Rabu, 04 Februari 2009

Debt and blame

Malcolm Turnbull's Coalition will oppose the Government's stimulus package because of
... the scale of the deficits and borrowing being contemplated, given the uncertain economic outlook and federal Labor's track record.... Mr Rudd has asked Parliament for permission to take us $200 billion into debt.
By coincidence, just yesterday I was having a look at some data from the Reserve Bank about debt.
The data give a handy perspective on $200 billion worth of debt, not to mention the 'track records' of government.

Our first graph shows the total money lent by banks and other financial institutions to owner-occupiers and investors, from 1991 to September last year.

(RBA Table D02: Lending and Credit Aggregates. Click on image for a better view)

That's a lot of housing debt – especially for the investors, who went from owing $10 billion in 1991 to $310 billion in 2008.

Staying with the investors for a moment: our second graph shows the loans extended to them by banks and other institutions in each month of the period - and what they spent it on.

(RBA Table D06: Lending Commitments - All Lenders. Click on image for a better view)

Apart from showing how much money investors had to throw at existing dwellings, this graph also shows a great acceleration in lending for money-throwing around 2000. What happened then?

In 2000, then-Treasurer Peter Costello changed the way capital gains tax works, so that henceforth capital gains would be taxed at half the rate at which income is taxed. This meant there was a rush of clever dicks trying to transform income into capital. This modern-day alchemy is otherwise known as negative gearing.

Here's how it works:
  • the clever dick takes on debt and buys an asset - say, a house;
  • the debt consumes income, but this income is not taxed and the price of the house rises by even more - at least, that's the plan;
  • the clever dick sells out, and now they have to pay tax - but, thanks to Costello, they pay at half the rate.
Another way of describing this sort of plan is 'gambling', because those higher prices really depended on some other clever dick or, sadly, owner-occupiers, coming up with even more money.

At the heart of the present global financial crisis is the implosion of a global bubble in asset prices, and in particular house prices, as clever dicks and desperate owner-occupiers have proved unable to continue paying for ever-greater debts.

Turnbull is hardly Costello's best mate, but he does base the Coalition's claim to better economic management on Costello's record. He should not. With his CGT reforms, Peter Costello behaved like a tout at the door to the casino.

The Prime Minister, Kevin Rudd, has also commented on the global financial crisis. It is, he says, 'a crisis which is not of our making'. On the occasion of the first of the Government's stimulus packages, he declared:
I will not sit idly by and watch Australian households suffer the worst effects of a global crisis they did not cause.
And again, on the announcement of the second package, for acted for 'Australians – who did not cause this crisis...' (that's from yesterday's Hansard - careful, that's a big pdf).

Instead, Rudd says the causes of the crisis lie in 'extreme capitalism' and, more particularly, 'unrestrained greed on Wall Street.'

True, the greed of those highrollers is audacious, shocking. But we should not ignore the role played by ordinary citizens, 'Mums and Dads', 'Australians', who borrowed and gambled on house price inflation. What is perhaps more shocking and, as Rudd's comments demonstrate, certainly harder to acknowledge, is the banality of greed.