Renegade Economists 300th podcast
As broadcast on 3CR radio, Wednesday July 31st.
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Transcript: Who Are Rising Property Prices Good For?
Karl Fitzgerald: This week it’s back to the master blaster, Professor Michael Hudson. Michael Hudson, on our very special 300th episode of the Renegade Economists. We’re talking about the economic policy, “magic trick box” – its been pulled out to keep this Australian residential property bubble juggernauting along. It hurts, it hurts, I know. We have to discuss it, here on the Renegades.
And this week on the Renengade Economists, for our 300th show, yes our 300th Renegade Economist show, our special guest is Professor Michael Hudson.
Michael we have seen today the Australian dollar plummet by two cents, due to some commentary from our Reserve Bank, our central bank Governor, Glen Stephens, that interest rates are more than likely to fall. There were a couple of reasons given for it. One was the weakness in the housing sector, and more to the point, their desire for the housing sector to take over from the mining sector, as the main jobs driver here. But the second point was that the terms of trade was falling, and that would imply that the dollar would also drop a bit further. So the Australian dollar was savaged.
Professor Michael Hudson: The explanation they’re giving doesn’t make sense. First of all, let’s talk about interest rates, which is the first part of your question. The effect of lowering interest rates is to increase the value of stocks and bonds and real estate. And by increasing the value of real estate, it really increases the ability of the bank mortgages to be paid. So lowering interest rates is a way to try and support real estate prices, hoping that enough Australians will borrow enough money from the banks, at lower interest rates, to pay an even higher price for the property, and thereby create a loan market for the banks. So the attempt is, Australia wants to avoid the kind of crash in real estate prices, that you’ve seen in the United States and Europe, which was estimated at 40% in 2008 when the crisis came.
How does Australia avoid the same kind of crash that you have here (USA)? The answer is by lowering interest rates, by lowering the dollar. And when the Australian dollar is lower, what this does is raise the price of imports. So the price in Australian dollars that consumers are going to have to pay for anything that is imported, is going to go way up. This increase in their prices is solely to help the Australian banks. Lowering the exchange rate does not help Australia export more, because its main exports are iron ore and raw materials. And these prices are set in London and America. They’re set in dollars, no matter what the Australian exchange rate is. That has zero effect on whatever is the price of iron and other raw materials.
So all of this is just a kind of distraction, kind of a parallel universe that they’re giving as an excuse for bailing out the Australian banks. Here’s what happened after 2010 and 2011, in the United States, the Federal Reserve pushed quantitative easing, which meant that the Federal Reserve was giving banks money at one tenth of one percent interest. The Federal Reserve said we’re going to create two trillion dollars of reserve. Go out banks, and make money to get out of the negative equity that you’ve run up- your negative net worth form all of your bad real estate loans.
So the banks went out, and they spent 800 billion dollars of quantitative easing too, on arbitrage, on buying Australian, Brazilian and other foreign bonds yielding more. So for instance, a bank could borrow at one tenth of one percent, from the Federal Reserve, and lend to Australia, at a five and a quarter percent, it could pocket the difference, and make an enormous amount of money on this kind of arbitrage.
All of this low cost money, pushed up the price of the Australian dollar, and everyone in low interest parts of the world; American and Europe tried to buy Australian bonds. The effect was that now there has been a large foreign debt to foreigners, and as the Australians lower the interest rates back down, there’s no more motivation for foreigners to try to play the arbitrage game with the Australian dollar. So all of this money that flowed into Australia, pushing up the dollar in 2010, 2011, and 2012, is now going back out, pushing it down. And Australian consumers have had the benefit of a high dollar, meaning that it’s much cheaper to buy foreign goods. But now a low dollar means that all of sudden, you’re losing all of the benefits that you’ve got in the last few years, from the artificially low exchange rate, resulting in high interest rates by Australia’s Central Banks. Now you’re losing that, and prices are going to go up, so you’re going to have a squeeze on the part of Australian consumers. And that’s not good for the Australian economy.
KF: One of the issues that many of us are concerned about is that first home owners are borrowing already, at an average of $290,000, to buy a property that is averaging somewhere between $450,00 and $550,000. So these are extraordinary prices that we’re paying. The Central Bank is saying that there is going to be another housing boom. And it will be housing construction that takes over from this mining largesse, which has largely been squandered in terms of the enormous profits made there. So it seems that the great Australian economic miracle is expected to continue, and fly in the face of the trends that we’ve seen overseas.
