My main topic this month is a comparison of the economic events of today to those of 1973–75, but the most recent Case-Shiller data on US house prices simply has to be “the Chart of the Month”. Last *month* the index dropped by 2.3 percent–implying an annual rate of decline in the realm of 25%! US house prices are down 13% from the peak in mid-2006, and in free-fall now.
Helen Dalley of Sky Business News interviewed me and Tim Mulholland, of Melamed and Associates, a Chicago-based consulting firm, about the Subprime crisis. If you’d like to see the video, click on this link:
http://www.skynews.com.au/video/video.aspx?id=43
Then use the selection panel to choose the third story–with the heading “Sunday Biz”, and the description “Sky News Reporter Helen Dalley talked finance with University of Western Sydney Professor, Steve Keen”.
There has been no shortage of commentators and players willing to vouch that this is the worst financial crisis they have ever seen. Equally, there has been no shortage of bailout moves by the Federal Reserve–remedies that put “the Greenspan Put” to shame in their magnitude.
And yet the market meltdown continues, and the casualties continue to mount, with Bear Stearns the latest–and surely not the last.
In all this, no one yet seems to have posed the question of “why now?”. Why is the crisis clearly more severe this time than ever before, and why are remedies that worked relatively quickly in the past (remember the fast turnaround of the market after October 1987, and the rapid recovery from the rescue of Long Term Capital Management?) failling today?
The answer is, simply, that the world has never in its history carried the level of debt that it is carrying today. The remedies that worked when America’s private debt to GDP ratio was a mere 150 percent (see Figure 1) are inadequate when that ratio is 275 percent.
The Canberra talk will now start at 7.30pm. The venue remains the same: ANU Emeritus Faculty Fellows Lane Cottage; building 3T.
For more information, contact the Nature and Society Forum at office@natsoc.org.au.
There has been a change of venue for the Per Capita lunch talk. The details now are:
A speaking tour of Melbourne, Adelaide and Canberra has been arranged for me by a number of groups. I’ll be speaking on Australia (and the OECD’s) debt bubble–the phenomena, analysis of how they came about, and what we might expect when they burst.
The details are:
The current turmoil on the Stock Market—and especially the sudden collapse of many once high-flyers—has taken a lot of people by surprise.
One person who, were he alive today, wouldn’t be the least bit surprised, is Hyman Minsky, who predicted that events like this would be a regular feature of a deregulated financial system.
He developed what he called “The Financial Instability Hypothesis”, and anyone who wants to understand today’s events needs to know about it.
The following is an extract from an article by Minsky in Challenge in 1977—well before even the 1987 Stock Market Crash—that provides a nutshell-sized precis of his theory.
The revelation in the minutes of the RBA’s February meeting that debate focused, not on whether there should be a rise, but on whether it should be 0.25 or 0.5 per cent, shows that the RBA wagers that the threats to the Australian economy are upside ones–tighter labor markets and higher inflation–rather than downside ones–a global slowdown as asset markets collapse during a credit crunch. The February minutes implied that the RBA might really throw its cards on the table at the March meeting, with a 0.5% rise being a distinct possibility.
On March 28, I’ll be launching Eric Aaron’s latest book Market versus Nature: The social philosophy of Friedrich Hayek. The venue is:
Gleebooks – 49 Glebe Point Road
Time: 6pm for drinks before a 6.30pm start; finish by 8.30pm
Eric’s earlier books include What’s Left–which is a memoir, an evaluation of the failure of communism, and an attempt to discern what remains of merit in socialist thought after the collapse of communism in the 1990s–and What’s Right–which blended insights from political philosophy, economics and biology to put the case for a more ethical approach to the future of humanity.
Stuart Cameron’s new company Rife Media has started a Debtwatch Podcast page:
The Podcast will still be hosted here as well, but it will probably appear first on Rife Media’s page as Stu does the production.
Stu also produced a Podcast from the Fabian Society seminar on “Economic Challenges Facing the Rudd Government”, at which Saul Eslake, John Edwards and I spoke. All the speeches, Geoff Gallop’s introduction, and the Q&A session afterwards, are all captured there with quite high sound quality.
