This comment was made this week at http://www.macrobusiness.com.au  (link may be locked)

http://www.macrobusiness.com.au/2015/02/housing-finance-rockets/#comment-1083174

• flawse

  February 11, 2015 at 12:59 pm

  “Macro Prudential Chastity belt that does not restrict movement.”

  Man you got a way with words!
  Therein lies the trouble. Any restriction of this housing thing and the whole houses of cards tumbles.RE gets spanked! Retail just gets whacked out of the paddock! Restaurants stand around with their lights on and no customers until the Bank shuts off the lights! This economic ship is badly listed. Anybody moves in any way it will tip over – but never mind just keep adding weight listed side!
  Maybe we can all work for the government which of course is some of the thinking that is taken seriously.

• Pfh007

  February 11, 2015 at 2:27 pm

  Flawse,

  The only way to reduce the pain of the adjustment is to make sure that as the debt deflation due to deleveraging kicks in is for the government to support the money supply.

  This is critical as the economy has been made dependent on money supply created by the process of bank lending and as banking lending starts to collapse the money supply will shrink – and shrink rapidly.

  The question is then how should the government support the money supply.

  I am opposed to the government spending money for the sake of it. A deficit should not be created by the government splashing out the money in cheques to the favoured.

  Misallocation is still misallocation so waste and pork and dud decisions and unwarranted welfare are still issues requiring attention.

  The least damaging way is to leave more money in the wallets of taxpayers and the most equitable way is by raising the tax free threshold so that those who work get to keep more of what they earn.

  The resulting deficit is printed.

  At the same time the money creating powers of banks are reduced by reintroducing a reserve ratio and steadily increasing it.

  This will ensure that the additional money supply due to the printing does not result in inflation.

  With the introduction of appropriate restrictions on off shore borrowing by govt (zero) and by banks for mortgages (progressively to zero) the exchange rate will decline to level warranted by our trade performance.

  The falling currency will immediately start to reduce the demand for imports.

  Weaning the economy off its addiction to low interest rates and unproductive capital inflows will not be easy but there is no alternative.

  Creditors extend credit while they believe the security is still worth more than the debt. When that is no longer the case the flow of credit stops almost instantly.

  The canary will croak seconds before the explosion.

  I appreciate that you don’t trust the government with managing the money supply (and I don’t have great confidence) but it is certainly a better idea than leaving it to the banks and the FIRE sector.

  But as I said earlier today an approach like this is very long odds.

  What is more likely is

  The LNP will encourage the RBA to explore ZIRP to delay actions and then stand by and let the economy crumble into a debt deflation depression.

  Or – more likely – hand over the ticking bomb to the ALP next year and let the ALP deal with the problem which they will attempt to do by

  1 Trying QE for Wall Street

  2. Cranking up govt debt to finance the deficit.

  Neither side are likely to try what I am suggesting – simply because of a combination of a fundamental misunderstanding of how the money supply is currently controlled/managed and the determination of the banking sector and their pet economists to do their best to maintain the confusion.

  The banks will fight bloody hard to maintain their business model of creating money with a trailing commission attached.