Bugger.

Mimi 1:04pm

The key isn't "Buy Gold" - wrong attitude, that is the reason why NZ could be bankrupt within 3 years- "Dig for Gold" is the answer.
Well- where are the Chinese gold- diggers?

People should stopped being so greedy and cut back on profits instead of cutting jobs. All this does is more people on the benefit and less paying taxes. So how on earth is the GOvt going to afford tax cuts. If all top management & Govt MPs took a 5% cut in salary, we'll weather the storm, no sweat.

PeterR, we are not or will not be in a state to bailout anyone we wont have the $, whatever and whomever it is will just go bankrupt....however in Fontera's case commodities might yet be safe and indeed bounce back quickly....people need food....and we have spare.

regards

hmm thought we already were. Debt of 86% of GDP, currency heading for the floor, kiwi's spending $1.16 for every dollar we earn....we pretty much went bust ages ago, its just someone forget to file the legal papers!

Where is Mr Cullen?? Never saw him being asked about Kiwirail etc...

How do CDS spreads relate to the probability of default?

http://www.dbresearch.com/PROD/DBR_INTERNET_EN-PROD/PROD0000000000183612...

The simple case

Consider a 1-year CDS contract and assume that the total premium is paid up front

Let S: CDS spread (premium), p: default probability, R: recovery rate

The protection buyer expects to pay: S

His expected pay-off is (1-R)p

When two parties enter a CDS trade, S is set so that the value of the swap transaction is zero, i.e.

S=(1-R)p ↔S/(1-R)=p

If R=25%, a spread of 500 bp translates into p =6.6%.

If R=0, we have S=p=5%.

On this basis a NZ government five year note is expected to pay ~87.5 cents (the recovery rate=R) on the dollar given the quoted 17% default probability.

An interpolated, theoretical NZ government five year note yields ~4.0% based on last night's close.

If an ordinary unprotected 5 year investor revovered only 87.5 cents on the dollar under Bernard's headline default scenario the yield would fall to 1.588%.

Definitely not enough.

But please correct me if am wrong. I am a learner where these instruments are converned.

Hey ,go easy on the detail Stephen.Weve had 9 years of dumbing down of education standards so just stick to short sound bites like "after Iceland, NZ is the worst in the OECD for indebtedness per capita "

If only the world were that simple, Stephen....

CDS are time contingent contracts so the use of the simple formula is questionable.

Accepting that, I think you will find that with p=17%, S=9.7% (pv of 215bp disc quart over 5 yrs), r=43% which is not way off default recovery expectations.

CDS and cash bond spreads are driven by quite different motivations and liquidity and hedge cost considerations (i.e. for the option seller, funding the short plus cost of counterparty capital) so it is not surpising that wide differentials can occur, although a 185bp cds/cash spread (400-215) does seem wide.

Thank you Michael Cullen and Helen Clark for all these years of fake prosperity and your social engineering.

New Zealander's should not worry about what may transpire five years from now. A whole lot of nations, including the US, are likely to go bankrupt first. If Roubini's opinion counts for anything, the United States is already insolvent.

http://www.forbes.com/2009/03/04/global-recession-insolvent-opinions-col...

Another economist, Simon Johnson, was director of the IMF's research department until last August. This interview provides an insider view about why the IMF has a 'hands off' policy with regards the US. http://www.npr.org/templates/story/story.php?storyId=101360253

Given that Credit Default Swaps may have been traded a dozen or so times and crossed as many borders before ending up on New Zealand balance sheets, makes waters very murky. One of the reason credit remains frozen is due to third party relationships to the CDS holder, and their real value.
http://www.wilmott.com/blogs/satyajitdas/index.cfm/2008/5/30/The-Credit-...

Nobody knows who these third parties are... and nobody knows how much a CDS is worth.
http://www.safehaven.com/article-9497.htm

The world GDP is roughly $17 trillion and the size of the CDS market is $45.5 trillion (year end 2008), and growing at exponential rates, driven by the current climate of fear. The CDS market itself will collapse long before New Zealand has to worry about it.

How good were their predictions five years ago?

How about abandon the welfare state and introduce a universal basic income.

We need a return on the money that we pay out in welfare.
Getting the unemployed (which is steadily growing) out to work for the dole they receive, wouldn't do any harm. eg. fixing up the railways, cleaning out the waterways of weeds, cleaning up rubbish etc, anything to improve the clean green image of NZ, which will help with our tourism. We need to get hard and stop being such a nanny state, and make these people work for their money. It gets them into the work ethic, and gives them some pride in improving their country. We are heading to the great depresion of the 21st century, a we simply can't afford to give people money for doing nothing.

Hey Bernard,

What is likely to happen here if NZ went bust?

In a depression many people will sense that (like Kiwi Rail) they are worth nothing......... just tallow and blood and bone.

Come on Bernard we are over taxed thats a big part of the problem Does the goverment know how to spend your money better than you do the last goverment spent our money like there was no tomorrow Tax cuts are well overdue.
Baz

Invest in property !

I love having a place on the net to share what is a pivotal point in world history. That said, I'm gonna take a break from this site, and think about how I can contribute something of more value. See ya all, and thanks for the company.

shame we sold everything the last time we were broke.

NZ has abundant resources that it is not taking advantage of thanks to conservation mania. NZ has been steadily making it more and more difficult for employers and businesses, and for entrepreneurs and startups, imposing new costs and regulatory burdens.

Leftwingers who say that we can simply get businesses to forgo profits at this time, are dreaming. Businesses are already in danger of going bust and dismissing all their staff.

Years already, of low business profits and regulatory burdens and hazards, are part of the reason that investors have looked for other, easier ways to make money. The way to make fast easy money has been property. The property market has turned into a "greater sucker" gambit, just like sharemarkets have in the past. The "greatest suckers" are those who bought at the top on borrowed money and are now getting wiped out as the market drops.

This has happened all over the Western world. The presence of capital gains taxes in some countries has made negligible difference. The main factor in housing bubble severity is the restrictions there are on the supply of land. When there is a land supply racket running, any cost burdens like capital gains taxes can be simply factored in and passed on.

A capital gains tax would make perfect sense only in conjunction with a reduction in company and income tax; that is, a shift off productively earned income onto "rentier" income; AND a removal of all restrictions on the supply of land. Along with that last, a reform of the RMA should definitely give priority to the nations economic interests particularly at this time.

All government spending should be looked at in the light of this test: would we have introduced this spending at this time? A lot of spending has been introduced under assumptions of prosperity that were false. China and India, for example, are under no illusions of their true economic condition. They know that they cannot afford luxurious regulatory protections of the environment and workers and minorities and all that, until they have everyone PRODUCTIVELY employed. Until we face this reality, we do not have a show.

raf Says:
"Slightly scaremongering headline if i may say so."

About the most level headed comment so far...
We know things are not rosy
We know if stupid (as against not the best in hindsight') actions are taken we will go bankrupt...memories of the late muldoon yrs...
Unlike the Muldoon/Lange changeover we have an advantage of knowing more or less where we are at and its not an 'overnight' hey what do we we situation, unlike Iceland and the Muldoon situation.
"Slightly scaremongering headline if i may say so."
Wrong...remove the "slightly"

Stopping the Super Fund contributions is a no-brainer: of course we should. As argued very well - and partly because very passionately * - here in the posts by Stephen Hulme, especially the first, to the Adrian Orr SuperFund thread.

(* Just a little shot across the bows of some on the forum who think debate here should be conducted dispassionately, without a barrow - especially political - to push, as if we were all, well, insipid, dry economists whose very life blood has been drained. [Not Bernard, of course :)] And as if economics is not at the beating heart of our societies, and a product of the philosophy informing how we live in them.)

Interesting Situation.

Would NZ be in a better position if the Govt hadn't given so much money to the Natives:

Wonder if NZ could get an interest free loan from the Natives.

Seem HON J KEY is keen on continuing the gifts to the Natives by opening up the Foreshore issue again prepares he knows NZ will get an interest free loan

Philbest I have debated the housing supply non issue with Hugh Pavletich on another thread. All the facts show we have not had a shortage of supply, we have been building 25,000 dwellings a year for an average population increase of 35,000 a year thats 1.4 dwellings per new person, the current occupation rate is 2.4 so as you can see we have actually been oversupplying the market. The Undersupply myth is promoted by those with vested interests like real estate agents, bank economists, builders and developers.

This artical in the sunday star times in 2007 says the same
http://www.stuff.co.nz/sunday-star-times/business/money-story-archive/13858

We have a problem in NZ of having too many property investors/speculators who simply buy and sell existing houses for profit and create an artificially high demand and pushing prices up and not enough investment in capital markets and companies who create jobs and economic growth.

We need policies to fix this problem and a capital gains would be a good first step in the process, Other policies I would like to see is stopping rental losses from being offset against personal income and depreciation on houses stopped. Also regulation on banks lending criteria for investment properties requiring at least 40% equity. If we can divert more investment money away from property and into the capital market instead then both the housing market and economy will be much better off.

Mark - You are right stopping the super fund contributions is a non brainer (glad we agree on something)

Kieran, why would vested interests in restricting land supply be OK, but vested interests in freeing up land supply not be OK? All I care about is being able to buy an affordable house, and Hugh Pavletich's arguments win hands down as far as I am concerned. It is the vested interests in restricting land supply that make me feel like going out and busting a few heads.

I simply do not accept that we can have an "oversupply" situation AND the world's most unaffordable housing, along with Spain and Ireland (according to Gareth Morgan, and certainly borne out by the Demographia surveys). I simply do not accept that the land supply chain has to include only land that has been "banked" for ten years or more prior to development. This is what you are leaving out of your equation. The construction of "enough" homes (by your standard) is not sufficient to result in affordability; there is a racket occurring over the land supply and value prior to the houses getting built. The potential for corruption is huge.

