The Ponzi concept come to mind.

    To exaplain, Hyman Minsky used three terms to describe possible financial positions:
    1. Hedge: income flows are expected to meet balance sheet outflows in every period
    2. Speculative: the firm must roll over debt because income flows are expected to only cover interest costs
    3. Ponzi: income flows won’t even cover interest costs, so the firm must issue new liabilities at the end ofeach period to capitalize interest (or must sell-off assets).

    Note that hedge positions are relatively immune to monetary policy–unless interest rates rise tremendously it is unlikely that interest costs will exceed income flows–while rising interest rates can turn a speculative position into a Ponzi position. Similarly, falling income flows can push a speculative position into a Ponzi position.

    The shift toward speculative positions, or fragility, occurs intentionally (and more-or-less inevitably because of
    the way in which expectations are affected by success in a boom), while the shift from speculative toward Ponzi
    finance is mainly unintentional.

    Minsky’s analysis typically began with the early post-war period, following the Great Depression that
    “simplified” balance sheets. The postwar economy thus commenced with hedge positions and conservative
    strategies. Over time, as the economy performed well, success bred innovations and revisions of rules of
    thumb, which allowed margins of safety to fall. The weight of speculative finance increased in the economy as
    a whole. As the expansion proceeded, one of two events could push some units to Ponzi positions that could
    precipitate a crisis: Either interest rates could rise or income flows could fail to meet expectations. Interest rates
    could begin to rise either “endogenously” as lenders began to build in larger “lender’s risk” out of fear that
    balance sheets and become over-extended, or “exogenously” as the central bank began to fear inflation and
    thus instituted tight money policy. Alternatively, some borrowers might find income flows less than expected,
    leading to “belt-tightening” spending reductions that would cause income flows of others to fall below
    expectations. Of course, rising interest payments could also cause spending to decline (some spending is
    interest-elastic, and as interest rates rise the cost of servicing debt rises and can cause other spending to fall)
    which lowers income flows.

    Thus, over the course of an expansion, the economy moves from hedge to speculative to Ponzi finance. Minsky
    argued that this is a necessary precondition for an unstable financial system. As income flows fall and as
    lenders cut-off lending to Ponzi units, economic units try to make position by selling out position.

    This generates falling asset prices and debt deflation process.

    And so, here we are thanks to the Howard Government’s hands off and enjoy the boom ride policies.

  49. Adrian

    Taking on board the obvious failures you’ve mentioned, when viewed from a larger perspective, it’s obvious that the Howard Goverment encouraged speculative lending and borrowing off the back of ‘low interest rate’. Now, when conditions change as they have we all end up living in a world of economic pain as debt-deflation does it’s stuff. Like Greenspan, Howard and Costello held romantic views of how the economy and markets really work. And even the RBA remained silent while the madness was taking place.

    Take the example I tried to illustrate to Julie Bishop.

    Failures catastrophic for US economy
    http://blogs.theage.com.au/business/archives/2008/09/failures_catastrophic_for_us_economy.html?page=fullpage#comments
    Running up to his electoral defeat last year Mr Howard kept repeating the same dangerous mantra “interest rates are lower and people can borrow more.”

    John Howard said the heavier debt burden reflected rising affluence.

    “It is the case that people are buying ever more expensive houses, and they are doing that because of a number of factors,” the Prime Minister said. “One of them is that interest rates are lower and people can borrow more.”

    Yes, our hero was pushing a dangerous mantra indeed. In his opinion, it seemed as though a new era had arrived under his leadership.

    He then went on to say: “Debt levels are rising, but we are choosing to use the debt more productively to buy assets that traditionally rise in value, like shares and property.”

    At around the same time the Reserve Bank’s figures on household finances showed that assets were rising faster than debt (in spite of many Australian’s carrying record levels of debt). Households, they claimed had assets, including housing, superannuation and other investments, that are equal to eight times their annual income.

    I guess now it’s all Kevin’s fault that the bubbles have burst?

