No more weird flatmates. 100% home loans (Oct 4)
I remember the slogan from around 2008. Every day riding up College Hill on the bus there was the bank ad. "No more weird flatmates. 100% home loans". And every time I rode past that bank billboard I wondered how on earth does that work? Where do the banks get the money from? How can that be sustainable? And more importantly, how the heck would you start paying something like that off?
Slowly, if at all, as it turns out. Our love affair with cheap credit and the world's love affair with cheap credit has seen us, in just a few years since, standing at the financial precipice, again. We've not fully recovered and we've not the lessons of the past.
In the text of the lecture given at the College de France in May of last year, author and academic Noam Chomsky stated that no one, virtually no professional economists, or the Federal Reserve, or the US central bank; no one took notice of the housing bubble that "reached 8 trillion dollars before it burst." Despite history being the ultimate case study, stating that no matter how big the economic bubble, it will always burst, no one flagged the signs. And there was a reason for that. Our belief in the efficient markets hypothesis was so entrenched and so complete, that "although everyone could see the arithmetic, virtually nobody could notice what was happening".
There were a couple of outside voices on the fringes calling into question the efficient markets hypothesis long before anyone else. One economist, Joseph Stiglitz, received his Nobel Prize mainly for his work that concluded: "Unfettered markets are not efficient and can be characterised by persistent unemployment". This being the exact opposite of the prevailing economic religion.
And even before that, as Chomsky writes, international economist, David Felix, added to the substantial empirical evidence that the "markets know best" idea is not working - writing that "liberalizing and globalizing capital markets has not accelerated economic growth in the developing countries by more efficiently guiding capital accumulation and technological progress". Felix went even further, saying that not only have these neo-liberal theories been associated with slower and more unstable growth but that the failure is systemic and likely to persist and that there is a growing awareness for its extremely weak basis in economic theory.
And with the Too Big To Fail insurance policy, essentially government endorsement for financial risk taking, a perfect storm was created. Quoting Chomsky: "The bigger banks knew that they were taking no serious risk with transactions that were very profitable but might well fail. And the reason is they could rely upon an implicit government insurance policy, it's called 'too big to fail'. The very existence of this insurance policy gives them substantial benefits as compared to rivals - means they can take risks, make profits, get credit on cheap terms and so on. And they regularly cash in when necessary."
And like all Big Government models, when it all comes crashing down as it always eventually will, the taxpayer will pay. The recent high profile New Zealand examples are too obvious to mention.
All this has been long understood and nothing particularly profound - that the practice is highly hazardous with the odd warning on the fringes. "The market inefficiency alone makes a financial crash a highly likely contingency and the risk is amplified by the perverse incentives from the political power of private capital. Among them the too big to fail government insurance policy, but there are many others as well," Chomsky notes at College De France.
So it's a slow grind ahead, says our Reserve Bank Governor Alan Bollard on what we can expect for our financial future.
I'd say we're in for a little more than that. We're at a stage where we just don't know how the financial experimentation that we've been witnessing will play out. We can't keep enduring ever larger speculative bubbles spaced closer together and ever longer tails of stagnant growth without there being a serious rupture in society's fabric.
Perhaps that's what we're witnessing now in the Occupy Wall Street and other movements. Also, in Greece where 20,000 people have just been laid off. I guess we'll see.
100% Home loans. It's almost quaint to think of it now.
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