Hugh Pavletich is an honourable man for getting out of this. Who wants to have his investments subject to the whim of petty bureaucrats who may well be on the take from one's competitors? The only obstacle to sections coming to market at well below $100,000 are political ones; that would be a fair price considering the price of farmland, plus costs of development plus a fair profit for a developer. The false increase in prices consequent on the supply racket, is probably more than $100,000; but this is not necessarily profiteering, the cost of financing ten years of land banking is huge.

You are simply not making any constructive contribution to this debate unless you allow for this issue to be addressed. Capital Gains taxes would merely be factored in and passed on as long as the land supply racket persists. Laws against land banking would not help. The result would merely be a huge bidding war for every parcel of land released to market, that would drive prices up just as much; only there would be massive profits for the existing land owner, either a farmer or the State. Then you would get a whole lot of legal difficulties about whether someone was a farmer or a land banker, wouldn't you?

Any government that addresses this problem is a friend of mine. Failure to address it definitely leads to consequences that will sink any government even if the voters do not connect their problems with the land supply issue. And Hugh Pavletich on TV getting a response from the interviewer along the lines of "wow, I'd sure like to be able to buy a new house for under $200,000", is exactly the point that we need to get across to everybody.

I completely agree with what you say about easy credit being a problem, and speculation; which of course occurs in the share market all the time, but without the disastrous consequences for everybody that housing bubbles have. But the consequences of these things have varied by market in the USA precisely according to the level of restriction on land supply; where land supply is restricted, prices have gone up ludicrously; where land supply is not restricted, prices barely went up at all; in some areas too many houses were built; this is much less of a problem than having the entire housing stock in a region or a country bubble in value; the total losses are barely a fraction; and the overstock of houses acts as a helpful brake on future increases, benefitting everybody who wishes to act responsibly and save up to buy one.

You and I are in complete agreement on the diversion of investment from capital markets and companies who create jobs and economic growth. But the worst diversion of all is the diversion into asset bubbles. I believe that had we in NZ not had the land use restrictions and the land banking racket, house prices would still be related to our incomes much as they were 20 and 30 years ago and more, we would have had no bubble, we would have a lot more lower income people in affordable housing without government subsidy, and I doubt we would have sprawled out across that much more green fields land or even built any more houses than we did anyway. The prices just would have been a lot lower, that is all. But best of all, the diversion of investment from capital markets and companies who create jobs and economic growth need not have occurred. The cost of appeasing the Gaia god is high indeed.

PhilBest Mises and the like are very good at pointing out problems but they have absolutely no practical real life answers to stopping or fixing them. Idealogy has no place in a crisis. Tangible solutions are needed not dreams about a mythical utopian free market society. Please provide a real life example of this utopian free market economy without regulations, government intervention or welfare that you talk about, not just ideology and theories on how it should be because I live in the real world not dreamland.

The credit crisis was caused by the housing investment bubble not the other way around if houses around the world didn't increase by 10-30% each year banks and borrowers wouldn't be falling over themsevles to cash in on it. The root cause of the problem is investment greed, it was the exactly the same for the 1929 and 1987 sharemarket bubbles and the 07/08 oil bubble. Regulation is ONLY way to stop an investement bubble from happening in property again. Unless you have some other solution?

Philbest I am all for increasing the supply of new housing what I am saying is supply was not the cause of the property bubble, artificial demand was because of investment greed. I wan't to see house prices drop to around 3-4 income (and they will). the answer to your question what do I think will get the economy moving now? Government Investment in captital assets that provide jobs now and in the future like the cycle track, electricity grid, fibre optic broadband etc..

Maybe you could answer these questions I asked hugh.

1)If House prices have increased in NZ because we have not supplied enough land and new houses to meet demand (25,000/year) how many do you think we should be building and why?

2)Do you think increased demand from investors/speculators has had any influence on prices?

3)Would you like to reduce the number of investors/speculators (not property developers, owners and builders) who buy and sell existing property for a profit?

4) Do you think the current drop in housing consents since 2007 has anything to do with the current financial crisis and drop in property prices or is it because local and central government has put restrictions on development in place since 2007?

5) What reasons do you give for the current drop in house prices and has this anything to do with increases in prices since 2002?

PhilBest 2.53pm
I agree 100% about breakdown in marriage (and other values) as being a problem, also the babyboomer wealth inequality but not conservation of land or social services. Education, health and social welfare are basic requirements of a first world compassionate society, or do you think free markets will take care of these?

Philbest said:

"The "conservation" of land, and restrictive zoning, has a disparate impact on the poor, on the young and those who do not own properties, in favour of the more well-off who maintain their nice views and surroundings, while property values escalate out of reach of all who are not already on the gravy boat."

This is true to an extent although I think you'll find even well off baby boomers with property will also be hard hit by this housing bust. Recent stories from the US highlight the destruction of retirement wealth. This is affecting everyone. In fact in some ways being a non-home- owner is probably a blessing in disguise.

So ultimately even the existing home owners who oppose new development on the grounds of maintaining property values are deluded. Stopping development in the short term may help maintain property values, but ulitimately is partly responsible for inflating property bubbles which then go pop and massively undermine values.

A classic example in Auckland at the moment is the proposed apartment developments on Alexandra Racecourse. Some residents in Ellerslie are all in a hooplah over it, because it will affect some of their views. Yet the racecourse is private land not a reserve to be protected for the preservation of their views in perpetuity!!! The racecourse in its present form is uneconomic, and unless the residents want the whole thing to go to commercial development, a little bit of development must be a good thing. A classic of short term, petty local NIMBYism.

Also Kieran, re: your figures on housing supply versus population growth. Remember a proportion of those housing starts will be holidayhomes/ baches, or inner city apartments (many of which accommodate foreign students rather than permanent residents). So the ratio of housing supply to population growth mightn't be quite as high as you assume

1) "If House prices have increased in NZ because we have not supplied enough land and new houses to meet demand (25,000/year) how many do you think we should be building and why?"

You are clearly having trouble understanding my explanations of why we can build "enough" houses, yet the price of every piece of dirt that every house, new and existing, is sitting on, is too high. This is because of land supply restrictions and "land banking"; which is adding six figures to the cost of every section before it gets built on, and is making the whole property development industry far too risky and dependent on the whims of bureaucrats and creating enormous scope for corruption which I would be very surprised if it does not exist. When people like you defend the restriction status quo, it does make me wonder whether you fall into the category of an irrational conservationist; or someone who is on the take; or someone who owns property the value of which will drop in the event of restrictions being removed (which is actually "most people" - a far more familiar argument I encounter is not that removing land use restrictions will not work, as you are arguing, but that it WILL work and will affect the value of "my" property, so no thanks!).

2)"Do you think increased demand from investors/speculators has had any influence on prices?"

Yes, in regions where supply was restricted. It had negligible effect on prices in regions where there were no land use restrictions, in fact such speculators simply could not function in those regions. Some oversupply of perfectly affordable housing did occur.

3)"Would you like to reduce the number of investors/speculators (not property developers, owners and builders) who buy and sell existing property for a profit?"

Not by regulatory force, but by removing the conditions in which they function. See answer to question 2).

4) "Do you think the current drop in housing consents since 2007 has anything to do with the current financial crisis and drop in property prices or is it because local and central government has put restrictions on development in place since 2007?"

I definitely think it is the result of the current financial crisis, but I believe that we would not have had a crisis if land prices had been kept low in the first place as they were in many USA States, especially the South and the hinterland. I think those regions of the USA are now unfairly sharing in the financial consequences of problems into which they had proportionally little input. Sure, there would still have been a "subprime" crisis, but a subprime crisis made up of a few million $150,000 mortgages is nothing like as serious as one made up of the same number of $500,000 mortgages.

5) "What reasons do you give for the current drop in house prices and has this anything to do with increases in prices since 2002?"

It is a classic bubble now deflating. If it goes up, it comes down.

http://www.newgeography.com/content/00621-case-shiller-housing-price-ind...

Why have some of the regions on that graph had a much bigger bubble than others? Ans. land use restrictions. OK, there are some other identifiable factors like Detroit having a completely stuffed economy in the first place, a legacy of bloated state government and militant trade unionism and the most overpaid production line workers in the world.

I agree with you on the role of easy credit (the fault of central banks) pumping up these bubbles. But I also agree with you on the need of credit to go to the productive sector of the economy. The easy credit has actually not benefitted those sectors anything like it should have. I return to my original post: that is partly because of government having set up the conditions (land use restrictions) for property prices to "bubble" and partly because of governments having increasingly strangled the business sector so that it is simply not worth the trouble of investing in that direction.

A low or non existent company tax rate would have made a difference and still could. Abolishing tax on interest would have made a difference and still could. (People might have saved more money). Eliminating barriers to development of land would have made a difference and still could. Making it easier for businesses to start up and hire and fire workers, would have made a difference and still could. But a capital gains tax would have done nothing in the absence of these other things - the cost of it would merely have been passed on to the captive customer base - and still will be.

I am all for a capital gains tax as part of a package that includes those other things. You would then find that the asset value gains that the tax applies to, would be nowhere near as great as if the tax was applied without those other measures. Come to think of it, if you are a typical statist, that is what you want - another source of tax revenue, regardless of whether or not it performs the function it was alleged to. There is no moral hazard like a tax that's revenue will be GREATER, the LESS it has the effect for which it was introduced.

Feel free to give me your ideas about banning speculation in housing, banning land banking, regulating mortgagees, and all that. I would suggest that the administrative costs alone would outweigh any benefits you suppose.

Kieran, I have answered your questions, I just took a little time.