MH: Well the question is if the prices are already so high for Australian houses, how much debt can a homebuyer take on. At a certain point, there are two ways of paying off a homeowner’s debt. One is to earn the money to pay. But now that Australia has put most of its raw materials to export, the mining sector doesn’t employ everybody. The Australian policy has not been to been to build up domestic industry. It’s simply to export more to China, to promote raw materials. It has a tax policy, that instead of taxing mines and the mineral exports, and using this to subsidise industry, it’s decided not to tax the mines. That’s what I think your last election was about. It’s not tax and finance, so it’s not using the government spending to really develop industry.
So where are the Australian home buyers supposed to earn the money, to pay the higher debts that they need to take on in order to buy a home? The only hope of the banks is that somehow, the existing owners can find somebody to borrow even more money from the bank, to buy the property at a higher price, so the banks won’t have to write down all of their high mortgages to an economically viable level. A viable level being a level that’s going to promote economic growth in Australia. You’re having what they called the housing boom, is actually stifling the rest of the economy, because it means that more and more of Australian incomes have to be spent paying rent and paying interest to the banks for the mortgages, and less and less is available to be spent on goods and services. And that’s what really employs Australians: goods and services not paying money to the banks.
KF: One of the re-badged policy proposals that some of the conservative think tanks are starting to push, is that young people can access their superannuation savings. Australia has some of the largest superannuation savings on the planet. I think we’re the second most for some, with 35 billion dollars saved there.
MH: We’re talking pension funds?
KF: Yes, we’re talking pension funds. I suppose that’s the American term for it. There’s some talk now that because Australians have to deposit some 10-12% of their income, each pay, into their pension plan, that they should be able to access that money to pay the huge deposits, where you’re having to put down some 70-80 thousand dollars just as a deposit to enter the real estate market.
MH: This is possibly the worst economic policy that any country could come up with. It means that people are going to end up being poor. They’re going to use their retirement funds to pay banks now, to push up real estate prices, and then when it comes time to retire, the big crash will come. Property will crash 40%, they will lose all of their equity, and they will be living out in the street, just like people in Detroit, people in Chicago, people in Spain, people in Greece. This is a total wipe out, and it doesn’t have to be this way.
Let’s look at the alternative. Australia has a very anti-labour policy. Both of your major parties are in America, what would be called, extreme right wing. Extremely controlled by the bankers.
A real social democratic or labour policy would do the following: they would not treat pension funds, or social security or retirement, as a user fee. They would say, lets pay this out of progressive taxation. Let’s tax the mines, the mineral exports; let’s tax the economic rent, and also the land rent. So instead of paying more and more money to the banks for houses, you would essentially be paying taxes to the government on land, instead of paying an income tax, instead of paying the current policy, and you would have progressive taxation. That is what every economist in the 19th century believed, it’s what the social democratic party believed, it’s what the Australian Labor party used to believe, before it turned around and said we should tax labour and not capital. Because now we’re getting our campaign contributions, and all of our support from the mining sector, from the financial sector, from the business sector.
So all of a sudden, your Labor party has turned into an anti-labour party, by saying, lose your savings; get wiped out when the housing prices come down. The future of Australia is going to be that of Greece and Spain, and Ireland if you go down this road. This is just a crazy road. You should look at Europe as a kind of dead zone for what Australia could be, if you continue to let the banks make this policy, and put it in the hands of the Labor party, or whatever other party is in office.
KF: We’re talking to Professor Michael Hudson, and I just wanted to point out that Hudson, in a recent article, China: avoid the West’s debt overhead – a land tax is needed to hold down housing prices.
“Should lands’ rental value be the basis of the tax system, or that of the financial system? A land tax holds down property prices- the more land rent is taxed away, the lower the housing cost will be, along with the economies debt overhead, and hence its overall price levels. So in addition to interest debt being cut in half, because land prices have dropped so much, labour and industry will be able to be cut proportionately”.
So that is a big challenge, for Australia, for the West, for even China. Are we going to continue to allow this naturally rising value of the earth, as represented in the land price bubble, to be paid to bankers in the form of interest on these huge mortgages- $290,000 loans? It’s carnage! Alright, lets go back to the interview with professor Michael Hudson.
Well we’re wondering what will be the next public property trick. Because not only is there this rumoured talk of young people being able to access their pension savings, but now the Baby Boomers in their pension phase, post-55 age group, they can set up a self managed super fund, and buy and sell residential and commercial property with zero capital gains- a tax on that property. Really, it’s onwards and upwards for the great ponzi game, and what we’re wondering Michael, what are you seeing around the world in terms of some of the ridiculous policies.