    And to imagine J.K. Galbraith raised his concerns about the markets and US economy (which is also applicable here) in 1998 by saying:

    There’s one thing that should warn everybody. If you forget everything else tonight, remember this, that when you hear someone say, “We have entered a new era of permanent prosperity,” then you should immediately take cover, because that shows that financial idiocy has really taken hold and that history, all history, is being rejected.

    This is the warning of the present time. We had a slight indication of that in August and September. It’s a warning that everybody should have in the back of her or his head. The effect of the speculative collapse is something which economists have not yet, even to this day, fully appreciated, because it is not the collapse that causes the trouble, but the further effect on investment, and also the further effect on consumer spending.

    A very large part of our present consumer spending is based on debt creation, credit cards, or the impression given by stock market gains or real estate gains. If and when the end comes, the economic effect will be the drying up, the slump, in consumer expenditure and, of course, the economic effects of that.

    * Posted by: John McPhilbin on September 29, 2008 1:11 PM

  50. Lol Adrian, in spite of my efforts I’m sure it all went over Julie’s head. I’m wondering whether Neil’s related?

    Costello reforms help Australia weather financial storm
    http://blogs.theage.com.au/business/archives/2008/10/costello_reforms_help_australia_weather_financial_storm.html?page=fullpage#comments
    On ‘All points West’ today’s question is: Is Australia’s economic miracle a mirage?

    My answer is simple yet my explanation more detailed.

    Mirage! was my answer and to quote Michael West:

    “The shape of the world economy has changed in the last 18 years. China has boomed.

    Although Australia’s GDP growth has historically tracked the US, this time we are in a particularly fortunate position of having a mining boom (although commodity prices have begun to come off sharply). And Government debt is not an issue.

    That said, Australia like the US is a current account deficit country (currently 6.2% of GDP) which means our banking system borrows from the rest of the world to support our lavish lifestyle.

    No longer can this country rely on a debt-funded spending spree to fuel a recovery. This is bad news for both the banks [business] and the consumer.”

    I know Howard and Costello laid claim to being the masters of the economy and interest rates but that is simply no longer a viable claim, and it never really was. They were simply riding a favourable economic wind.

    They were also front and center when it came to cheering Australian who took advantage of artificially low interest rates by taking on boatloads of debt. Nor did they monitor the lending practices of the financial sector, in spite, in spite of the obvious lending lunacy that was going on.

    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.

    Rewind back twelve months and I can still hear Howard repeating the same dangerous mantra “interest rates are lower and people can borrow more.”

    Howard said the heavier debt burden reflected rising affluence.

    “It is the case that people are buying ever more expensive houses, and they are doing that because of a number of factors,” the Prime Minister said. “One of them is that interest rates are lower and people can borrow more.”

    Yes, our hero was pushing a dangerous mantra indeed. In his opinion, it seemed as though a new era had arrived under his leadership.

    He then went on to say: “Debt levels are rising, but we are choosing to use the debt more productively to buy assets that traditionally rise in value, like shares and property.”

    At around the same time the Reserve Bank’s figures on household finances showed that assets were rising faster than debt (in spite of many Australian’s carrying record levels of debt). Households, they claimed had assets, including housing, superannuation and other investments, that are equal to eight times their annual income.

    Mark Davis, author of The Land of Plenty writes:

    “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.”

    It just doesn’t get anymore succinct and to the point than that. And it was the Howard Government that have left us in this precarious position.

    In fact it was reported just recently that our “economy is even more vulnerable to an economic downturn than the struggling US, leaving us facing the spectre of soaring unemployment, falling house prices and a long-drawn out economic slump.

    Experts say the only way to head off a crisis is to quickly cut interest rates and improve household finances decisively.

    The bleak picture is painted by economists who point to a series of data showing how we compare to the US.

    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.”

    * Posted by: John McPhilbin on October 7, 2008 9:12 AM

  51. Dave@1&5 – Had a more careful read and I agree we are resource rich and we can expect that our resources will continue to be in demand but not up to the boom-time levels and pricing.