The whole point of the gold standard is that money supply does NOT increase, the VALUE of the money (representing gold) in circulation increases. Through the 1800's, the banks who issued gold-backed currency were forever having to introduce smaller and smaller units of that currency: a given unit of gold bought more and more as production increased and economies grew. This has been mistaken for harmful "deflation"; it is not harmful, it is the natural state of the world; even if we had zero inflation/deflation today, that would be "inflation", because the economies of scale and technological advances would not be reflected in reducing prices.

You do not seem to be acquainted with this, but that is no surprise. Even the academic economics profession leaves its students disgracefully uninformed on this.

Matt, thanks. Interesting discussion this.

Mark Hubbard, too. I simply do not know whether anyone really understands Soros deep down. I know and agree completely that he is public enemy number one when it comes to using his wealth to support socialism, sorry this has not been clear in my postings up till now; but nevertheless it cannot be denied that the man has got his talent for making killings in bear markets, from somewhere, and I would be very surprised if he did not get that from Von Mises. This would be a simple case of finding and using the best tactics even if they come from the "enemy" camp.

But what if all Soros cares about is numero uno, and he really is no socialist at all other than in so far as he can use it to create the conditions in which he can get richer? Mind you, it makes little difference in terms of the results on all the rest of us. But I don't think you could assume that he wouldn't know Mises if he tripped over him or that he doesn't understand what lassez faire means. He is very very clever and very very deep.

Kieran; I think that ".....Education, health and social welfare...." are things that we are rapidly running out of the ability to pay for simply because we have for too long taken for granted the source of the creation of the wealth that enabled us to establish these things in the first place, and have treated this part of the economy as a giant ATM to be drawn on indefinitely. If we go broke, we won't have them any more, will we; that is really what this whole thread was all about.

I think you need to realise that actually using the land and the resources God has given us, is all part of being able to provide well for our fellow man.

I recommend, if you can get your head around it, George Reisman's essay "Environmentalism Refuted":

http://www.mises.org/story/661

This puts in scientific and rational terms, what many Christians believe, that God has endowed the earth with ample resources for all. But it covers much wider ground than that, and is very relevant to this thread. It is an outstanding work of intellectual force.

Roger Douglas makes a lot of very good points in his latest on NZCPR:

http://www.nzcpr.com/midweek56.htm

"......The problem with the job summit is that it is likely to be a distraction when New Zealand needs to look to the dollars, not concentrate on the minor issues that is, the cents.

While the participants at the summit will take a micro-look at how we might artificially-create a few jobs over the short-term, the suggestions to come out of the summit do not address the fundamental issues New Zealand faces and that we need to come to grips with, if we are to expand the number of well-paying jobs over the longer-term.

There is a fraudulent notion to the job summit's focus on artificial job-creation. The reality is, every dollar taken out of the private sector to finance the debt of the proposed "˜fiscal stimulus' merely takes job opportunities away from where they exist in the private sector, and allocates them across a politicised area of the economy.

If you take into account the secondary effects, not one single extra job is created.....

"......The Government avoids communicating two key facts to the public. That it is excessive household debt and massively increasing Government-expenditure that is responsible for New Zealand's recession. That is what frightens away investment and puts us on notice of a possible credit-downgrading.

We were in recession prior to the Credit Crisis hitting our shores. Our banks are in much better condition than in the Northern Hemisphere.

To pretend that increasing Government-spending is the solution to our private and public indebtedness is to be fundamentally dishonest to the public......

"........The productivity gains we require to reclaim our standard of living, which was once third in the world "“ is around 5%. This increase is to be gained from the introduction of competition into the state sector, both public and private. It is in the state sector where the bulk of economic waste lies.

By this action the Government will be in a position to provide real tax cuts, not the pretend ones currently on the table that soon we will see slip away......

"......There is no argument that the state sector can provide social services like Health, Education and Welfare better than the private sector: each of these Government departments is in a state of resolute failure.

Monopolies by nature do not subject themselves to efficiencies in the way that private companies do in a competitive environment.

Further, by nature Government monopolies are subject to bureaucratic-capture, vested interests and political failure, and as such we have financial disasters the scale of ACC, or the railways.....

"......Raising our sights to long-term productivity growth is the only hope we have of raising real wages in an economy without exacerbating unemployment.

As a country, we will not increase the standard of living we enjoy, until we stop pretending that we can become wealthy by taxing others. Bully tactics over an attitude of lifting our game together will further serve to hurt the poor.

We will not increase the minimum wage without simultaneously putting people out of the workforce - until we get productivity-gains at a level beyond those increments....."

oh, Phil, unlike Lew Rockwell, who Mark Hubbard says he is "going off", possibly because of his nasty objectivism.

For the record as philosophically I am an Objectivist [politically a Libertarian, economically a capitalist] that is not why I am going off Rockwell, rather, the reason is precisely because I don't think he is a very good Objectivist (at times - enough holes to be worrying).

Philbest

Thanks for answering my questions, I can assure you I am not a land conservationist or want to see property prices remain inflated, I don't support land restictions because there are none. If there were then I agree it should be stopped, but all facts show there is not. Blaming local government for the housing bubble is a waste of time and a smoke screen for the real problem which is allowing an investment bubble to infect housing in the first place by promoting it as a better investment than shares (where investment bubbles normally occur). Untill you do something about that housing will be infected again and once the infection has started fundamentals of value get thrown out the window and greed takes over, normal supply and demand become meaningless.The share market needs to be made more attractive by removing the tax incentives property investment currently receives or the same will happen again supply shortage or not.

In terms of the gold standard, Yes I am aquanted with deflation and thats exactly why its not used, there is not enough gold, or maybe we should have .1trillion cent coins like Zimbabwe but in reverse, that sounds like a good way to run an economy.

I will have a look at Gary North.

Are ya all ready for this yet. They all have one thing in common, successful Debt Free BASED Monetary Systems;

http://www.webofdebt.com/articles/state_bank_option.php
http://www.michaeljournal.org/guernsey.htm
http://www.hnzc.co.nz/hnzc/web/research-&-policy/our-archives/books.htm
http://www.teara.govt.nz/1966/F/FitzroyRobert/FitzroyRobert/en
http://www.kamron.com/Liberty/colonial_script.htm

A second part to above as the spam filter would not allow me to post so many links in one. It is quite simply a Debt Free BASED Monetary System or Bust;

http://www.facebook.com/group.php?gid=2697600352
http://en.wikipedia.org/wiki/W%C3%B6rgl
http://www.globalresearch.ca/PrintArticle.php?articleId=10772
http://rspas.anu.edu.au/economics/publish/papers/wp2007/wp-econ-2007-07.pdf
http://www.thedebtrealignmentinitiative.com/Debt_Realignment.html

True wealth is about to come to the fore once again - Food, water, shelter
Just how much do you Liberterians want urban crawl to encroach upon productive land. Until there is a consumer on every square metre, until we end up a foreign dependent serfdom unable to feed its population. Just where does your opening up of land stop, at the same destination as the myth perpetual growth.
http://www.optimumpopulation.org/opt.earth.html
http://www.optimumpopulation.org/opt.more.ukpoptable.html

Just expanding on the land supply issue, it shouldn't matter if there is a under supply or an over supply if normal market value is set by fundementals of income and rental yeild supply/demand etc... prices will go up or down to suite.

In a bubble market values are not set by fundamentals but by potential future capital gains, thats why investors are prepared to go into negative cashflow and why some cities had bigger bubbles than others, they are the markets with a perceived better potential for capital gains after all its about location location location isn't it?

The issue is not supply/demand the issue is the fact a housing bubble was allowed to even happen at all. Even if there was/wasen't a housing shortage is irrelevent a housing bubble should not of been allowed to happen full stop. House prices should be able to increase without turning into a bubble market.

To stop a bubble from ever happening again in housing you have to stop the Investment money that fuels and allows it to grow from flowing into it.

Bubbles cannot be allowed to develop in the housing market again supply shortage or not just look at the consequences. Leave investment bubbles to the stock market and make sure they never happen to housing again even if there is a supply shortage for whatever reason and I am not saying there is, what I am saying is so what!! values should be set by income/rent and normal supply/demand... not an investment bubble.

"In a bubble market values are not set by fundamentals but by potential future capital gains, thats why investors are prepared to go into negative cashflow and why some cities had bigger bubbles than others, they are the markets with a perceived better potential for capital gains after all its about location location location isn't it?"

that makes sense to me. I suppose you would factor the behaviour of the NIMBY's in as well.

I think what Douglas is saying is that the use of private sector tax to pay for the government's 'fiscal stimulus' is imprudent, or bad economic management.

My understanding is the government intends to fund the 'fiscal stimulus' through increased debt (i.e. not present 'real' taxes but future 'non-real or imagined' taxes).

I do feel that during an economic slowdown, lower taxes and lower compliance costs, particularly for small (i.e. owner-operated) business is far more prudent management. We do need to keep small business in business - or these 'imagined' taxes will never eventuate. The government's policy changes so far for SME's is extremely poor - not much relief at all. It will not do anything to stem shrinkage in that sector.

Kate:
>I think what Douglas is saying is that the use of private sector tax to pay for the government's "˜fiscal stimulus' is imprudent, or bad economic management.

Well, private sector taxes usually pay for public works, either directly or eventually (if funded by debt).

Kate, that the fiscal stimulus is imprudent is Douglas' assertion. The argument he uses to support it is that such public works will displace private investment. He even calls it, with typical hype, "fraudulent".

Unfortunately it's his argument that turns out to be the logical fallacy, and on a couple of levels to boot. Not very impressive from a supposed economic guru.

Now, you make the same assertion, but offer a different argument to support it. Of course, we could debate your argument - which in fact has a good deal of empirical evidence against it - but this hardly helps poor old Roger's confusion...;-)

Phil

You want everyone in Chindia to be productively employed, you must be blindly cornucopian or do not understand the implications.

The US has 300 Million people and consumes 25 Million barrels of oil a day (NZ is about half that per capita), based on scaling this up to 2 billion in China and India, being mean and only giving each half of what we consume that would require another 40 Million barrels a day of oil, not to mention other resources, It simply is never going to happen.

