November 10, 2013

Increases In Anticipation Of Future Increases

A reader suggested this exchange as a topic. “Could there be a more relevant topic? ‘There has never been two bubbles in the same asset class in a single generation.’ Comment by Ben Jones 2013-11-08: That was Michael Orr, real estate expert at Arizona State University, that said that. It gets down to a serious question, that IMO is answered by, it’s the same bubble. It never went away. Look at how quickly some re-embraced gambling in real estate.”

“Let me ask this; did China have one bubble, or two? Or Canada, or Australia, or New Zealand, or London, or Dubai? You’ll hear lots of people say China has a bubble, but they don’t say, China’s had two bubbles in just a few years.”

From Reuters. “The Bank of England is aiming to create a financial system that can withstand sharp falls in asset prices, not to attempt the near-impossible task of stopping future bubbles, one of its policymakers said on Wednesday. Donald Kohn, who was formerly vice-chairman of the U.S. Federal Reserve and now serves as an external member of the BoE’s Financial Policy Committee, said he would be vigilant towards higher house prices, but did not aim to stop them.”

“‘Our objective is not to iron out all cycles of asset prices or credit,’ he said in a speech to the Oxford Institute for Economic Policy, echoing comments from fellow FPC member Martin Taylor last month. ‘Financial cycles, imbalances and asset bubbles will persist. It is human nature to become overly optimistic and pessimistic, to go through cycles of greed and fear. Herding behavior in markets reinforces this tendency,’ he continued.”

“Kohn said he was keeping a close eye on the housing market, adding that where booms were driven by lending, the FPC would aim to ensure lower peaks and shallower troughs in prices. ‘One particular danger sign would be evidence of a bubble dynamic in prices - that is, increases in prices in anticipation of future increases,’ he said.”

The Business Spectator. “The first obvious characteristic of the Australian market is that there has been an upward trend to Australian house prices since 1955. Is this upward trend the free market at work? Not on your Nellie. For the years from 1955 till 1983, the government’s chief intervention was negative gearing – allegedly for the benefit of landlord and tenant alike, but clearly financially directly favouring landlords – and the market was also slowly adjusting to the opposing force of the gradual removal of rent controls.”

“This makes 1985 a good date to select to compare Australia’s still-officially-denied bubble to undeniable bubbles overseas. While we didn’t blow up as fast, our bubble is now bigger in real terms than Japan’s, dwarfs America’s – though we were on a par until 2006 – and is put in the shade only by the UK and The Netherlands.”

“The other bubbles however are largely the creation of what I dub the ‘Politico-Financial Complex’ – the mixture of electorally-driven politicians and profit-driven banks that has turned out to be a far greater danger to capitalism than the military-industrial complex which exercised Eisenhower’s mind back in the early 1960s. The pen has indeed turned out to be mightier than the sword, but it is the banker’s pen, not the poet’s, that has ruled.”

“That has been the case in every bubble economy, as noted in last week’s post, with the PFC’s signature being the correlation of accelerating mortgage debt with rising house prices. Since 1980, a plethora of schemes has been introduced whose side-effects – whatever were their professed direct aims – included propelling house prices ever higher, as government policy turbocharged the reborn Australian tendency for leveraged speculation.”

“Though existing home owners were the chief beneficiaries of these schemes, their primary aim when introduced was not favouring one social class (home owners) over another (renters), but macroeconomic stimulus. The scheme certainly worked in its primary objective – stimulating the economy. But this was at the expense of its alleged secondary objective, of ‘ensuring that Australian families can gain access to adequate housing at a price they can afford.’ The second (Keating), fourth (Howard) and fifth (Rudd) incarnations of the scheme set off obvious bubbles in house prices, each one building on the legacy of its predecessor.”

“So the second key characteristic of the Australian market is that it’s one where government manipulation rules, rather than mere market forces. While this manipulation was initially aimed at macroeconomic stimulus, it has resulted in entrenched strong class interests in the housing market, with the favoured owners and landlords overwhelmingly more powerful than tenants.”

Bits Bucket for November 10, 2013

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