So I will be debating the irrepressible Steve Keen at the Perennial Investment Partners annual conferences in Sydney and Melbourne later this month. Steve will commence his now famous hike from Australia’s Parliament House to Mount Kosciousko on the 15th of April after losing his bet on house prices with Macquarie Bank’s Rory Robertson.
While Steve likes to tell people that he presciently predicted the GFC, he also forecast another Great Depression, a rise in unemployment to 15 per cent plus, and a 40 per cent fall in house prices. Of course, all of these latter predictions have proven well wide of the mark: economic growth is strong, unemployment is falling, and house prices have been rising. Steve also likes to compare Australia to Japan, but forgets to tell people that Japan’s population is forecast to fall by one-third over the next four decades while Australia’s will rise by two-thirds (Japan has had negative population growth for some time now). That’s a pretty crucial difference when it comes to thinking about housing demand.
The ABC offered a summary of the bet yesterday. According to Steve, the bet was actually in ‘two parts’. But as the ABC tells it:
“While Mr Robertson disagrees that there was a second part to the bet, he says he is still happy to do the same walk if Australian house prices drop 40 per cent from any new peak during his lifetime.
“Betting the house on an economist's forecast typically is not a smart move. Unfortunately, Dr Keen recklessly encouraged everyday Australians to sell their homes at what turned out to be the peak of the global financial crisis, and the trough in local house prices,” Rory Robertson responded.
"That's why he's getting set to walk from Canberra to Mt Kosciuszko wearing a t-shirt saying, 'I was hopelessly wrong on house prices. Ask me how!"”
On the subject of house prices, the RBA Board Minutes contain some useful insights into their views on the market. This is germane in the context of the widely misunderstood asset price targeting debate.
In my post yesterday I examined in considerable detail the recent (and largely ill-informed) reportage around the Governor of the RBA’s remarks on the role that monetary policy can play, if any, in helping stabilise coincident asset price and credit booms.
I presented evidence that suggested that the equities and debt markets had actually served as key conduits for credit crises more regularly than residential real estate, and, given the significantly higher underlying risks associated with both equities and business lending, argued that these were more likely to be the subject of any monetary policy action in the event that the RBA was (a) permitted and (b) inclined to explicitly focus on asset prices to the detriment of its conventional inflation-targeting mandate.
I noted that notwithstanding the media’s claims that such action is a fait a compli, there is striking dissent at the highest levels of both Treasury and the RBA as to whether the central bank should try and delicately ‘lean against the wind’, as has been asserted in some quarters.
And I drew attention to the fact that many eminent economists from across the ideological spectrum, such as Ben Bernanke, John Maynard Keynes, and Milton Friedman, believe that there is a highly adverse empirical precedent for this kind of policymaking: all three concluded that the principal catalyst for the Great Depression was the attempts by the US Federal Reserve to pop the share market boom during the 1920s using restrictive monetary policy.
Finally, I argued that while I agree with Glenn Stevens that there is a valuable place for moral suasion, jaw-boning and ‘open mouth operations’ in the central bankers’ toolkit—as we saw the RBA very successfully effect in 2002-03—I disagreed with the claim that macro-prudential tools face the same problems as monetary policy apropos credit crises.
My point was that there is a fundamental difference between these two instruments: macro-prudential policies can be directed at cauterizing the underlying causes of concurrent credit and asset price booms—namely counter-cyclical lending standards and the inherently human tendency to overreact (positively and negatively) during good and bad times. In contrast, interest rates could only hope to influence the observable symptoms of these problems—ie, changes in asset prices—in a highly haphazard and unpredictable way with likely unsavoury consequences for the wider economy.
In any event, the RBA’s Board Minutes suggest that it is relatively relaxed about housing market conditions, and intimate that the double-digit growth in 2009 may be slowing in response to the tighter settings put in place last year:
“The housing market remained fairly buoyant, with private-sector measures suggesting price growth of 10–12 per cent over 2009 and the ABS measure of prices of detached houses having risen by slightly more. Prices appeared to have levelled out in late 2009 in lower-priced suburbs, consistent with reduced demand following the winding back of the higher grants to first-home buyers. Loan approvals had declined in November and were estimated to have fallen further in December, perhaps indicating initial reactions to the tightening of policy.”