Neven

On the housing bubble issue, THIS is a very good recent study:

http://www.heritage.org/Research/SmartGrowth/bg2247.cfm

""¦..the costly stimulus plan is little more than a grab bag of congressional policy obsessions that other Presidents suppressed in the past; the financial rescue plan is a jumble of confused generalities; and, as currently proposed, the President's troubled homeowner relief program would further undermine any remaining notions of personal financial responsibility by requiring taxpayers who paid their bills to subsidize the many homeowners who didn't.

One of the chief failings of these programs is that they focus on symptoms, not causes. Nowhere among the host of initiatives is there any attempt to address the several underlying causes that undermined the stability of the housing finance market and the ability of ordinary American families to acquire affordable housing.

Indeed, based on President Obama's initial pronouncements on the issue, his Administration seems intent on exacerbating some of these causes by diminishing freedom of choice and making housing even less affordable. In turn, these policies will substantially slow the process of recovery in homebuilding and housing finance"¦"¦

""¦"¦. * Whereas the typical relationship between median house prices and median income was historically about three-to-one or less, this "median multiple" (the ratio of median house price to median income) in most urban areas of California rose to between seven- and 11-to-one at the peak of the market.
* In 2007, the median-priced home in the metropolitan areas of San Francisco, Los Angeles, and San Diego was more than 10 times the median income of households in those areas. In other areas with tight land-use regulations, that ratio was 5.5 for the Washington, D.C., area; 5.1 in Portland, Oregon; 5.9 in Las Vegas, Nevada; 6.0 in Seattle, Washington; and 7.1 in Miami, Florida, to name just a few of the many unaffordable places in the United States.[5]

In contrast to the high housing prices in regulated areas, less stringently regulated areas maintained their affordability during the past housing boom and bubble. In 2007, the ratio of median house price to median income was 2.3 in Indianapolis, 2.8 in Atlanta, 2.5 in Dallas, and 2.9 in Houston. In each of these areas, the median price for a house never exceeded $200,000"”in contrast to $804,000 in San Francisco, $588,000 in San Diego, $430,000 in Washington, D.C., and $365,000 in Miami.

Not surprisingly, delinquency and foreclosure rates in the areas with tight land regulations and inflated housing prices are among the highest in the nation. They are also the areas that have experienced the greatest declines in housing prices over the past year, thereby further destabilizing regional housing markets and the national mortgage finance system.

According to house-price data collected by the National Association of Realtors for 159 metropolitan areas for the fourth quarter of 2008,[6] 26 metropolitan areas had experienced house-price declines in excess of 20 percent since the fourth quarter of 2007. Among these 26 metropolitan areas, 18 were in the land-use restricted states of California (seven); Nevada (two); Arizona (two); and Florida (seven), while six were in the hard-hit recession states of Michigan and Ohio.[7] In Michigan and Ohio, however, house prices generally remained at or below the 3.0 historical median multiple norm.

Given the high debt burdens that high housing prices have imposed on many homeowners in the four most heavily regulated states, it is not surprising to find that the highest foreclosure rates are also concentrated in the same high-cost, land-use restricted states: According to RealtyTrac, a leading real-estate reporting firm, nine of the 10 areas with the highest foreclosure rates were in California, Nevada, Arizona, and Florida,[8] while 18 of the top 20 were in urban areas that Brookings includes in its most restrictive category, including California, Nevada, Arizona, and Florida.[9]"¦"¦

""¦"¦..The Demographia analysis also focused on the magnitude of the potential loss per loan to lenders that may occur as a result of a foreclosure. For example, while the Atlanta area had the 17th-highest foreclosure rate in 2008, the affordable nature of its house prices meant that the peak-to-present decline in house prices entailed a median loss of only $24,800. By way of contrast, the median peak-to-present loss exceeded $230,000 per house in San Francisco and San Diego and was more than $200,000 per house in Los Angeles and San Jose.

In addition to the substantial monetary loss that each foreclosure in these areas imposes on mortgage lenders, these same areas seem likely to receive a disproportionate share of whatever federal subsidies are provided in a nationwide program of foreclosure mitigation, loan renegotiation, or loan refinancing. As a consequence, taxpayers nationwide are being placed in the position of having to bail out borrowers in those few regions whose abusive land regulations contributed to the bubble in home prices and its subsequent collapse"¦"¦"

Mark Hubbard, nice exchange of views. Yes, we can agree to differ on Soros. I just simply cannot believe that someone genuinely so clueless on free markets, etc, could be such an incredible player of financial markets. I am inclined to believe that he is sucking in the leftwing politicians he supports, to his own long term advantage, knowing that he can make more of a killing for numero uno with them in power than in a real free market.

What turns me off about objectivism is the rejection of altruism in itself. I think that there is a pure altruism and a perverted altruism which has been hijacked by socialists to their own ends, same as "christianity" has been hijacked by those socialists.

Gary North has a fabulous essay called "What Would Jesus Steal", which absolutely NAILS this issue.

Matt in Auck says:

"the NZ Herald is once again showing what a piece of garbage it is by publishing this dross"

That's funny considering that about 70% of the content on interest.co.nz is sourced from the herald.

Kieran, YOU take YOUR ideological blindfold off and look at the facts.

http://www.mackinac.org/archives/1998/sp1998-01.pdf

".....Employment and GDP stopped declining after 1933 and started increasing again exactly the date the New Deal policies where implemented, simple...."

And they fluctuated up and down for the rest of the 1930's: is that what you call a policy that "worked"? I fear that the same will happen again: years of unemployment fluctuating between 13% and 17%, followed by a World War for which the conditions have been furnished.

Ah, now you couldn't care less about the evidence on land use restrictions. If it wasn't for the States in the USA that do not have restrictions, YET, we would simply not be able to make these valuable comparisons, so entrenched are anti-human Green ideologies pretty well everywhere in the Western world.

There is no logic at all to your argument that it is our terrain that is the problem. Why, then, have the sort of strangulatory restrictions that we do have, at all?

You are clearly having trouble understanding my explanations of why we can build "enough" houses, yet the price of every piece of dirt that every house, new and existing, is sitting on, is too high. This is because of land supply restrictions and "land banking"; which is adding six figures to the cost of every section before it gets built on, and is making the whole property development industry far too risky and dependent on the whims of bureaucrats and creating enormous scope for corruption. Why can you not see that ten years of land banking financed at 10% interest per year; would be adding 6 figures at least, to the cost of every section?

If all the new houses that have been built, had been built on land bought a matter of weeks before the development proceeding, and if we had a genuinely competitive market in land development instead of an unpredictable racket, all those houses would have been sold for more than $100,000 less than they otherwise were; it is not a question of ending up building "more" houses than what we did, it is a question of the price that the dirt they were sitting on, ended up at.

And the effect on all existing houses is the real "biggie". We have a struggling first home buyer signing up to $400,000 worth of mortgage on some old dump of a house that is actually worth about $30,000, sitting on a piece of dirt that is "worth" $370,000 just because it is closer to the city centre than those pieces of dirt on the edge of town that are "worth" $150,000 because they have been land-banked for 10 years and because there is no real competitive market in housing development.

Do you really think that this situation will never, ever, have led to a single incidence of corruption? When bureaucrats have the power to break developers to the tune of tens of millions of dollars? You must be one of these lefties with a misplaced faith in human nature.

Another study you must read, is "The Costs Of Utopia" by World Bank Economist Alain Bertaud. He describes in great detail, the process by which house prices in Portland have been pushed up by land use restrictions, AND average commuting distances have been forced UP, not down, by urban limits. A fascinating example of unintended consequences coming back to bite utopian totalitarianism differing from fully-fledged communism only in its scale.

http://alain-bertaud.com/images/AB_The%20Costs%20of%20Utopia_BJM4b.pdf

Scroll down to page 12 of the PDF for a VERY revealing graph of Portland's housing density. Do read the whole report. Owen McShane wrote an article summarising it in a recent NBR.

Oh, I've located Owen McShane's NBR columns on the Alain Bertaud studies:

"The High Costs of Central Planning"

http://www.rmastudies.org.nz/index.php/columns/56-columns/283-345-plans-...

"Part 2"

http://www.rmastudies.org.nz/index.php/columns/56-columns/285-the-high-c...

Phil

I assume you are talking tata nano v smart car, though neither will make any difference, in fact according to Jevons paradox will make the situation worse.

As for some techno wet dream of a post-oil age, I'd suggest you follow the numbers, there is no evidence that we are doing anything but becoming more dependent of a ready supply of cheap liquid fuel

Neven

Kieran:

So the policies prior to 1933 which allowed unemployment and GDP to spiral out of control were better?

On other threads I've posted you link after link on how your thinking on the Great Depression is utterly flawed, yet you continue on this line. I don't have time to regurgitate the arguments yet again, but you do not argue in good faith until you demonstrate conclusively how the opposing view to your own, the one that fits the facts of reality, is wrong.

Another question for you though from the Austrian Economists:

Is going trillions more into debt to solve a crisis that arose from cheap credit and too much debt just like trying to cure your lung cancer by smoking an additional pack per day?.

I've not really been following the latter part of the argument above Daniel, I've not had time, but I skimmed this morning, to see in the one section I cited that Kieran is still banging on with his mis-guided notions on the Depression, and how he thinks Roosvelt solved this (whereas he made it deeper and worse). And also how Hoover before him was not a free marketer, not at all, but another interventionist.

And I'm not repeating all the links yet again. People seem happier in their ignorance for whatever reason (just a pity that such ignorance enslaves me to the Big State, alongside him - that's what makes me angry).

Mark:
>...I cited that Kieran is still banging on with his mis-guided notions on the Depression...