MH: They’re trying to save the fact that the banks have made their money, mainly by mortgage loans. About 80% of loans in the United States, Britain, and probably Australia are mortgage loans. So banks are worried that if the price of property goes down, then all of sudden, they’re going to take a loss. The whole economic policy of Australia, Europe and the United States, is how do we keep property prices from falling? Now they make it appear as if rising prices for homes is a good thing, because you’re making a profit, but it’s not a good thing if you’re a homebuyer.
Suppose you’re graduating from school, you’re getting your first job, you want to get married and start a family, the higher the prices, the more of the debt you have to take on, and spend the rest of your working life trying to pay it off. And if it costs more to pay off a home mortgage, or to rent, or to pay for housing in Australia than it does in other countries, then all of a sudden, Australian industry is not going to be competitive. And you’re not going to have people able to earn enough money to pay the mortgages. And if they can’t pay the mortgages, there’s going to be the same that you’re having in America and Europe, and the whole pile of cards is going to fall. That’s what the banks are trying to postpone.
And when you see the dollar going down, this means that foreign investors are taking their money and running, and it means that Australian bankers realise the game is over. They say the only way we can do it is to loot the pension funds. Strip the pension funds off the people, pay it to the upper 1%, take everything we can, and send it abroad as quick as we can, because the game is over.
KF: You’re on 3CR’s Renegade Economists. This week we’re discussing with Professor Michael Hudson, the state of economic policy plays. And Michael, when it comes to neo-liberal economic theory, which really has dominated our economic policy frameworks in the last 20/30 years. There’s a lot of focus on the dangers of public debt. But the fact that private debt really isn’t such a big issue, what really underpins this push?
MH: There’s an attempt to break down government. Now that they can’t make that much money on housing anymore, the banks said, ‘how are we going to make money?’ And they’re trying to make money by saying, ‘let’s privatise public utilities’. The big play now is to force governments to sell off their roads, their transports systems, their railroads, anything in the public domain. The land. And sell it all to the private sector. These are all natural monopolies, which is why they were in the public sector to begin with.
And the banks are going to lend money to buyers to put up tollbooths on the road, to put up parking meters on the sidewalks, to begin jacking up the prices, whether it’s electric power or any other public service, they’ll raise the price. And the idea is to double the prices in the Australian economy, and cut living standards in half. And the way to cut living standards in half is to say, government spending is bad, let the bank lend to the private sector. Then they’re going to come in and smash you down like anything, and they’re going to turn you into Indonesia. That’s basically the plan. They want to impoverish you.
Their business plan is to make money by impoverishing Australian consumers. And the way to do it is to break up the government, break up the public sector, and it’s very much like the invasion of a country. Very much like when the English invaded Australia, what did they do? They grabbed all of the land from the Indigenous population. Well now there’s another grab. Now the banks are treating the Australian white population, just like the white’s treated the indigenous population there. It’s like the Norman invasion of England; they want to take whatever’s in the public domain. They want to privatise it, and then pledge it to the banks for debt. Instead of the landlord’s running the country, you’re really having the bankers today play the roll of what the landlord’s did in the 19th century. The long-term affect throughout the whole world is a kind of oligarchy, and a neo-feudalism.
KF: Well, I’m interested in what the banks are pursuing, because really they’ve got the mortgage streams, the rent based mortgages, and those regular income streams coming in, and really providing the liquidity that allows so much credit to be expanded. But as you’re saying, they’re after the utilities as well, which is another steady income stream that the powers-that-be rely on, and really the infrastructure as well. So alongside superannuation, there are four really strong pools of income heading into the F.I.R.E sector. The Finance, Insurance and Real Estate sector, as you call it. Is there anything else left, or have they locked it all up?
MH: They haven’t locked it all up yet, but I don’t know the Australian economy that well. But what you call a steady income stream, the objective is not to keep the income stream steady. It’s to do to Australia, exactly what Margaret Thatcher, and then the Labor Party under Tony Blair did in England.
Once you privatise roads or public transportation, or railroads of private communications, all of a sudden you add on interest charges, financial charges, exorbitant executive salaries, and stock dividends. You add a whole set of charges that are all of sudden built into the prices, so that instead of providing basic public services, basic public needs of costs and prices, all of a sudden you have financialised these prices. And these prices go way, way up.
And the monopolists call that a free market, and it’s the exactly the opposite kind of a free market that Adam Smith, and other 19th century free economists talked about.
