The RBA has put rates up now on the belief that the finan­cial cri­sis is behind us, and it has to return to its estab­lished role of con­trol­ling infla­tion.

That this deci­sion was like­ly was flagged by the speech by Antho­ny Richards last week, which implied that the RBA, hav­ing ignored the house price bub­ble cre­at­ed by pri­vate cred­it growth in the pre­ced­ing two decades, was wor­ried about the renew­al of the bub­ble ini­ti­at­ed by the Gov­ern­men­t’s First Home Ven­dors Boost (I refuse to call it by its offi­cial name, since the mon­ey clear­ly went to the ven­dors, while the buy­ers copped only high­er prices).

One of the keynote speak­ers at the 38th Aus­tralian Con­fer­ence of Econ­o­mists in Ade­laide last week was Edward Lazear, who was Chair­man of the US Pres­i­den­t’s Coun­cil of Eco­nom­ic Advis­ers from 2006-09.

In oth­er words, he was in one of the world’s eco­nom­ic hot­seats right when the “Great Mod­er­a­tion” (see also Ger­ard Bak­er’s UK Times arti­cle in ear­ly 2007) gave way to the Glob­al Finan­cial Cri­sis.

2010 is shap­ing up as the year that the bulls and bears of the world’s last unpopped asset mar­ket bubble—Australia’s prop­er­ty market—will col­lide head on. The gap between those pre­dict­ing yet anoth­er bub­ble, and those pre­dict­ing its ulti­mate demise, has closed.

The bulls as always, empha­sise the “fundamentals”—population-fuelled demand out­strip­ping lag­gard­ly supply—and that “Aus­tralia is dif­fer­ent”.

The bears, as always, empha­sise lever­age— that the true fun­da­men­tal behind asset prices is peo­ple’s will­ing­ness to go into debt to buy them, in the belief that they can flog them for a lever­aged prof­it to the next Greater Fool. And on the “We’re dif­fer­ent because we have kan­ga­roos” the­o­ry, the bears con­tend that Aussies are just as sus­cep­ti­ble to a well dis­guised Ponzi Scheme as any­body else on the plan­et.

If the econ­o­my does in fact recov­er from the Glob­al Finan­cial Cri­sis—with­out pri­vate debt lev­els once again ris­ing rel­a­tive to GDP—then my approach to eco­nom­ics will be proven wrong.

But this won’t prove con­ven­tion­al neo­clas­si­cal eco­nom­ic the­o­ry right, because, for very dif­fer­ent rea­sons to those that I put for­ward, mod­ern neo­clas­si­cal eco­nom­ics argues that the gov­ern­ment pol­i­cy to improve the econ­o­my is inef­fec­tive. The suc­cess of a gov­ern­ment res­cue would thus con­tra­dict neo­clas­si­cal eco­nom­ics just as much—or maybe even more—than it would con­tra­dict my analy­sis.

A new blog mem­ber asked “Why do you use Math­cad?” in response to my most recent post about using some of the funds donat­ed by vis­i­tors to the blog to help fund my research.

It’s a very good tech­ni­cal ques­tion, and one that deserves more than just a reply to the com­ment. So I’ll try to explain why here.

I build dynam­ic mod­els of the econ­o­my using sys­tems of ordi­nary dif­fer­en­tial equa­tions. There are many pro­grams that sup­port this these days, from pub­lic domain pro­grams like Scilab to com­mer­cial giants like Math­e­mat­i­ca and Math­cad. I’ve tried most of them, and I’ve stuck with Math­cad for two rea­sons:

Thank you to the rough­ly 170 indi­vid­u­als who have made dona­tions to date via the “Donate” wid­get on the right hand side of the blog.

Dona­tions have totalled A$7,730, of which about $800 has been for Michael Hud­son’s talk in Syd­ney (on Fri­day Octo­ber 23rd at Cus­toms House, Syd­ney at 6pm).

I have just made the first pur­chase using those funds, of a Dell Stu­dio 17 inch lap­top that I will use while research­ing with my sys­tems engi­neer­ing col­league Trond Andresen in Europe lat­er this year.

There will be a din­ner with Michael Hud­son and his wife after the talk at Cus­toms House on Fri­day Octo­ber 23rd at a restau­rant called Young Alfred, which is also in Cus­toms House. The din­ner will start at 8pm.

If you’d like to be part of the book­ing, please let me know via an email to me at debunk­ing (at) gmail dot com (spelt out this way to min­imise the addi­tion to the already ridicu­lous amount of spam I receive!).

I’m happy to admit that I underestimated how strongly governments would respond to this financial crisis. Dramatic reductions in interest rates, huge fiscal stimuli and—in the USA and UK—expansion of government-created money, have all had a positive impact on the economy and asset markets (both shares and houses).

In his recent essay, Aus­tralian Prime Min­is­ter Kevin Rudd esti­mat­ed that the res­cues were the equiv­a­lent of rough­ly 18 per­cent of glob­al GDP over a 3 year peri­od, which is an unprece­dent­ed lev­el of expen­di­ture by gov­ern­ments.

Eichen­green and O’Rourke’s com­par­i­son of today to the Great Depres­sion gives the most bal­anced assess­ment of how effec­tive these poli­cies have been at the glob­al lev­el.

Ross Git­tins has writ­ten a very good overview of the fail­ings of neo­clas­si­cal eco­nom­ics in today’s Syd­ney Morn­ing Her­ald:

Self-right­ing mar­kets and oth­er shib­bo­leths

The arti­cle men­tions the Dahlem Report, but does­n’t pro­vide a link to it. For those who would like to read it, here it is.

I also wrote a post on the Dahlem Report short­ly after it was writ­ten, and helped pub­li­cise it by plac­ing it on my blog. Giv­en that its tone was in some ways even more dis­mis­sive of con­ven­tion­al eco­nom­ics than I am, the title for this post was obvi­ous:

I delayed pub­lish­ing this on the blog because I thought it was worth sub­mit­ting it to a news­pa­per for first pub­li­ca­tion on the anniver­sary of the Lehman Broth­ers col­lapse. That has occurred: a slight­ly edit­ed ver­sion of this post (for rea­sons only of length, I has­ten to add!) is in today’s Syd­ney Morn­ing Her­ald (page 4 of the print ver­sion), WA Today, and prob­a­bly sev­er­al oth­er news­pa­pers in the Fair­fax chain.

You have just come from your annu­al med­ical check­up, where your doc­tor assures you that you are in robust health.