    Also, at the end of the day we’ll recover, however, the expectation of reaching the wealth levels reached at the peak could be many years away. A long slow recovery is my bet.

  52. Shane,

    You’ve hit the nail on the head where the threat of unemployment is concerned, there was a major major drive to shift manufacturing to places like China and consequently the low cost production also played a role in reducing global inflation for such a period that many governments and central banks believed inflation in developed economies was dead.

    I think you’re spot on:

    ” I think one of the main reasons developed economies like ours, the US and Europe moreso than other economies is that our manufacturing industries have been shifted offshore.

    The reality is that other than the mining industry the majority of jobs growth in our economies has been in the sales services areas. These position do not create anything, they simple sell products and offer services.

    In addition the growth of these sectors has been a direct result of increased borrowings against property assets with people living a lifestyle from borrowings.

    When an economy starts to slow it is the sales and service industries that shrink first and this is why our unemployment rate will increase more than it would if our manufacturing industry had remained in our country.

    So watch the retail, banking,finance,broker, insurance, hospitality and accommodation sectors shed staff.

    I am not being judgemental, simply observing the actual happenings over the last 15 years. It will now all come home to roost and maybe jolt things back into a better equilibrium.”

  53. John

    What amazes me is that the top end of town seem totally blind. Sol the Telstra boss and his team are now holding their board meeting at Las Vegas and billing Telstra.

    I as a shareholder demand this rot stop. 10,000 staff to be sacked confirmed by telstra yet the excesses at the top continue. Staff to service my problems is more important to me than the management team lapping it up at Las Vegas on a junket.

    How bad do things have to get before the top turn around and look at the real picture.

    I suppose there have been revolutions over history when the wealth goes too far. Maybe a few beheadings of CEOs is needed 🙂 ( joke) but maybe they all need to be massed sacked for the culture to change.

  54. Shane

    Beheadings? Now why didn’t I think of that! Lol

  55. Shane

    Here’s something of interest, but what happens when housing has been overpriced and unemployment and job insecurity run counter to the market:

    “Both Treasury and the Reserve Bank have been counting on the lack of housing supply in Australia to stop prices from plunging as they have in the US and Britain.”

    Layoffs loom in building industry

    http://www.theaustralian.news.com.au/story/0,25197,24889988-601,00.html

    MASS lay-offs are looming in the home building and building supplies industries as orders for new homes evaporate in the face of the financial crisis.

    There was a shock 12.8 per cent fall in the number of plans for new dwellings approved by local councils in November.

    The number of new apartment developments on the drawing boards fell 21.9 per cent in the month and is only half the level of a year ago.

    The severity of the fall, which followed three months of big interest rate cuts and the tripling of the grant for first-home buyers purchasing newly built homes, has raised concern about a much sharper downturn in the housing market and sparked calls for the Reserve Bank board to cut interest rates further when it meets next month.

    The slump in building approvals came as new Organisation for Economic Co-operation and Development research showed Australians had more of their wealth tied up in housing than people in other major developed nations.

    Non-financial assets, principally housing, represent 75.8 per cent of Australian household wealth compared with 64.8 per cent in Britain and 43.1 per cent in the US.

  56. John @ 55

    Both Treasury and the Reserve Bank have been counting on the lack of housing supply in Australia to stop prices from plunging as they have in the US and Britain.

    John, I’ve been saying this for a couple of months now. There will be some short term drop in prices but only as a result of forced sellers and buyers being prudent.

    Probably the biggest cause in drop of approvals is not lack of demand but rather lack of finance to fund the constructions. People are also unwilling to buy a house and get a mortgage with the possibility of unemployment rising. With less houses being built, demand is still going to outstrip supply in the short to medium term. Prices may have dropped a few % in the past couple of months but there is no way they will drop by the amounts seen in the US and UK. As it is, prices only need to stagnate at the moment for it to be a relative price drop and I think most people can live with that. Housing is a long term investment anyway, it’s only in the last couple of years that people have been able to make large short term gains but those days are behind us for a while (and possibly forever because I think most Governments will take policy action in the future to limit property bubbles in light of the US experience)..

