Ending the era of speculation – An economic reform plan for the ALP and Australia

So the Turnbull government is blowing itself up day by day and poll by poll.

It seems as though fanatics in the government cannot wait for the policy ‘purity’ opportunities of being in opposition and are keen to accelerate the process of getting there.


However, although the ALP have made some of the right noises in recent times and are doing well in the polls,  they are still a long way from capturing the zeitgeist and turning a growing dissatisfaction with the government into a definite preference for the ALP. The ALP are getting ‘warmer,warmer’ but run the risk of veering off into “stop – you are getting colder” territory at any moment.

The ALP are looking better but mostly because the LNP are looking so woeful.  A bit less chaos from the government and things (including polls) could turn around.

Start talking about the core of Australia’s economic ‘problem’

The problem is not just:

  • Inequality in income
  • Inequality in assets
  • Unaffordable housing
  • Flatlining wages
  • Lack of opportunities for young people

They are very important but are symptoms of a much deeper problem.   Or to put it another way, if you want to make a real difference to the above it will be easier to do so if the driver for change is a solution to the problem that is generating these symptoms.

There is less need to actively redistribute if the pie is growing and the policies that are causing income and wealth to artificially clot in certain wallets are addressed.

The core problem is that our national economic ‘model’ is not driving productive investment and has not for years – the last 20 in particular.   Towards the end of the 1990s the deregulation of the financial sector was given a course of steroids and it has been causing damage to the fabric of our economy and consequently our society ever since.

Unproductive investment, more commonly known as asset price speculation, can make an economy ‘feel good’ for years as a few crumbs do fall from the table and some ‘wealth effects’ do trickle down and out.  Likewise asset sales to foreign buyers provide a national lifestyle while we still have assets to sell.   We can still ‘get by’ and buy ourselves some ‘nice things’ while doing long term damage to our future prospects.

Australia has been following economic policies for 20 years that ‘felt’ good but were consuming the foundations of our economic future.

In their bones most people know we have been living beyond our means but they can’t quite put their finger on how we have managed to do so for so long.  It is only now, 20 years down the track as they notice their income is grinding to a halt and their debts and expenses still growing that they realise something somewhere went wrong.

To really convince the public that the ALP understand the nature of the problem and are offering serious solutions, the ALP must start talking about the core policy failures of the last 20 years (in truth more like 30-40 years) and that the solution lies in directing all arms of policy towards a change in direction – driving productive investment rather than speculation and offshore asset sales.

Productive v Unproductive is the criterion to judge policy.

The challenge for most of the current class of economic policy commentators and policy makers is that modern economics does not make a distinction between productive and unproductive investment.

All investment is treated alike and simply assumed to be productive.   All of the formulas and all of the text books simply talk about “investment” when they need to distinguish clearly between productive investment and unproductive investment.

If you are struggling with how this criterion of ‘productive investment’ might be applied in practice and are fretting that “one person’s speculation might be another person’s investment” you should start with the easiest and most easily identified examples of unproductive investment.

Simply discouraging the worst examples of unproductive ‘investment’ better known as asset price speculation – the lowest hanging fruit – is likely to be enough for now (and the next 10 years).   We need to wean the economy and ourselves off our destructive economic diet and that will take time.

Even if we wanted to stamp out all forms of unproductive investment right now – we cannot and should not – a gradual cure is better for everyone.  Crashing the economy generally causes pain to those at the bottom.

1. Unproductive credit creation by private banks 

Start restricting, by direct regulation, credit creation by our private banks where the loan security is an existing asset.  This is not the article (there are many on the Glass Pyramid) to explain the significance of the privilege enjoyed by private banks but suffice to say that it is not in the public interest to have private bank credit creation directed to pumping up the prices of existing assets.

There is nothing difficult about requiring private banks to lend more readily where the security and purpose of the loan is the construction of new housing and lend less where the security is to buy existing housing.

At the end of the day – people do not even need banks to borrow money to buy existing housing.  There are plenty of non-banks lenders that are more than happy to connect investors with those who wish to borrow to buy an existing house.   The private banks have more important and more skilful work to do and that is assess loan applications and extend to private bank credit to those that wish to build new housing capacity and new productive capacity more generally.

