Wednesday, 2 August 2006

debt

Look out for debt, says he who keeps encouraging people to take out home loans.

When Australia's unsustainable household debt bubble bursts and Howard's supposedly-battling aspirationals start really battling on weak financial ground, maybe then they'll realise that, in hindsight, eroding employment security might not have been such a good thing.

Hanrahan was right.

4 comments:

Emily said...

Bedad he was!

Apple de Messy said...

I find your strident anti-Howardism interesting. Whilst it can be effective to rally the masses behind a banner of hatred for a particular symbol, I would put it to you that it does little for genuine political debate and understanding.

Or, put another way, play the ball, not the man.

Jim said...

I was going to reply to this more quickly, but I forgot, until being reminded by Em last night.

Firstly, the ball here is household debt. I hate that middle Australia has taken on such large, and in my opinion unsustainable, levels of household debt. I also hate the policies that the current government has pushed that seem to encourage this trend, the most noticable of which is the first home-owner's grant. The Economist has also commented on this. Rising interest rates are one of the keys for turning this into a real problem when the economy downturns, I think, and the IR deals done earlier this year are going to exacerbate the problems for debt-ridden middle-Australia. Its about the policies.

I am by nature and upbringing very wary about debt, quite probably to my financial disadvantage at times, which might explain why I think this is a problem, but this blog is about my thoughts, so there it is.

Secondly, although he isn't for this issue, Howard sometimes is the ball. For better or worse, the PM is the figurehead of the Australian people, and represents us in international affairs. My problem with John Howard is that he does not present an image that I feel is too spineless and devoid of beliefs (in anything at all, good or ill, beyond his own political wellbeing) to represent my idea of the Australian character. It may be that my idea is wrong, but it still sits poorly with me.

Apple de Messy said...

I definitely agree with your general assertions, but I think we part ways on the specifics.

I totally agree that the level of debt that the average Australian has taken on is scary, and very possibly unsustainable, depending on interest rate movements. However, this starts to become a question of individual liberties: should the government control the level of debt that individuals can take on? Given that other mechanisms exist to control this already (i.e. banking lending criteria and APRA's regulation of this) I would answer this with a resounding no.

This poses a second question that you've posed as well: Has the government encouraged this behaviour? I would argue that the First Homeowner's Grant has had little to no impact on the housing bubble, given that $14,000 does not a deposit make anywhere in Australia except maybe country Tasmania. My strong impression is that investors, not first home buyers, are fueling the housing bubbles (as indeed they fuel most bubbles), and I would argue that some more important, Australia-specific drivers of investor fervour are:
1. A very long stretch of economic prosperity.
2. The 50% discount on capital gains tax.
3. A possible lack of education and understanding about the risks of debt.

I don't think the Howard government can particularly take credit for #1, they are certainly responsible for #2, and at the end of day the state governments are largely responsible for #3, because they control the school cirriculum, which is about the only time in someone's life that you can force subject matter down their neck.

However, having said all this, the fact that much of the Western world is experiencing exactly the same housing bubble as Australia indicates pretty strongly to me that the situation in fact has fat-diddly squat to do with Austrlia's / Howard's policies, and is primarily due to a period of interrupted global economic expansion coupled with historically low inflation and consequently historically low interest rates. Human greed has done the rest.

So I guess the third question (which you've posed as well) is: Is the government taking steps to ensure that we slowly deflate rather than burst the housing bubble? In this area, I freely admit that Howard/Costello's performance is looking increasingly poor. They seem to be running a loose fiscal policy, which is essentially forcing the Reserve Bank to run a tightening monetary policy, which, as you've pointed out, will all end in tears when people can't afford their repayments. However, having said that, it is difficult to rectify the glaring inefficiences in the taxation system without running a loose fiscal policy. Perhaps a topic for another day.

Which brings us around to Howard and his style of leadership. I agree that Howard is relatively spineless and devoid of beliefs, generally preferring to take a populist approach to policy-making. This is reflected in, amongst other things, in the government's loose fiscal policy. Is this a necessary consequence of democracy? I would hope not, but Howard's general popularity and extended stay as prime-minister of Australia would indicate that it is a successful technique. What is the solution to this problem then? I would imagine that a solution is that Australia becomes more interested and informed about politial and economic issues, but that seems unlikely in the near term...

Hmmmmmmmmmmmmmmmmmmmmmmmm....