  57. John

    The market will slow until such time as prices realign with the median wage. Problem with that is that rents will climb denying first home buyers the ability to save for a deposit.

    The First home Owners grant is not longer being recognised as a deopsit by some of the major banks and it looks like this will be the case with all of them soon as they tend to follow each other like sheep.

    We will have many more families sharing larger homes to combat the rental crisis.

  58. Dave, like Shane, I believe that the housing market is out of alignment with not only wages and therefore affordability, but also the availability of credit and now the tightening of credit. The housing boom is over.

    Housing for too many has simply been and will continue be unaffordable – there may just be a downward correction in the vicinity of 15-25% depending on how this plays out, in my opinion. Who knows, it may be more?

    Shane’s comments, I suspect, highlight the reality::

    “The First home Owners grant is not longer being recognised as a deopsit by some of the major banks and it looks like this will be the case with all of them soon as they tend to follow each other like sheep.

    We will have many more families sharing larger homes to combat the rental crisis.”

  59. Here’s another indication that all is not well, many of our Boomers are heading for Bust.:

    Pension demand surges 50%
    http://www.smh.com.au/news/national/pension-demand-surges-50-per-cent/2009/01/08/1231004198465.html
    “THE meltdown in Australians’ superannuation and retirement earnings has generated a sharp rise in older people having to fall back on the pension.

    The rate of age pensions being granted rose 50 per cent in the closing months of last year as the sharemarket slump cut deeply into retirement nest eggs.

    According to figures obtained by the Herald, the number of pensions granted rose from about 2000 a week in October to 3000 a week in December.

    Anxiety about plummeting incomes was even more widespread with the numbers of people applying for the pension even higher. More than 5000 a week in December claimed the age pension, up from about 3500 in September, but many of these failed to qualify.

    The decline in superannuation and other assets has also halted a trend in recent years towards part pensions, driving a higher proportion of people to qualify for the full pension because of their declining private income. The previously buoyant property and investment markets meant an increasing number qualified only for a part pension.”

  60. John

    I still maintain that part of a persons superannuation be used to guarantee the deposit on their first home. It would not be taken from super but simple invested in fixed cash income componenet to be accessed by the lender should the loan turn sour.

    This would negate the need for Mortgage Insurance which is a hefty premium on first home buyers who do not have 20% deposit for their first home.

  61. John

    Dave, like Shane, I believe that the housing market is out of alignment with not only wages and therefore affordability, but also the availability of credit and now the tightening of credit. The housing boom is over.

    John, I agree that the housing boom is over but I fail to see why the affordability ‘crisis’ is the reason for this. House prices are high simply based on demand. Affordability will cap it for a lot of people but not everyone. I can’t see any economic reasoning why simple affordability problems will result in a decrease in housing prices (other than forcing people to rent but then those that can afford to buy will and they will rent out the properties).

    I will say it again, the only reason house prices have dropped at the moment is that there are desperate sellers. No one is an anxius buyer, especially in the current economic uncertainty – accordingly, current deamnd is down. But these non-buyers are still ‘in the market’ for a house and if they aren’t buying because of the uncertainty, they’ll be renting. Hence increases in rentals which is just as unaffordable as expensive house. Ultimately these people will re-enter the market to buy and prices will return to normal but the current drop is simply a reflection of decreased purchasing demand, not a symptom of housing being unaffordable (because the alternative to buying is renting at higher and higher rental amounts!!) The critical point here is that tere aren’t enough houses. While ever demand for housing in a given area outstrips supply, prices will go up – it’s simple economics. There is a cap to this but that cap is the amount the second highest bidder pulls out at. What might be unaffordable for most of us, definately isn’t for some people!