More housing and commercial premises means lower prices, lower rents and lower input costs right across the economy.  In cities like Sydney and Melbourne where the rental vacancy rate is less than 2% and immigration is running too hot more new housing is essential.   Driving up the prices of the existing housing stock with private bank credit is an indulgent pastime we can no longer afford.

2. Unproductive capital inflows 

Restrict/discourage capital inflows associated with No. 1 and the mere transfer of ownership of assets offshore.  The discouragement can be in the form of taxes on unproductive inflows or outright restrictions on foreign acquisition of existing local assets or assets like land or existing infrastructure or industry.

Capital inflows that are directed to the construction of new productive capacity are different as they are adding to the productive capacity of the economy.

By the way, most of our most successful trade competitors restrict unproductive capital inflows as basic economic policy as those flows tend to drive up an exchange rate and reduce competitiveness.   Why should we allow what China and many of our other trading partners either prohibit or bury with red tape and regulation.

3. Unproductive government capital inflows 

Restrict the sale of Commonwealth bonds to offshore parties where the funds raised are not directly funding government projects that are clearly productive (not many perhaps but yes there are a few).

This may mean special classes of government securities and maintaining registers of ownership but so what?  We should know exactly who has legal and beneficial ownership of our government securities and we certainly should not be selling bonds to foreigners to fund consumption or recurrent expenditure.

Selling government bonds offshore drives up our exchange rate and reduces our competitiveness and damages the productive sectors (export and import competing parts of our economy).

Banking system reform

Needless to say adopting the criterion of productive v unproductive involves reform of our private banking system and its role in our monetary system AND how it is regulated.


Because our current framework assumes that there is no need for deliberate policy action and regulation to encourage productive and suppress unproductive uses of the ‘privilege’ of private bank credit creation.

As a result the vast majority of the credit creation by our private banks is secured by existing assets and is extended for the purpose of purchasing existing assets.

Our massive household debt driven bubble in house prices did not happen by accident. It was the result of a bunch of policies and ideological myopia that assumed that every credit creation decision of a private bank in a free market would be productive.

It has been a public policy failure of massive proportions.

Trying to keep the house price household debt bubble inflated is now bending all other arms of policy out of shape, including immigration where excessively high rates of immigration are driven by a determination to provide support for the economies of Sydney and Melbourne which are now almost completely centred around the “pseudo investment” of asset price speculation.

While the Glass Pyramid is of the view that the ‘privilege’ of the private banks with regard to credit creation should be entirely removed at the very least it should be regulated to reduce the abuse of the privilege for speculative and unproductive purposes.

But what about APRA?

APRA has no mandate and no institutional rationale to make the distinction between productive and unproductive private bank credit creation. To the extent that some have called for measures that seek to have APRA do so they are resisted by APRA (and the private banks and the RBA) because drawing the distinction is not part of the economic ideology that informs the role of APRA (or the RBA).

Plus many of the calls for APRA to act and implement macroprudential policies have failed to call for the application of a distinction between productive and unproductive credit creation.  Often the proponents of macroprudential  policies by APRA are simply seeking to have unproductive credit creation reserved to a special class – i.e.   Give more credit to first home buyers to buy existing housing than ‘investors’.

A banking and regulatory framework that inherently supports the enhancement of existing asset / wealth owners over new asset /wealth creation is not fit for purpose.

Can the ALP do it?

If the ALP can make the distinction between productive and unproductive investment the core of their reform narrative they will ‘smash’ the LNP who are currently  determined to make existing asset / wealth owners even richer.

The creation of new productive assets and the expansion of a productive economy is an attractive story to sell.

Squeezing a few more drops out of asset price speculation and asset sales is the strategy of small minded people like Scott Morrison and Matthias Corman who, at the moment, are determined to support rent seekers and economic moochers every chance they get.

Selling economic reform is never easy and will require skill and building trust, but a story that has at its core the distinction between the productive and the useful over speculation and rent seeking should sell itself.

The ALP need to move quickly as we are reaching the end of an ideological era and there is a risk that the LNP will wake up, move first and adopt the language of reform and in seizing the initiative may persuade the Australian public to accept its ‘version’ of reform.

The result being another decade of LNP government and reform that is promised but never delivered.


