The National Forum   Donate   Your Account   On Line Opinion   Forum   Blogs   Polling   About   
The Forum - On Line Opinion's article discussion area



Syndicate
RSS/XML


RSS 2.0

Main Articles General

Sign In      Register

The Forum > Article Comments > The low-interest road to ruin > Comments

The low-interest road to ruin : Comments

By Saul Eslake, published 23/9/2009

Keeping interest rates too low for too long could encourage an increased demand for risky investment products.

  1. Pages:
  2. Page 1
  3. 2
  4. All
A nice, clear explanation of (some of) why the crisis emerged and why Australia is doing better than other countries.

Stimulus packages are necessary and appropriate, but there is a certain irony in governments trying so hard to make consumers do more of what got us into this mess in the first place spending more, saving less, buying houses etc.

Its going to take a great deal of finesse for governments to unwind stimulus at an appropriate rate.

The risk is that were sowing the seeds of the next crisis in our response to this one, just as the US did in the early 2000s.
Posted by Rhian, Wednesday, 23 September 2009 2:39:33 PM
Find out more about this user Recommend this comment for deletion Return to top of page Return to Forum Main Page Copy comment URL to clipboard
I think we should be cautious in accepting the authors argument that a high appetite for risk on the part of both lenders and borrowers is about to return.

Lending standards are tighter as what lenders define as "credit worthy borrowers" is somewhat stricter than before the GFC.

Significant numbers of people have taken a blow to their household income as unemployment has risen and UNDERemployment has risen sharply and continues to rise as firms cut back on working hours rather than whole jobs.

Inflation is currently below the RBA's target band (we will have to wait a couple of weeks for the results of the September quater).

So I don't see any strong evidence at this point in time that low interest rates are on the verge of causing an orgy of unservicable borrowing by a private sector already carrying unprecedented levels of debt.

I don't agree with calling for a pre-emptive strike that will hurt large numbers of ordinary Australians who have lost income through no fault of their own.
Posted by Fozz, Wednesday, 23 September 2009 8:45:33 PM
Find out more about this user Recommend this comment for deletion Return to top of page Return to Forum Main Page Copy comment URL to clipboard
It would be a stretch to claim that low interest rates caused the previous melt down when there is a mountain of evidence that greed by lenders was at fault.

Control of greedy lenders who take ridiculous risks with other people's money by raising interest rates is a very blunt tool that results in a lot of collateral damage to ordinary investors in shelter - the mums and dads with mortgages. Shelter is a basic need and government relies on private investors to supply the welfare housing it refuses to provide.

Maybe some who argue for a quick return to higher interest rates are also driven by greed.

There has got to be a better way to deal with inflation.
Posted by Cornflower, Thursday, 24 September 2009 7:36:46 AM
Find out more about this user Recommend this comment for deletion Return to top of page Return to Forum Main Page Copy comment URL to clipboard
I am aware that pundits hate being reminded of previous prognostications, but this one was too juicy to pass by.

In his last offering on this Forum, on March 3rd 2009, Mr Eslake pronounced as follows:

"In the last few months it has become increasingly apparent that, notwithstanding its resilience during the first year of the global financial crisis, the Australian economy faces a much bleaker outlook in 2009. The sharp downturn in the world economy... has greatly increased the risk that Australia, too, will experience a recession this year."

On the day this was published, the All Ordinaries closed at 3204.

Yesterday, the All Ords closed at 4741

That's a 48% increase over the period in which we - according to Mr Eslake - "faced a much bleaker outlook".

But we are now better informed.

"One of the reasons Australia's experience of the financial crisis has been less severe than has that of most other Western countries is that Australia's central bank was one of the few that didn't make the mistake of leaving interest rates too low for too long in the early years of this decade."

Unless you are an old cynic like myself, you're probably surprised that this sound piece of hindsight wasn't included in the March 3rd analysis.

But to this particular observer, the reason is obvious. If you want to write an article full of "we're rooned" forecasting, you're hardly going to rummage around for reasons to be cheerful.

The underlying question of course, is "why do they bother?"

They are as accurate as a lump of seaweed, and as likely to stumble upon a correct forecast as I am.
Posted by Pericles, Thursday, 24 September 2009 5:07:37 PM
Find out more about this user Recommend this comment for deletion Return to top of page Return to Forum Main Page Copy comment URL to clipboard
One of the inherent risks faced by economic forecasters is that of being reminded of previous forecasts that have turned out to be wide of the mark. And I long ago learned that if you can't cope with that, you need to try something else for a living.

So I'm entirely unperturbed by "Pericles"' drawing attention to what I wrote here last March. In fact I'd argue that the excerpts from that piece which he reproduces weren't as far off the mark as I have been on other occasions. By all the definitions of a recession except the widely- (though erroneously) used consecutive-quarters-of-negative real-GDP- growth, Australia has experienced a recession: we have had four quarters of negative real per capita GDP growth; three consecutive quarters of negative growth in real gross domestic income; and a rise in the unemployment rate of 1.9 pc points in 18 months. To be sure, it's been a milder recession than I (and others) expected; and it's been much less worse than the recessions experienced by most other comparable countries; but through this period my forecasts have generally been at the less pessimistic end of the spectrum of opinion.

The fact that the share market has risen by nearly 50% over this period proves nothing, other than that the share market turns well in advance of turning points in the economy, and that it is prone to much larger swings (in both directions).

I don't deny that, as "Cornflower" asserts, 'greed' played a role in the financial crisis (see for example the Shann Memorial Lecture I gave at UWA in August, at http://www.grattaninstitute.edu.au/publications/eslake_shann_lecture_090819.pdf). However, as I said there, greed wasn't confined to Wall Street or City of London bankers; and incompetence (admittedly, well-paid incompetence) was at least as much a factor as greed.

I'm not arguing, as "Fozz" implies, for a 'pre-emptive' hike in interest rates. I'm merely suggesting that with the economy now in a different state from that which was envisaged when rates were cut to their present level, it is unrealistic to expect them to stay at this level indefinitely.
Posted by Saul E, Thursday, 24 September 2009 6:38:31 PM
Find out more about this user Recommend this comment for deletion Return to top of page Return to Forum Main Page Copy comment URL to clipboard
Saul,

the entire cut and thrust of your argument is that you would like to see interest rates hiked up sooner rather than later because you believe that lenders and borrowers are on the verge of regaining the willingness and the ability to begin engaging in another wild borrowing and bubble-inflating spree.

Hence the title "The low interest road to ruin".

Significant numbers of Australians are currently experiencing a reduction - not rise - in ratio of income to mortgage debt and this seems unlikely to change in the near future with rising underemployment

So for many, rising interest rates may well be the road to ruin.

Interest rates are such a crude, indiscriminate tool - a kind of "smash 'em all, let God sort 'em out" approach.
Posted by Fozz, Thursday, 24 September 2009 8:37:21 PM
Find out more about this user Recommend this comment for deletion Return to top of page Return to Forum Main Page Copy comment URL to clipboard
  1. Pages:
  2. Page 1
  3. 2
  4. All

About Us :: Search :: Discuss :: Feedback :: Legals :: Privacy