But his arguments are consistent with the facts of what happened - GDP went consistently up, unemployment went consistently down during the stimulus - whereas Philbest doesn't seem to want to admit that happened.

So can I take it that a stable money supply is a constructive goal to aim for?

Mark:
>All the facts, figures, and no doubt graphs, to prove the Keynsian re-writing of history to be arguably one of the most dangerous re-writings of history there has been.

This is not rewriting history: the facts are what they are. During FDR's stimulus, GDP went consistently up, and unemployment went consistently down. When the stimulus was removed to balance the budget, the reverse happened.

You know the one about a beautiful theory - which I is how I would describe the Austrian theory - being destroyed by ugly facts. Well, this is the situation we have here. I think you can't really have an empirical, "facts of reality" approach on one hand, and then reject the facts when they don't fit your theories....;-)

Mark we have debated this issue before. Hoovers ideas were not implemented until Roosevelt in 1933. From 1929-1933 Monetry and fiscal policy was tightened by the head of federal reserve from the advice of treasury at the time.

New Deal policies were started in 1933 not 1929 here are the facts:

http://en.wikipedia.org/wiki/New_deal

I am not going to keep going over the same ground with you.

(Thanks Daniel for your comments)

I can tell from Mark Hubbard's comments that this is a time wasting argument. Hoover's ideas were wrong, just as FDR's were. The upturn in 1933 certainly could not be credited to either a President who had only just taken office; nor could it be credited to the policies of his predecessor if, as you say, those policies were not enacted until that time.

The crash from 1929 onwards, was the result of the tightening of monetary policy following a period of monetary inflation, along with kneejerk trade protectionism and beggar thy neighbour policies. I did not think any school of economic though was in dispute about that.

What New Deal proponents need to confront, is THIS:

In the spring of 1937, the American economy took a sharp downturn, lasting for 13 months through most of 1938. Industrial production fell almost 30 per cent within a few months and production of durable goods fell even faster. Unemployment jumped from 14.3% in 1937 to 19.0% in 1938, rising from 5 million to more than 12 million in early 1938. Manufacturing output fell by 37% from the 1937 peak and was back to 1934 levels.

Roosevelt actually had to abandon the New Deal as the Federal Debt had become so alarming. Paul Krugman and other modern day Keynesians assure us that he should have kept his nerve and borrowed and spent even MORE. Oh well, I suppose we need to try it and watch the consequences. But this is strange considering that recovery resumed after that earlier abandonment of the New Deal. It is a pity that a world plunging into war obscured the conclusions we should be able to draw, shortly after.

Daniel Barnes, that is the most dishonest distortion of what I said: "I fear that the same will happen again: years of unemployment fluctuating between 13% and 17%, followed by a World War for which the conditions have been furnished." (Actually I should have said 19%, not 17%).

Years of unemployment never going below double figures, and going back up again long before any drop attained single figures, is hardly evidence of a policy that "works", especially given the rapidity with which unimpeded free markets would achieve the result. No-one remembers recessions like the 1921 one, that were short and sharp precisely because free markets were largely allowed to work. And turning around an improving situation into a deteriorating one after 4 years in office, is hardly evidence that those policies "work".

In fact new rule for this forum and the entire Internet - and note, for convenience I have at times referred to Wikipedia, so am guilty also.

Rule:

Reference to Wikipedia automatically counts as loss of argument for the linkee. :)

PhilBest: great post. Yes, those are the facts. But no Keynesian will have the stomach for them.

Kieran, I simply cannot get my head around your new trend of argument that we DON'T have land use restrictions. Come ON, man.

But yes, you have represented my view correctly here:

"Your solution: (NB: although this is only PART of "my solution")
Get rid of land restrictions so prices never increase therefore it will be unattractive to the investors who cause bubbles. I say go for it lets remove all land restrictions and prices will never increase again yahoo"¦."

"That is unrealistic. Geographical land restrictions can't be removed....."

So why do we need regulatory restrictions as well? And earlier generations bought affordable new houses all over Wellington hillsides; your geographical restriction argument is codswallop. The geographical restrictions may well have added to the prices; the price penalty resulting from regulatory restriction is in addition to, and far worse, than that.

"....and land/house prices go up anyway because of inflation....."

FINE, as long as they do not go up faster than people's incomes.

"......Price increases (even the possibility of an increase) attracts investors and hence the chance of another bubble."

I do agree. But prices do not "bubble" in the event that there is a free market in new housing development. There may be a brief period in which too many new houses get built, but this would be a rapidly self correcting phenomenon in a free market.

"My solution:
Stop investors with tax and bank lending restrictions. Much easier, realistic and acheivable."

And completely failing to address the issue of whether oncoming generations will be able to afford homes. As long as developers need to "land bank" and take enormous risks with huge investments, risks that depend on the whims of bureaucrats, homes will be remain in the "severely unaffordable" category. THANKS FOR NOTHING.

Capital Gains taxes will be built in to pricing, and the resulting revenue stream for the government will make them completely reluctant to actually address the underlying causes of the ease with which those capital gains can be gouged out of trapped home buyers.

You also completely fail to grasp the implications of central-banking induced credit expansion and contraction. You are among the majority in assuming that it is politically impossible to change that. In times of credit expansion, the easy money will find a route to any bubble that is on offer. It is abundantly clear to me that the reason that this LAST bubble has been a severe housing bubble, in contrast to economic history heretofore, is the increased imposition of restrictions on land use; "Smart Growth" and Urban Limits; the greater ease with which new house supplies could be furnished in response to credit expansions in the past, resulted in building booms, not pricing bubbles; and in fact this is what happened this time around in those few parts of the USA that still regard humanity as taking precedence over trees and grass and birds and snails.

"Green" policies are being quite rightly blamed

Raf

It is the expansion of the money supply that is the root cause of our problems.

I don't disagree except I think its a symptom not a "root cause", Why/How did this happen without anyone noticing? I have my own theory, that basically what we are seeing is the US doing an economic Super Nova before it becomes a black hole. Hopefully the rest of us will not be sucked in as well.

I do enjoy the inanity however of pseudo-economists debating events of 80 years ago as though it has any relevance to what is happening now

Neven

neven911 Says:

March 9th, 2009 at 10:26 am

".......the whole economic structure is incomparable with what is happening now, Today we have govt of up to 40% of GDP (in the 30s they had barely discovered income tax) so whatever the state does (stimulates or cuts back) will have an enormous impact.

We have this amount of state "˜interference' because we are more wealthy (and therefore can afford this level of govt overhead), The process of becoming less wealthy (and therefore reducing our ability to support overheads) is not going to made any less unpleasant by rapidly altering the state, and any assertion that all will be well if we stop the bailouts is clearly ludricrous.

No-one as far as I have read has positively identified the root cause of this current situation but I doubt it is simply land supply regulation as Hugh contends or Bernards (and Cullens) favourite of we should all just save more, or the fiat currency/fractional/central banking system (ala Ian)

The more I read, the more I suspect it is human psychology, that given a dream, in this case that we can all gain increasingly consumptive growth driven wealth and a set of facts that vary from that we will chose the dream......"

I have been diverted onto debating FDR and the New Deal, but I must say that what you say there, is very like what I have said before on other blogs. I agree completely that we are starting from a position today where government is already very much bigger than what it was when Keynes devised his theories and "the New Deal" was introduced. I would refer you to my comments at 10.45 on the 7th, earlier in this thread. I think we need to ensure that the process by which REAL wealth is created (not speculatory bubble wealth) is not hindered by taxes and regulation. We can all too readily overstep the boundary of what the engine of our economy can sustain. I agree that this involves a "dream".

Just a quick comment on the Smart Car/Tata Nano idea. That just happens to be where we are at today. But I recommend you read George Reisman; "Environmentalism Refuted", and also Jesse Ausubel: "Renewable and Nuclear Heresies".

My point about the Smart Car/Tata Nano, is that the ability to mass produce exciting new technology cheaply in Asia, will help us out of these problems. It is all part of the great progress of humanity that is possible through wealth creation and capital accumulation.

neven, regarding money supply:

except I think its a symptom not a "root cause", Why/How did this happen without anyone noticing?

Together with other related issues, such as expansion on the expansion of cheap credit, central banks distorting market interest rates, that is, government interventionism, of course the pumping of the money supply was a root cause, and not just a symptom. What are you contending it was a symptom of?

As as for no one noticing - huh? Of course they did: you can go to the Internet site of just about every Central Bank and download graphs of the money supply and see it for yourself. You see, this was a deliberate policy on behalf of big governments, mis-fed and mis-led by their plethora of Keynesian advisors - Marxists without the beards. Missing this point is why you mistakenly do not see this increase in the money supply as a root cause, and merely symptomatic of ... whatever, which I still leave for you to explain.

I have to say neven, while I agree the US economy, and society, have much further to fall under what will be seen as disastrous policies by Obama, unfortunately, your reasons are not seemingly based on facts or consistent economic theory as far as I can see, thus, I'm afraid 'your own theory', forms part of the 'inanity' of the 'pseudo-economists debating' that you then describe in your final sentence.

And now that Matt has introduced God into the thread, I can at long last, with dignity, leave the thread, as it can only nose dive from this point into who knows what mystical nonsense.

