Steve Keen's Debtwatch

Com­pare the fol­low­ing two state­ments, and see if you can guess who the speak­ers are, when they made these speech­es, and what they announced in them:

“[We are] con­cerned about the rate at which house prices are increas­ing and the poten­tial risks this pos­es to the finan­cial sys­tem and the broad­er econ­o­my. Rapid­ly increas­ing house prices increase the like­li­hood and the poten­tial impact of a sig­nif­i­cant fall in house prices at some point in the future. This is par­tic­u­lar­ly the case in a mar­ket that is already wide­ly con­sid­ered to be over-val­ued.” (Speak­er One).

When the hot air final­ly leaves this new hous­ing bub­ble, its defla­tion will be too slow to result in a 40 per cent fall from June 2010 to June 2025…

Right up until the ear­ly 20th cen­tu­ry, tak­ing an inno­cent stroll on the fore­shores of the US West Coast was haz­ardous for your health: you might sud­den­ly fall uncon­scious, and wake up to find your­self an unfree sea­man aboard a US clip­per bound for Chi­na. That’s where the term “Shang­hai­ing” orig­i­nat­ed: not because the crime hap­pened in Shang­hai, but because Shang­hai was nor­mal­ly the victim’s first port of call as a ship­ping slave.

Paul Krug­man post­ed on a famil­iar top­ic yesterday—the fail­ure of most infla­tion hawks to admit that they were wrong—and includ­ed praise for one such hawk who has indeed changed his mind and said so:

There’s an inter­est­ing con­trast with one of the real intel­lec­tu­al heroes here, Narayana Kocher­lako­ta of the Min­neapo­lis Fed, who has actu­al­ly recon­sid­ered his views in the light of over­whelm­ing evi­dence. In our polit­i­cal cul­ture, this kind of switch is all too often made into an occa­sion for gotchas: you used to say that, now you say this. But learn­ing from expe­ri­ence is a good thing, not a sign of weak­ness. (“A Tale of Two Fed Pres­i­dents”)

This arti­cle is the third in a series on Australia’s hous­ing mar­ket. Read the first arti­cle here and sec­ond arti­cle here.

In the last two arti­cles in this series, I argued that Australia’s house prices “walk like a duck” – using BIS data, Aus­tralia is one of only four coun­tries where prices are twice as high in real terms as they were in 1985. And they “quack like a duck” – accel­er­at­ing house­hold debt is a major dri­ver of ris­ing house prices, as in the oth­er present and past house price bub­ble economies (the US, Spain, Japan, Nor­way, the UK and Den­mark). So hav­ing con­clud­ed they’re a duck, what species of duck are they?

My pre­vi­ous post on house price data from the BIS (How to spot a hous­ing bub­ble before it bursts, Octo­ber 15) scotched one part of the ‘No Bub­ble Dow­nun­der’ case: Aus­tralia is one of four coun­tries where house prices are more than twice as high as they were in real terms in 1985 (see Fig­ure 1).

Fig­ure 1: The Bub­ble Con­tenders

Any­one who has been moti­vat­ed to read eco­nom­ics for the very first time by the eco­nom­ic cri­sis that began in 2007 should have real­ized at least one thing: that com­mu­ni­ca­tion between econ­o­mists resem­bles the Tow­er of Babel after the con­found­ing of tongues. Econ­o­mists who speak in one tongue hear what those in anoth­er say, but com­plete­ly fail to under­stand it—and then shout back some­thing that is just as incom­pre­hen­si­ble to the oth­ers’ ears.

I would love to be in the audi­ence watch­ing the body lan­guage at this year’s “Nobel” cer­e­mo­ny for eco­nom­ics. Robert Shiller, who is far too polite a per­son to make it obvi­ous, will nonethe­less at least fid­get as he lis­tens to Eugene Fama’s speech, since Fama con­tin­ues to dis­pute that bub­bles in asset prices can even be defined. Shiller, in con­trast, first came to pub­lic promi­nence with his warn­ings in the ear­ly 2000s that the stock and hous­ing mar­kets in the States were dis­play­ing signs of “irra­tional exu­ber­ance”.

After a bub­ble has burst, no one denies that it exist­ed. But before it does, the pop­u­lar refrain is that though bub­bles exist­ed else­where in the world, “there’s no bub­ble here”. So hous­ing bub­bles are admit­ted to have exist­ed in Japan, the USA, Spain and Ire­land – because they’ve already burst.

But the rest of the world – and espe­cial­ly Aus­tralia – is dif­fer­ent. House prices in Aus­tralia, the UK, and every­where in between where they are still ris­ing, are jus­ti­fied by … (fill in your favourite fun­da­men­tal rea­sons here) and are not in any way man­i­fes­ta­tions of bub­bles.

This is a set of 5 lec­tures that I deliv­ered last week in Quito, Ecuador, at FLACSO–the Latin Amer­i­can Fac­ul­ty of Social Sci­ences. In future years I hope to expand this into two com­plete courses–one on the his­to­ry and devel­op­ment of eco­nom­ics from a dis­e­qui­lib­ri­um per­spec­tive, and the oth­er on dynam­ic mon­e­tary mod­el­ing in eco­nom­ics using Min­sky, the Open Source sys­tem dynam­ics pro­gram that I have devel­oped with the help of a grant from INET.