APRA Watch – We can do so much better than Macroprudential

Macrobusiness today noted that the “property industry” whinging has started as APRA finally emerges from hibernation and attempts to throw some macroprudential water on the crackling and sizzling property markets in Sydney and Melbourne.

Macro-prudential measures – if they achieve their objective – which is to reduce the supply of credit to particular groups and thereby reduce the level of demand for particular assets and thereby slow the rate of increase in the price of those assets – are ultimately a form of capital control – just messy, easily criticsed and not very effective.

Because they are selective and because they put sand in the gears of a Debt Machine economy (without actually addressing that the Debt Machine model is the problem), it is not surprising that they are the subject of a lot of criticism.

It is like living in Never Never Land and then arbitrarily deciding that Tinkerbell will be limited to 50% spell power.  Don’t expect Wendy and Peter to thank you!  

Macroprudential policies rely on the theory that you can switch a Debt Machine, that is dependent on ZIRP already, to run on a wholemeal blend of nice innocent fresh debtor flesh (FHB taste sweetest). Why anyone would think that is a good idea, even if it were to work, is hard to explain.

Rather than have uglies in white shoes prop up inflated asset prices with manipulated interest rates we will get new young families to do so.

The macroprudential strategy is a risky exercise because there is a good chance that a Debt Machine running on ZIRP and very inflated asset prices will shudder to a halt and slide into reverse when the knobs are twiddled and the uglies in white shoes are forced to take a seat.  One would not want to be standing next to the macroprudential lever if that happened – yanking it back suddenly in the opposite direction may not re-start the Debt Machines forward motion.

A much better approach is to be upfront and regulate the worst forms of unproductive investment directly and that means slowly fixing the broken price signals (interest rates) that are driving the mal-investment. And that involves nothing more than slowly restricting the hot money inflows that make the artificial interest rates possible.

Did I mention that running an economy on interest rates supported by hot money inflows inflates the exchange rate and thereby undermines the competitiveness of the economy?

Well that too!

PS: Before you all stamp your feet are call me a crash-nik, that is where QE for the People will come in to help make sure that while the deleveraging takes place (and the money supply is shrivelling) there is plenty of fresh dollars being injected to the system via tax cuts.

A “Golden Kanga 0% Save the Nation” bond is just what the doctor ordered.

As natural as Weet-bix.

To read the original version of this comment in the original context at click this link. (link maybe locked – but there is a free trial available).

Categories: Macrobusiness

1 reply »

  1. In response to a concern raised about the original version of the post at Macrobusiness

    a further comment

    Even Steven,

    I did not say it was not effective – just not very effective. In any event the purpose of my comment was to point out that macroprudential is just a very limited and inefficient variety of capital controls.

    As it is a capital control I am not opposed to it but why use a poor quality control when better ones are available.

    The notion that there are a bunch of ‘productive’ businesses with great plans that would be viable if only credit was cheaper doesnt really stack up. Credit is already cheap. What is stopping them investing is a belief there is insufficient demand in the economy to warrant the investment. Driving rates even closer to ZIRP will not change that.

    Encouraging business decisions that dont stack up with cheap credit fuelled by hot money inflows is a recipe for malinvestment.

    Not sure where I suggested macropru would cause the economy to grind to a halt. All I suggested was that driving up the exchange rate in the process of securing even lower rates was counterproductive.

    In theory giving cheap debts to good people sounds great but the problem quickly arises that

    1. Most people think they are good and deserving. Miranda Maxwell appears to know a few.

    2. The economy has been running on credit extended to bad people and the asset prices reflect that. Maintaining asset prices with big debts granted to good people is a dubious objective and alllowing/causing them to deflate is very likely to cause the economy to grind more slowly.

    In short, macropru is a poor solution and insofar as it gives a fig leaf to crazy monetary policy and capital flows it is probably doing more harm than good as it deflects attention from the fundamental problem.


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