Mark - the money supply was expanded by public servant sectors, atleast in Democratic countries, infiltrated by trained co-operatives of the international bankers, who's advise was not so gently rammed down their throats by the threat of economic sanctions should they choose to ignore it.
The bankers did not care if countries had Democratically elected leaders or dictators, if they thought the loans would be repaid they would deal with anyone. If they thought their was little chance that loans would be repaid, you remained undeveloped until a suitable leader was in place.
The extent of the extortion in supposedly democratic nations simply came down to if the individual cabinet executives in power at the time were working for them or doing what they could to resist them.
The only time this pattern has been broken, has been when Debt Free BASED Monetary Systems have managed to be put in place in the hands of decent leadership.
Unfortunately in every case thus far the slave minded bankers have managed to suppress and shut down everyone of them.
The most recent crime being the largest they have ever perpetrated, will hopefully provoke sufficient decent that the basically decent majority might once again begin to question the spin they are being FED(pun intended) and demand reform.
The largest force in the world, if they are fully informed, are the basically decent majority who just want to get from start to finish in peace and dignity. Thus far due to manipulation and misinformation they have been pawns in a world of hurt.
Mark, you and I are so similar in many thoughts, but you appear to think that the cloak of the Diplomatic Curtain does not exist.
Also, I ask do you believe in the Libertarian Mantra that the only law required is that their is no law needed but one, that you do what you wish as long as it is not detrimental to others. This sounds fine in theory, but how long do you think before it turned into a million grey areas in practice. Grey areas that would need adjudication or anarchy would ensue.

Mark - I am a happy Atheist, all I was playing on was your fellow Libertarian Philbest's proclaimed Christianity

Matt, you really, really must read "The Costs of Utopia" by Alain Bertaud, which I linked to earlier on this thread.

http://alain-bertaud.com/images/AB_The%20Costs%20of%20Utopia_BJM4b.pdf

The front page refers to Moscow, Brasilia and Johannesburg, but scroll down and you will find analyses of urban density profiles for Portland and Curitiba as well. The surprising reality is that the distorted urban density profile has resulted in GREATER average commuting distances for a city like Portland, in comparison to a city that has developed freely.

Utopian environmentalism is just as mistaken in its conceits as communism was.

Increase urban densities closer to the centre by regulation without actually confiscating property and directing people where to live (i.e. totalitarianism) only has unintended consequences that more than negate the original intentions. And even if you do it by totalitarianism, the abandonment of market principle property pricing has the worst consequences of all.

"The Spatial Organisation Of Cities" by Alain Bertaud, is another much lengthier "must-read" if you want to understand this topic.

http://alain-bertaud.com/images/AB_The_spatial_organization_of_cities_Ve...

Cities naturally develop a density profile where the highest densities are at the centre and declines evenly to the edges. Attempts to impose shorter average commuting distances by putting urban limits in place, actually have perverse opposite outcomes. The mechanism underlying this, is the effect on property prices that urban limits have - it forces up the price of all property. (Kieran denies this).

People desperately looking for affordable living, tend to cluster at the edges where prices are lower. Infill development, driven by this demand, also occurs closer to the edges. Look at those urban density profiles and see for yourself.

The idea that imposing urban limits will result in people willingly queing up for inner city apartments, is a delusion. They cannot afford inner city apartments. Inner city apartments everywhere in the world, are occupied solely by the rich.

In any case, I think that the idea that high density living is the answer to some future age of scarcity of resources and low carbon emmissions, is absurd. How many solar panels or wind turbines can you mount on each apartment in an apartment building? How many vege gardens can each occupant have? How many trees can they plant and tend? What are the consequences of all the occupants of closely-clustered apartment buildings burning biomass for heating?

Have you seen the study "Consuming Australia", by "the Centre for Integrated Sustainability Analysis" at Sydney University, that calculated that carbon footprints were higher in the case of inner city living than in the case of suburban living?

"Commuting" absorbs only around TEN PER CENT of total energy consumed by households (29.4% from goods and services consumed, 28.3% from food, 20% from household uses (mainly electricity), 11.8% from construction and renovations, and just 10.5% from transport, mostly petrol). Different locations"”downtown, high-density inner suburb, suburban, or urban fringe"”barely matter. The major carbon variable is household income. Those with the highest household carbon footprints are those with high incomes living in "vibrant downtown communities."

Why do environmentalists not take a serious look at the advantages of stand-alone houses surrounded by nature? Why do rows of houses each of which are surrounded by dozens of trees, repel environmentalists?

If you want to reduce commuting distances, allow more flexibilities of land use and multi nodal development. The major difference between today and past eras where so many people walked to work, is that in those days, houses and factories and offices were freely intermingled. Cars and roads were regarded by our ancestors as a means of raising quality of life by separating these things.

Public Transport is now completely unviable as a replacement for cars, simply because our cities and economies have grown according to the enormous flexibilities and timeliness of the car and the truck.

Lower commute distances, not changes of modes, are the answer. The way to achieve this is by LESS regulation, not more, and by building more new roads (to provide interconnections between areas) not less. Business startups in suburban areas should be encouraged. Telecommuting is a wave of the future. IT-based car pooling likewise. Taxi licensing laws should be abolished to enable anybody to carry fare paying passengers on routes that they are travelling anyway.

We need facts and flexible minds.

Soooo, Steve Withers, which foreign currency do you think will be safe to shift your money to? I'd loooove to know.

Do you really think that high tax, big government, borrow and spend, countries will be your best bet?

I think the world is pretty much all going down together right now, unfortunately. I'd pick a basket of countries with small government, good increases in the rate of productivity right up to as recently as statistics are available, and low private and public debt, and that are not too geographically close to wobbly dictatorships or corrupt socialist strongmen. No, I'm not going to tell you what countries fill that criteria, you can do the hard work for yourself.

Iain:

The Meriam-Webster definition of laissez faire per your link, quote:

1 : a doctrine opposing governmental interference in economic affairs beyond the minimum necessary for the maintenance of peace and property rights 2 : a philosophy or practice characterized by a usually deliberate abstention from direction or interference especially with individual freedom of choice and action

Please indicate a single post I have made in contradiction of that definition?

Oh.

You guys are barking up the wrong tree if you think increased elected government regulation has caused this mess.

That certainly has been 'a' factor, but the biggest factors have been straight out government interventionism in all it's forms as I have written on to people are sick of me in other threads.

Kieran, please actually read this whole posting.

Where did I say a free market acts to correct a bubble?

I do say that the free market will correct the EFFECTS of a bubble if allowed to do so; i.e. the bubble deflates and the assetts concerned return to their correct market value. Governments all over the world are desperately trying to keep bubbles inflated by bailing out mortgages and banks and cutting interest rates and trying to get banks lending again; as if all this was not what led to the crisis.

House prices at a median multiplier of much more than 3.0, represent a bubble that has been kept from deflating by interference in the free market process. While the price crashes that have occurred in some areas are spectacular, and those yet to occur in New Zealand might be spectacular, land use restrictions will prevent that affordability level from being reached. The right political will in addressing the land supply issue, will allow it to be reached.

You are absolutely unique among debaters on the subject of land use restrictions that I have encountered. Nobody else has ever argued from the points of view that we do not have land use restrictions, but if we do we shouldn't remove them because that would be bad for the environment, but they don't have any effect anyway because our terrain acts as a natural barrier on development, and we shouldn't enact any legislation that would bring residential land onto the market at the cost of farmland plus cost of development because our land prices are already as low as they should be.

The most common argument I encounter is the honest argument that yes, land prices definitely could be brought back down by removing zoning and urban limit restrictions; but that would affect the value of MY property and everyone else's, therefore this is a non starter.

You clearly have either this vested interest or some other one, in this issue and you are trying to obfuscate observers of this debate with a whole lot of hollow bluster. I will take your word for it that you are a fundamentalist christian but I will also assume that you actually have not had time to seriously consider the arguments I have made both on the housing issue and the environment, as I do not want to think of you as dishonest. I also do not understand how a fundamentalist christian does not leap at any chance for his children or grandchildren or nephews and nieces or whatever, to have affordable housing one day.

I would ask you, as a self-described fundamentalist christian, to consider that the media and our educational institutions and indeed much of our bureaucracy is stacked by anti-Christian secular humanist leftwingers and Greenies, and that if you have not seriously researched these issues we are debating, well outside the all-pervasive sources of "information", you are in danger of succumbing to what is in fact an elaborate tissue of lies. The fact that this elaborate tissue exists in what is a "free" society, is what makes it plausible; if you actually lived in a totalitarian country of course you would be cynical about what you are told in the non-free press and the State schools and so on.

To get emancipated from the environmentalist movement's lies, you need to read the George Reisman essay "Environmentalism Refuted" and buy yourself a copy of Bjorn Lomborg's "The Skeptical Environmentalist". I could recommend a lot, lot more, but those two will give you the most sound basis of truth and reason on this issue.

Reisman's essay completely blows out of the water, all the "resources are running out" arguments of the sort that "JH" linked to above.

I have precised Reisman's points on this subject as follows (but I still recommend everyone reads the whole essay).

We have actually barely begun to prospect the entire surface of the earth, and under the sea bed, for all known resources.

As mankind becomes more technically advanced, he discovers uses for more and more resources. Many of the resources we use most today, we did not use at all until we discovered how to use them.

There is no reason to believe that we have come to an end of that process. That is, we will yet discover resources that give us even more power over our well-being than the resources we currently make use of.

The more capital accumulated by mankind, the more access we get to resources. We can drill deeper, extract elements more efficiently, access the resources under the sea bed, and so on.

Furthermore, that accumulation of capital underpins the research and technological progress that bring ever more resources within our purvey, and anything that restricts or harms that process of accumulation of capital, will have an effect of "self fulfilling prophesy" regarding resources.

Apart from what has been blasted into space, every molecule in every substance "used" by man, is still here and will be able to be re-cycled one day; a lot of it has merely been re-ordered to man's advantage meanwhile. Even every carbon molecule that has been burnt to extract energy, returns to the biosystem after a short time in the atmosphere, and will be able to be accessed again for the purpose of energy, by our descendants at some time in the future.

Although Reisman does not say so, it is such a beautiful system, I think some very intelligent designer must have had a hand in it!