KF: Well we’ve got about $200 billion worth of utilities’ that one of the big lobbying groups wants to privatise. This shock horror headline of, ‘billions of dollars in infrastructure deficits’. And they’re calling to sell these all off, because the public financing model isn’t up to repairing these bridges, or providing actual freeways, or doing what they really should be doing: building more rail. And this is just one of those little tricks of the trade that they’ve got. They’ve undermined the public revenue system, the taxation system, and now they’re relying on privatisation and greater private sector debt, to do what the public system used to do.
MH: It’s almost conspiratorial. They are deliberately running down the infrastructure, not only in Australia, but also in the United States and in England. And the model for all of this is the ‘Thatcherite’ public-private partnership. You’ve seen what happens to the British train system, if you want to see what’s in store for Australia, look at what’s happened to privatising the British train routes. Maintenance was underfinanced by the government, just look at how they’re underfinanced by the private sector, that cuts the costs and essentially strips the assets of these railroad companies to pay very high dividends to the bond holders, high dividends to the stock holders, enormously high salaries, and the service goes down and down and down. I think you need some comparative lessons to how this private-public partnership is basically a rip off by the banks in every country that it has been tried.
That is exactly the same policy that President Obama is planning in the United States. And he is giving a series of speeches around the country. I gave a summary of the speech he gave last week, essentially saying that the government has failed and we’re going to have to turn it over the public sector. What Europe and America has built up for hundreds of years in the public sector, shall be given away to our campaign contributors, and they’re going to take it over, and they’re going to charge huge multiples. So Australians are going to have to pay a lot more money to use the roads, a lot more money for gas, a lot more money for telephones, a lot more money for everything, while the currency goes down. So you’re headed to a squeeze that’s turning Australia into a third world country. That’s the Australian political plan. That’s the intention, because it’s the only way of giving the bankers enough money to empty out your pension funds, your superannuation funds, and take the money and run, and put it all in Switzerland, or London, or wherever they’re going.
KF: Well I do hope that the common sense will stand up and realise that there’s a vested interest in sculpting the media landscape to distort the science of opinion of economics their way. But with this global push for greater private debt, for a reduced public sector role and using the austerity sledgehammer to break that through. It’s very interesting that with virtually everything the conservative sector has wanted to happen, all of this money printing with QE3, the velocity of money has slowed down incredibly. Really, you would think that if these so called economic theorists have some validity to what they’re saying, then the velocity of money would be flowing through the economy, and there would be some better returns for all of the efforts that have been made.
MH: I don’t think there’s any such thing as the velocity of money. I bet you, nobody who listens to your show can possibly tell you what the velocity of money is. It’s a purely mathematical derivative, that is sort of the MV=PT. Ideas to say that money and prices go up together. Money doesn’t push things up, the answer is credit.
The whole monetary equation was developed over a century ago, to describe a different world. A world in which banks couldn’t simply create their own credit. And the explanation today is that most credit isn’t being created to buy goods and services, it’s being created to buy real estate, and stocks and bonds. It’s created to buy assets. And the monetary price thing relates only to prices, so you can ignore the concept of velocity. I can guarantee you that there’s no way in which it means anything at all. You know that when someone starts talking about the velocity of money, you know that they’ve been brainwashed. And just ask them what they mean, and watch them stutter.
KF: Really, there’s spending throughout the economy at the speed which money’s changing hands. You were saying that it no longer counts, and that it’s really not a relevant pointer to the health of the medium of exchange?
MH: it’s not relevant, because what changes hands is really credit: the IOU, and promissory notes. It’s a whole super structure based on money. People aren’t really using money anymore. For instance, corporations are not borrowing from the banks, but they’re issuing their own paper directly into the money market. It’s what’s called shadow banking. The whole character of paying for transactions, of money and credit, has been transformed in a way that the formula’s that were developed 100 hundred years ago just don’t take into account. Most money is spent on assets, not goods and services. So when you talk about money being spent, what is it spent on? And what kind of prices? Velocity is just a residual. It really doesn’t mean anything at all. What people pay for their rent, and for their goods and services, that’s pretty much unchanging. It’s the function of how often they get their pay cheque. It’s absolutely meaningless and simply a distraction from looking at how the structure of how the economy is evolving.
KF: So, there we go. That’s Professor Michael Hudson, of Michael-Hudson.com. That’s: Michael-Hudson.com. Make sure you check out that article, ‘China avoids the West’s debt overhead’. He has also got one there on Obama’s speech last week. Thanks very much for listening to the Renegade Economist. My name is Karl Fitzgerald, and yes, that was episode 300.