    If house prices do drop, the drop will only occur in 2 areas – the very upper end of the market (ie $1M + housing) and the very outer suburbs. The former because the very wealthy will have been hit by stockmarket losses. The second because people opt to rent rather than buy. Both will pick up the slack pretty quickly once the economic conditions start to improve again.

    The reason I say the boom is over is because there will be far more Government and regualtory intervention to prevent housing (and other) bubbles created on the back of cheap debt from occurring in the future. Hopefully lessons have been learnt from the US experience.

  62. Shane @ 60

    Sounds sensible to me. Risk is I guess that it just keeps the bubble inflated which doesn’t help housing affordability. If banks don’t accept the whole FHG as a deposit, that’s probably not such a bad thing and may keep prices flat for some time.

    The people I feel for at the moment aren’t the home owners but rather the people who have to sell for one reason or another. It’s only the people desperate to sell at the moment that are losing out. For the rest of us, it’s just like shares, only the value of our houses hasn’t dropped by as much as the stockmarket has!

  63. Dave55

    Mate I don’t think prices will drop much, I think they will slow and even stagnate for a number of years. As always some areas will grow and some will fall but overall I believe the market will stagnate for around 5 years.

    Demand in the market to me is a bit of a double edged sword. If there is strong demand keeping prices up why are auction rates plummeting and turn around sale times extending by a number of months compared to 12 months ago.

    In addition Real Estate Agents nearly always say the market is great or good as the nature of the beast is to talk up the market they are selling. Reality could be a different story.

    Results trickling in from statistics are in my opinion still lagging from the better days with delayed settlements and of the plan purchases.

    Lets see what the results are in 6 months time because sellers must have buyers and finance is not the easy answer like it was 12 months ago even for investors. Many investors used Low Doc loans and these are slowly being phased out.

  64. Shane,

    I agree with your assessment about house prices stagnating.

    My point about demand being strong was related to housing generally (sorry – prob didn’t make that clear). Hence the poor clearance rates etc for sales. Only those people who have to are selling at the moment. Just because the house down the road sold for 20% than what everyone thought it was worth doesn’t mean your place is worth less, it just means that the seller was desperate. If you are also desperate to sell then yes, your house might also go for 20% less than its worth but that is your choice to sell into that market. This, I think, is a short term situation.

    But because housing demand is high, the lower sales rates has a corresponding increase in rental demand pushing up rents. I heard of one example in Newcastle where a place advertised for rent at $450 pw was let to the person willing to pay $600 pw.

  65. Dave55

    No doubt rents will increase but I think you will also see some areas where rents will fall. I think the longing for the 5 bedroom new house to rent is slowly being replaced with the happy to rent 3 bedroom fibro house for a much lower price.

    Especially with petrol now reducing in costs people will be happy to commute that extra distance and save themselves money.

    I rent an old queenslander out of town for $230 per week instead of renting in town at $500 per week. costs me $70 per week extra in petrol but in the end I am saving $200 per week.

  66. Dave and Shane

    We live in very interesting times for sure.

    My guess with high rents is that in many cases those who used increasing equity to support multiple loans to increase their housing portfolios are struggling but how long can this last?

  67. I am getting the feeling that some developers are well and truly stuffed by the demise of easy loans. For example, a local new housing development is stuggling to sell newly built houses. I wonder why..priced at $750,000 in an area where the median house price is $461,250.

    Older people don’t want to live in a bland housing estate and young people are now no longer prepared to risk taking out such a huge loan.

  68. MIn

    you are correct the easy loan demise is starting to bite as the banks issue tougher guidelines to me every day. If you want a Low Doc now you need to provide BAS statements, so in reality the Low Doc is a dying type of loan. It was used by many developers, hence the collapse of projects as funders pulled out of financing as yet completed projects.

  69. Min

    “I am getting the feeling that some developers are well and truly stuffed by the demise of easy loans. For example, a local new housing development is stuggling to sell newly built houses. I wonder why..priced at $750,000 in an area where the median house price is $461,250.