Regarding Bjorn Lomborg's book, it's circumstances are this. A Resource Economist, Julian Simon, who saw through the environmentalist movement's lies from day one, organised and edited a book, "The State of Humanity", that was made up of contributions from experts in the field, concerning the actual statistics from authoritative sources such as governments and the UN, on resource reserves and prices, forest cover, food production, air and water quality, and so on. Understandably, the environmental movement was very angered about it, and Bjorn Lomborg, a Greenpeace member who was a professor of Statistics from Denmark, set out to study the work and produce a refutation.

What Lomborg discovered, turned him against the environmental movement and led to him writing a book that not only confirmed Julian Simon's points, but was like an expanded and updated edition of Julian Simon's book. (Simon actually died at around that time). Of course, Lomborg has been attacked roundly by the environmental movement; you can look into the debates back and forth on Wikipedia. The central point to keep in mind, is that none of Lomborg's book represents any attempt on his part to introduce adventurous new theories or research of his own; although his opponents like to claim that "Lomborg's science is all wrong", all he has done, is produce an impressive autodidactic work of collation of statistics (for which he is eminently qualified) from unimpeachable sources.

In the context of our argument, we are talking about emotive arguments about "paving over paradise" while NZ is ONE POINT FOUR PERCENT BUILT ON. Christchurch alone could expand to 1 million population without coming anywhere near natural barriers, and increasing the percentage by which NZ is built on, by about another POINT FOUR PERCENT. Hugh Pavletich deserves our thanks for all the voluntary work he has done collating statistics by which we can judge where we stand in housing affordability. A desire to bring affordable housing like our grandparents enjoyed, to the younger generations, is something to be applauded. If he was as mercenary as you might be thinking he is, surely he would be right up there with all the other land bankers and outdoing them at their own game. Even if he has dropped out of the game through an inability to keep up with it rather than purely honourable motives, the points he raises are entirely valid.

As someone else says above, Capitalism has been given a bad name by people who actually act as parasites and exploit non-free markets that are created by political interference. The land-banking developers fall into that category. Hugh has blown their cover with his analyses. The people who are the most successful at land banking, (and corruption is the obvious route to becoming the most successful), will be implacably opposed to a free market in land supply. It is those interests, joined with the basically anti-human environmentalists, who are the vested interests here.

I am now quite satisfied to leave it at that; others can read what I have said and the articles I have linked to; and they can read what you have said; and they can make up their own minds.

Kieran - in case you'd not seen it, Hugh P has got around to answering your questions! March 8th, 2009 at 12:25 am, on the Guest blog: Hugh Pavletich responds to Herald criticism. I have therefore felt encouraged to repeat some of my questions to Hugh and await a reply. I'll take a leaf out of your book and also ask if PhilBest could help out with those too please, these are:

"Regarding money supply and speed [of it] here in New Zealand say, if 80% loan value ratios were applied throughout our upswing, would the result have been better or worse affordability?

Regarding inflation control in New Zealand, if the money supply reducing effect and immediacy effect of the OCR mechanism were not "˜blunted' (weakened) with approximately 80% of mortgages being on fixed rates, would the result have been better or worse affordability?

Regarding relevant loss adjusting rules here in New Zealand, if losses were "˜ring-fenced' and it was not possible to offset investment property losses against other income, would the result be better or worse affordability?

Regarding investment flows, if in New Zealand funds and savings could find more investments with equal or better risk/rewards than property, would the result be better or worse affordability?

Regarding the effectiveness of the "˜Intent Rule', if it were replaced with something more effective for taxing capital gain on investment/traded property, or simply replaced with a capital gains tax*, would the result have been better or worse affordability?

(* Personal home/s exempt.)"

I had also asked Hugh:

"Regarding the effect of property taxation/gains tax; if in Australia and UK, say, these were removed during the upswing of the property bubble, would the result have been better or worse affordability?"

and Hugh's answer was:

"Without capital gains - im sure more resiential rental construction would have happened in Australia. My overiding concern is to ensure that there is no impediment to the provision of residential rental stock"

However, given the way you have commented on a capital gains tax above in your answers to Kieran (ie. effective to degree if part of an appropriate package, I think is what you mean) I'd be keen to get your thoughts on this question too please.

Just to be upfront about it, my interest in the issue of housing affordability (and inflation) is to do with the knock-on effects to the productive sector as I am a member of the New Zealand Manufacturers and Exporters Association (NZMEA). I have the view that land supply and compliance are part causative factors and that because a 'perfect' implementation of solutions to those factors is very unlikely we should not ignore other causative factors and seek to address those too.

I do note that in answering Kieran's question - "1) How many residential units should we be building annually? [Hugh said] Well north of the 25,000 with all the poor quality stock we have in this country requiring replacement. I use annual build rates per thousand population as the best measure. Through normal building cycles (not the bubble ones) my sense is that we should be swinging between 5 to 8 / 1000. We urgently need to see solid research on this."

So I'm left wondering if we can lean too much on the housing supply issue until objective, evidence based said "solid research" has been completed? As I said, I'd rather we get to an understanding that it might be a little more complex than just housing supply-side issues, in New Zealand, and that money supply and speed thereof, etc. is worth looking at too - not pleasant nettles to grasp, but they may need a good grasping nonetheless, because....

As for NZ going bankrupt within 5 years, whether the timescale be 5 years, 5 months or 50 years I believe we should not let the furor of the GFC mask ("smoke screen" perhaps Kieran) the systematic/structural issues that seemed to put NZ into recession before Lehman Bros, AIG et al became popular household names! I'm keen to comment on this but it will have to be later today or tomorrow. In the meantime you might care to have a look at the 'Public Comment' section of the NZMEA website, linked from my name here. Also an idea I've had about inflation control which I posted on the NZX website blog associated with David Skilling and Mark Weldon's "˜Swan Dive or Belly Flop' paper, entry 87. It resembles Phil Verry's Interest Linked Savings Scheme (also on the MEA website as a download) to a degree, but comes from a different start point, is meant to be complementary to the OCR not replace it, and might be more implementable than some supplementary instrument ideas.

Thank you Kieran and Les Rudd.

I would ask you, Kieran, whether you think that "free market fluctuations" could be worse than the fluctuations resulting from central bankers jerking the base interest rate all over the place?

This is just another example of the best intentions of government intervention actually causing worse problems that what they were alleged to ameliorate in the first place.

So whether we have "free market" booms and busts as you say, or central banking induced booms and busts, as I say; the effect on the property market is the same, so let's move on to the next point.

I agree with all your suggestions for getting on top of the effects of these boom and bust cycles on property prices, and the implied suggestions in Les Rudd's excellent list of questions. But I insist that abolishing urban limits and restrictive zoning is also essential if these other measures are to be fully effective.

The whole point of land banking, that, as you say, Kieran, "we have had it for (the last couple of) decades", is that once that banked land is finally rezoned for housing, it is payback time for the developer/speculator. So of course the effects take a decade or two to really start to bite. Also, note that if the rezoning does not proceed according to some speculators predictions, they could well end up in bankruptcy, and of course many of them now have, along with the finance companies that backed them. You would argue that it is the recent downturn that has killed them; I would argue that their investment has been prolonged over years by zoning and RMA issues and they have only suffered from the downturn now because their investment could not be realised closer to when they put their money up in the first place. The risk of this is actually a strong disincentive for developers, and the development industry will tend to be dominated by fewer and fewer big players.

If 80% loan value ratios were applied throughout our upswing, the result would have been that the bubble would have burst at a lower point, when first home buyers were finally priced out of the market as happened at a higher point when loans were too easy to get.

The money supply reducing effect and immediacy effect of the OCR mechanism being "˜blunted' (weakened) by approximately 80% of mortgages being on fixed rates, I think would tend to reduce upwards pressure on house prices, but would be hard to pick among the main factors like low confidence that are extant at the time that the OCR gets cut.

If losses were "˜ring-fenced' and it was not possible to offset investment property losses against other income, it would probably not affect affordability as the whole point of property speculation is the expectation of profits, not losses. But this measure would certainly worsen the rate of bankruptcies once a decline did hit, and result in a faster collapsing bubble. The effect on land banking speculators might be that fewer of them would engage in this activity, but the whole game would become one of even greater risk and excitement and the potential for corruption would be increased still more. As long as Urban Limits apply, I would find it hard to imagine any land being released for housing that had not already fallen into the clutches of a land banker, and that land bankers expectation of rewards for risk being even higher than otherwise.

If in New Zealand funds and savings could find more investments with equal or better risk/rewards than property, it would certainly help the whole country economically, but I would still argue that as long as conditions exist in which a property bubble can form, it will form eventually, and by the very nature of a bubble, it will represent exciting high returns compared to everything else, and will eventually top out with very similar negative consequences anyway, with the exception that if investment in productive activities had been greater meanwhile, the country would be in a better shape to cope with the effects of it.

I believe, based on a study by World Bank Economist Alain Bertaud, that the effects of capital gains taxes on property bubbles tend to be neutralised if there are land use restrictions, as the cost of the taxes just get passed on to the captive buyers. I don't really follow Hugh's suggestion that more construction might happen in the absence of capital gains taxes, as capital gains taxes surely are meant to apply to increases in value of the land, and that increase in value is occurring during periods when construction is not an option at all. Once it becomes an option, the cost of the taxes are just part of the price passed on to captive customers. If there were not land use restrictions, though, the competitive nature of development would then ensure that profits on the land would be kept to a minimum and any capital gains taxes would be minimal.

When you say THIS, Les Rudd:

".....I believe we should not let the furor of the GFC mask ("smoke screen" perhaps Kieran) the systematic/structural issues that seemed to put NZ into recession before Lehman Bros, AIG et al became popular household names!...."

I could not agree more, I have been saying that on blogs for a long time.

I think that the "land banking" issue is the answer to Kieran's insistence that the land use restrictions have not resulted in too few houses getting built; "enough" houses have been built, but the price of the land they are built on has been driven up by over $100,000 per section.