Categories: Macrobusiness

5 replies »

  1. I just don’t get it…..why do people continue to insist on seeing housing as anything OTHER than an investment assets (just like any other asset you invest your income from ‘delayed gratification’ into).

    Australians are weird….no one runs around complaining that their superannuation went up 8% last year… why do you continue to insist its an outrage when housing goes up more than 8% (eg long term average).

    Yes its ok to complain about short term rises above this amount (eg Sydney’s last 4 years is crazy…..but the 4 years before that was sub rate increases).


    • The concern is not that people wish to invest in a block of land and the pile of bricks that sit upon it but that the focus of so much public policy is directed towards driving investment in that particular asset class over any other. These policies extend from goosing demand to crippling supply.

      If Australians are still super keen to invest every dollar they earn into their private shelter after all the worst distortions are removed I doubt there would be the same concern but then I think it is highly unlikely they would do so because without those distortions they will be looking for assets with better returns. The over capitalisation of the family home is a feature of the last 20 years.

      Australia has no shortage of land suitable for housing but it does have a huge shortage of land you can use for housing as a result of public policy.

      The Australian housing market is the product of bad regulation and when it comes to credit creation by TBTF (I.e. Effectively taxpayer guaranteed) banks no regulation is bad regulation.

      The really perverse aspect of the policy focus is the encouraged use of massive capital inflows via our private banking system to keep down the price of credit for lending secured by the existing housing stock. Those inflows are completely unnecessary – we have more than enough local capital to build shelter.

      One might understand if the policy was to simply to allow red blooded foreigners to extend credit directly to local borrowers via direct securitisation as then at least those lenders are taking the risk directly and the borrowers are paying the price demanded. But that market was non-existent for years because direct lenders refused to undercut directly the taxpayer guaranteed banking sector who were offering offshore lenders the option of exposure to the local market with all the protections of lending to a TBTF bank.

      Only when the market went nuts in the last four years AND APRA finally lent on the banks to curb some of their most loony lending did we start to see foreign lenders return to direct lending to developers and buyers (usually off the plan foreigners who the local banks stopped lending to) at the sort of rates one expects as a bubble starts frothing. No surprise that those manic developments are the ones starting to fall over.


      • Wait…whaaaat???

        1/ Who said anything about “private houses being the issue” eg your “private shelters claims” every article I read is about stinking landlords investing money and buying up properties so poor children cant afford to get their first rung on the property ladder…..

        2/ Yes I agree with you that interest rates in the last few years have been super low and this caused purchase prices to increase….but this had nothing to do with securitization.

        Overseas investors thought that 2% with Australian banks was a good deal compared to 0% (or worse) with EU facilities but this was on a global basis – had nothing to do with Aust govt backstopping.

        You don’t think expats and foreigners walked away because the govt pulled capital gains discounts and or rates have gone up.

        Nothing to do with APRA about why the Chinese and others are walking…..Irony is within a few months their will be claims that brickies and sparkies are out of work and needing more jobs… us….help us….


        • Hmmm,

          1. What you are talking about? I support investment in new housing by investors and the extension of credit on favourable terms and tax policy, land supply policy to encourage them. Build baby build has been my recommendation for years. I am not so keen on extending easy cheap credit where the investor wishes to buy an existing house but I am open to you persuading me of the benefits.

          2. You are wrong. The RMBS market died after the GFC and the AOFM bought up all the current issues to stop the prices collapsing. The RMBS market was dead for years in Australia BECAUSE foreign lenders knew there would be no takers for securitised lending at the rates they were willing to accept because borrowers could get cheaper from the TBTF government backed local banks.

          2% with Australian banks was a good deal and it came with a govt guarantee. Offshore parties could have got even more by lending directly to Australian housing borrowers via securitisation but they did not. No guarantee! That old risk thing seems to be the issue. They gave up better returns for 2% risk free.

          APRA banned the banks lending to offshore borrowers. That obviously did not affect offshore buyers with cash or offshore finance. They are now drying up because the Chinese govt has pulled the plug.

          Ahhh so you have noticed rates are going up on some classes of credit creation!

          That is called removing a distortion.

          Removing the distortion of the ZIRP monetary policies of other central banks is another one that is long overdue.

          You are so used to bad Government intervention in the banking and monetary system that you think the removal of the bad regulation is a problem.


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