    Older people don’t want to live in a bland housing estate and young people are now no longer prepared to risk taking out such a huge loan.”

    In spite of all the reports we get about the economy and housing industry etc, much understanding comes from having a good look around at what’s actually happening around us. I’ve also had the impression that even if the government were to start hastily building affordable housing it won’t stop the current downward spiral of housing prices to more affordable levels and partly for the reasons you’ve mentioned.

  70. Shane

    You’re a good source of ‘no bull’ information. Cheers.

  71. It’s a shame that everyone else will be suffering along with the banks (Westpac isn’t alone) – especially the economy as a whole. Banks will now be looking for even more devious ways to boost their bottom line. And lending costs for both private and public uses are likely to make life much tougher. The lending boom has definitely gone bust

    “Mrs Kelly indicated the bank would in future steer clear of corporates dependent on large amounts of debt and rising asset prices to run their businesses.”

    Westpac learns the hard lesson of risky lending
    WESTPAC will tighten its lending practices and reduce its involvement in big banking syndicates as a result of the failures of Allco Finance Group and ABC Learning Centres, says the chief executive, Gail Kelly
    Mrs Kelly said after Westpac’s annual general meeting in Sydney that the size of these syndicates had become unwieldy to run when companies ran into trouble and needed to refinance debt.
    The end result was “extensive and protracted” negotiations. “We have taken these lessons on board,” said Mrs Kelly, who predicted syndicates would inevitably get smaller as foreign banks withdrew from Australia to concentrate on their home markets.
    Nonetheless, both she and the Westpac chairman, Ted Evans, were adamant that the bad debt difficulties the bank had encountered over Allco, ABC Learning, Babcock and other corporates were not a sign of any breakdown in Westpac’s lending or risk management practices.
    “What the board has learnt is that there were no systemic problems,” Mr Evans told shareholders, after being questioned about a doubling in bad debt charges in its 2008 financial year.
    However, he warned the worsening economic environment would lead to even higher loan impairment charges over the coming 12 months.

  72. “I wonder why..priced at $750,000 in an area where the median house price is $461,250.”

    Agree with you on the easy loan bit but in the case you mention I’d have to think they have double trouble. Not only are they having financing problems but there seems there could be a disconnect between the product being offered and the product being demanded in that area. How many home owners are going to pay twice the median house price for a property in the same suburb?

  73. John

    Westpac nearly went under after suffering massive losses in the early 80s by lending to Skase, Bondy and other corporate high flyers. You would have thought they learned their lesson then.

    It will all happen in another 10 to 15 years no matter what Gail Kelly says as it seems to be a cycle.

  74. Shane

    Madoff’s story is quite incredible.

  75. Hello Huh.. I agree..obviously the reason why these houses are not selling and verified by the reported downturn in new housing commencements. Same work, less profit, big reduction in turnover.

    This has been on the cards for at least the last 2 years viz housing unaffordability. Certainly the Rudd government has made a good attempt to prop things up as a temporary measure, but the problem is huge overpricing in my opinion.

    One thing caught my eye..this as an ‘affordable housing’ development on the Sunshine Coast. Blocks around 450sqm..like little doll’s houses where you can eat your dinner and listen to next door’s flushing the loo. Price $450,000. The word ‘affordable’ utilized because the houses were $15gs lower than the median.

  76. Shane,

    Westpac’s exposures here are pretty mild comparred to some of the other banks and are no where near what it was like with Skase and Bond. Of the big 4, other than the fact they probably paid too much for St George, they are probably still one of the best operators. It’s the first bank that I would buy shares in.

  77. Min,

    Price of steel and other things haven’t helped new building prices either. I don’t think there is a lot of fat in new house prices …

  78. Not certain Dave. We recently employed a professional painter (only because of my crook hands as normally I do all the painting, being my father’s daughter)..asking price $25ph. I said, Are you sure because I wouldn’t want to short change you. And so one thing is for certain, it’s not painters who are making the quids.

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