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The Forum > Article Comments > Too little, too late > Comments

Too little, too late : Comments

By Henry Thornton, published 15/8/2006

Firmer monetary policy earlier would have left us in better shape now.

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The use of rates is such a blunt way to go about controlling monetary outcomes. What about the control of credit. The RBA has allowed credit to grow at very high rates for a long time now surely it is time to stop the speculative lending and reign in credit control using this method. That way they will not hurt the average person with higher rates but will merely restrict the level of borrowing. For example making sure that people who want to buy a property have a healthy deposit rather than no deposit or these ridiculous 48 months to pay arrangements we see at retailers or tighter control of credit cards. All of these would be more sensible and preferable to using rates as the big stick to bash us with.
Posted by Daniel M, Tuesday, 15 August 2006 12:09:45 PM
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Daniel, I think if the RBA induced a credit-crunch by reducing debt-growth to (for example) 'sustainable' levels, the result would show this to be a much blunter instrument than simply raising interest rates.
Consider this - the aggregate Australian household income is around $440 billion per annum. Wages are currently growing slightly faster than the 20-odd year average of 4.1% - so will perhaps increase by $20 billion this year.
So, if additional credit were doled out at $20 billion per annum, what would happen? If the entire wad were spent on housing, it would mean either:
a) The average new home loan would fall to $33,000 assuming turnover remains at current sluggish levels of 600k - implying an average house price below $50,000.
b) The average new home loan would remain at $221,000, but turnover would fall to 90k per annum. Meaning effectively, that it would be next to impossible to sell a house.
Posted by foundation, Tuesday, 15 August 2006 4:34:10 PM
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I think that you do not need to place an artificial limit on this as you have done of say $20B linked to wages growth. The RBA must have some idea of the amount of credit that they want to create. Obviously this figure is less than in the preceding period hence the rate rise. So that just loan at that amount at a natural rate of interest and leave it at that. The problem with loaning out to much money is that the rate of credit grows fastr than the increase in goods and services (read some articles about classic Austrian economics). They create the money out of no where using fractional reserve banking which is the real root cause of the problem. Also you analysis does not take into account the potential use of our savings to sustain current prices and perhaps some more policy to help people to increase their savings rather than just letting them borrow for current consumption. Plus looking at housing we are experiencing an asset price bubble, prices are ridiculous and out of control so a reduction bringing the prices back into line with affordability would be a good thing in the long term.
Posted by Daniel M, Wednesday, 16 August 2006 7:49:17 AM
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Daniel, I agree with everything you have written. I don't even deny that causing a quick, severe correction in house prices (rather than a multi-decade period of stagnant or slowly falling prices) would be in the best interests of our economic future. I just think that your conclusion is debatable.

In particular, I think it's important to keep in mind the relationship between tighter monetary policy and higher international exchange rates. I believe this will be the most influential factor for Mr. Stevens & Co. in the near future. Their motivation for raising interest rates will not be to lower demand locally and force producers to cut prices (thanks to globalisation this just won't work - our demand for imported goods and oil are insignificant on a world scale), it will simply be to maintain our dollar value in a world of rising international interest rates. The alternative is massive imported inflation.

As a healthy side-effect, it will make traditional wealth-creation strategies such as spending less than you earn and saving the difference more attractive than borrowing to the hilt and speculating on unproductive assets (houses mainly but also art, diamonds, classic cars etc) inflating faster than the cost of borrowing.
Posted by foundation, Wednesday, 16 August 2006 8:36:49 AM
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Oh I get it now.

The economically educated folk, writing in a dead mans name, now understand that Howard's government is not that good at managing the economy. They diddle at the edges of something they simply don't understand, like two year olds playing with the TV remote. (Sometimes it gets the desired results but whichever way the TV is still there and something, or something will make it work eventually.)

What a laugh.

There are many other economic tools available , some as suggested above, rather than let interest rates ramp up and inflation play the catch up.

The problem is that Howard and co are so arrogant they think they are superiour beings and anything they choose to do must be inherently 'right'.
Posted by Aka, Wednesday, 16 August 2006 5:57:51 PM
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Clearly you are unfamiliar with 'Henry's' back catalogue of calls for higher interest rates, disincentives for unproductive 'investment' etc. He/they have been warning of the dire consequences of the irresponsibly loose monetary policy of the last few years forů well, the last few years.

"There are many other economic tools available, some as suggested above, rather than let interest rates ramp up and inflation play the catch up."
I don't understand the concept of "inflation play[ing] the catch up". However, can you identify an economic tool (other than interest rates) the government or RBA can employ to support the AU$ in an environment of globally rising interest rates?

As for the other economic tools available, I can only repeat the title of the article - Too Little, Too Late. It really is. Preventing our massive debt-bubble from inflating in the first place would have been a very good thing. Intervening now to force it to pop might be the most responsible way out of our pickle, but there would be blood on the streets. What would 'Mum & Dad' prefer - an extra $50pcm in mortgage costs on their $300k house, or for that house to suddenly be worth $150k?

To change stances slightly, I think the only politically palatable way out is to encourage inflation. Not just here, but in the US and Britain also. The central bankers can massage the inflation figures down and raise interest rates more slowly than they need to. They'll promote themselves as inflation fighters. Meanwhile the government(s) will blame the rising costs of living on external forces - demand for oil and minerals from Asia etc.

The common man will complain about rising costs, but manage to survive thanks to wage increases. All illusions of course. The only reality is that debt levels, relative to incomes (household, governmental and national) will fall. Eventually we'll reach a point where our debt has become manageable, and our assets reasonably priced relative to incomes, then of course we'll start the whole stupid cycle over again.
Posted by foundation, Thursday, 17 August 2006 8:31:31 AM
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