Kieran is right that the easy money policies have resulted in the bubble inflating as rapidly as it did; but in the absence of the land restrictions, I insist that competition between developers would have kept prices low, and I also insist that prices will not resume "affordable" levels without the land banking issue being addressed. I also insist that "easy money" being turned on and off are going to remain with us courtesy of central bankers. Also worth noting is that New Zealanders seem to regard easy money as money that is at double US "easy money" rates.

Another interesting assessment, is "Two Ways to Revamp U.S. Housing Policy"
By Edward L. Glaeser AND Joseph Gyourko

http://economix.blogs.nytimes.com/2008/12/16/two-ways-to-revamp-us-housi...

"......The first problem, the shortage of housing for the poor, is best solved by providing more housing vouchers, not expensive tax programs aimed at stimulating construction of affordable housing. Subsidizing developers to build new housing for the poor makes no more sense that paying auto companies to provide a special line of poor people's cars. Our current system, where the poor generally buy used cars, is a much more efficient way of providing cheap transportation. Section 8 vouchers can enable the disadvantaged to live in existing homes, which is much cheaper than new building.

The Low Income Housing Tax Credit, the primary tool for subsidizing housing supply, makes the mistake of trying to apply the same rules everywhere. It subsidizes new housing in Manhattan, which needs more building, and in Buffalo and Houston, which already have plenty of cheap homes. A better approach would be to scrap the tax credit and make Section 8 vouchers more available and portable across cities.

Section 8 vouchers aren't going to do anything to ease the high housing costs facing middle-income Americans, though. That problem requires policies that reduce the barriers to building.

The current housing price slump shouldn't disguise the fact that homes in San Francisco and New York remain extremely expensive by historical standards. Prices are far above construction costs because robust housing demand, fueled by rising economic productivity, has collided against barriers to supply, like minimum lot sizes and height limits.

Borrowing subsidies, including the home mortgage interest deduction, do little good when housing supply is constrained. In markets with limited supply, credit subsidies push up housing prices, and make housing less, not more, affordable.

Moreover, the benefits of the deduction go disproportionately to richer Americans who itemize on their tax returns and own bigger homes. Rather than a new round of credit subsidies, it makes more sense to gradually reduce the upper limit on the home mortgage interest deduction and shrink the public role in encouraging people to bet big on housing.

The only path towards widespread affordability is to build more, which requires reducing NIMBYist regulations. Localities tend to put their own interests ahead of the nation's interest by restricting building in order to keep prices up and reduce congestion. The federal government should increase its efforts to counter this tendency. After all, stopping building in one area just leads to building and more congestion somewhere else. In other settings, when groups try to increase prices by restricting supply, the government sends in the antitrust police......

"......It is bad economics to let local barriers drive people to less productive areas, and it is also bad environmentalism. The environmentalists who prevent building in temperate California are actually increasing carbon emissions, by driving people to build in the far more energy-intensive suburbs of Houston and Phoenix.

Expensive localities are never going to give up their growth controls on their own, but the stimulus package provides a natural tool for promoting affordability. If some aid to expensive states is made conditional on permitting more construction, then pricey places will face incentives to permit more units and promote affordability....."

Phil
Regarding fluctuating interest rates, I would like to see the setting of an OCR scrapped and instead the reserve bank have more direct control over the money supply also unemployment taking precedence over inflation.

In regards to ring fencing losses I don't think you fully understand how negative cashflow works. Investors are happy to be in this situation because they expect a greater capital gain in the future (which is not taxed unless your a trader). The loss includes depreciation which is a paper loss only. It is then subsidized by IRD at the end of the year against other personal tax liabilities. This increases the return on property and means low rental yeilds are acceptable.

Putting the housing bubble aside America and Australia out perform us economically and a large reason for this is because they have far more investment in capital markets and less in property than we do. I beleive this is because we have no capital gains tax and they do, there is no other reason I can see for it. Other tax reforms like ring fencing losses and removing depreciation would be even more effective.

I agree that the rezoning process could be made easier and faster with reforms to the RMA but getting rid of land zoning alltogether is never going to happen. If National really does want to see NZ catch up to Australia they have to introduce a CGT so there is more investment in business and less in property like Australia has or we will just keep falling further behind.

One of the best articles I read- great contribution Les Rudd !

Thanks Walter. Much of that thinking has been around a while and is parts are used in other countries. The question is, how to get it/more of iit adopted in growth effective policy in NZ?

Thanks again for the encouragement Kieran. Yes, I and others are under no illusion about the hill in front of us, but that doesn't mean we shouldn't climb it, with or without help.

I had a think about the 'intent rule' in Hugh P's recent 'Guest Blog':

http://www.interest.co.nz/news/guest-blog-hugh-pavletich-responds-herald...

However, I'd still prefer introducing CGT, because of the relative simplicity, but in either case it'd be with family/personal home/s exemption and with appropriate reduction in income and corporate tax. It's about balancing tax and investment flows, not simply about giving government more of our hard earned.

Of interest: how was THIS for accuracy?

"The Residential Real Estate Bubble"

by Gary North

MARCH 5, 2002

http://www.lewrockwell.com/north/north96.html

""¦"¦..The Federal Reserve System is now pumping in new money at over 20% per annum"¦"¦

""¦"¦..I don't think Greenspan has increased the money growth rate to 20% in order to give a boost to the U.S. stock market. The stock market was not falling sharply, although it was heading down. He is concerned about the overall economy. He gets blamed for recession. We were in a recession last year, contrary to the financial press at the time. He has inflated us out of it"¦"¦.

""¦"¦.. Corporations borrow short-term money to finance inventories and to keep their doors open. They finish projects that were begun prior to the recession. CD-rates are emergency money rates and day-to-day operations rates. The FED's expansion of money since last January has stimulated this kind of business activity.

What matters most for businesses, long-term, is the long-term corporate bond rate. The lower this is, the cheaper it is to borrow long-term money for financing land acquisitions, buildings, equipment, and other longer-term productive assets. The FED's stimulus package has had very little effect here. It has not succeeded in driving down corporate bond rates low enough to persuade managers to begin loading up on long-term corporate debt.

What about the response of business to cheaper short-term and mid-term money? It has sagged remarkably. Commercial paper (CD's) has fallen from over $325 billion to about $200 billion.

These are short-term loans. What we are seeing is remarkable. The law of economics is this: "At a lower price, more will be demanded (other things being equal)." But the short-term money rate has fallen from 6% to under 2%, yet the amount CD money demanded has plummeted. The decline in demand has been even more dramatic with commercial and industrial loans from banks, which are longer-term loans. They have fallen from about $1.1 trillion to $520 trillion "“ a drop of over 50%.

Conclusion: other things have not remained equal. Despite falling short-term and commercial loan rates, businesses have left the debt markets in droves. This means that they have stopped expanding. They are operating on the basis of retained earnings.

This is rational in a market that is not expected to produce profits in the near future"¦..

""¦"¦..Hard hit in 2000 were real private fixed investment and real nonresidential fixed investment. The biggest hit was in nondefense capital goods orders: down to a negative 25% at the bottom: the end of third quarter"¦..

""¦"¦.. Only one area of the economy stayed positive: housing starts/home sales. Here is the heaviest debt load for consumers. Housing is basically a long-term consumer good, heavily funded by mortgages. So, consumers have remained optimistic, long-term, but their employers have grown pessimistic at least with respect to the short term.

Consumers believe that the housing market will always rise. They think, "buy now, pay later." They think, "I can lock in low-interest fixed mortgage money today, and I'll pay it off with depreciated dollars." This strategy has worked ever since 1946.

The credit markets are supplying this money to borrowers. The mortgage market is presumed to be secured by the U.S. government, so Fannie Mae and Freddie Mac keeps making available mortgage money to borrowers. These enterprises are called GSE's or Government Sponsored Enterprises.

If mortgage holders think they can win at the expense of mortgage-issuers, why do people continue to put their money into pools of long-term mortgages? Because they think these pools of capital are government-guaranteed. They are looking for high returns short-term. They figure they can sell off their holdings later if rates climb"¦..

""¦"¦"¦.. In the week following September 11, the Federal Reserve extended credit of $81 billion to ensure adequate liquidity in the markets. On September 14, Freddie Mac moved in an entirely opposite "“ and counterproductive "“ direction, issuing $5 billion in two-year notes that took cash out of the market. No other debt issuer did so because the markets were loathe to buy private company debt during considerable market instability. But Freddie Mac exploited its implied government guarantee to raise cheap money from frightened investors at a time of national emergency. . . .

In recent years, the dramatic growth in GSE debt has significantly increased the risk to U.S. taxpayers. Fannie Mae and Freddie Mac have increased their debt six-fold since 1992, from $196 billion to $1.26 trillion in the third quarter of 2001. In a decade when Treasury borrowing dropped dramatically, uncontrolled GSE debt was moving in the opposite direction. Almost unbelievably, the GSEs now guarantee more debt and mortgage-backed securities ("MBS") than all comparable U.S. Treasury debt.

This debt has been issued chiefly to fund a lucrative investment portfolio, which was undertaken solely to grow profits for GSE shareholders. Here's how it works: the GSEs borrow funds cheaply because of their implicit government guarantee, then invest them. The above-market returns are highly profitable "“ but do nothing to increase American homeownership. In 2000, both GSEs reported that this arbitrage investing accounted for approximately 60 percent of their net income. That's like a local government issuing a revenue bond to build a schoolhouse, then using part of the money to play the stock market. If the GSEs bet right, their shareholders profit. If they bet wrong, the U.S. taxpayer loses.

Compounding this debt growth, the GSEs are also leveraged far beyond what would be permitted for other financial institutions. At year-end 2000, the GSEs' debt-to-equity leverage for on-balance sheet liabilities was 30:1 versus 11:1 for commercial banks. If the GSEs were to meet the standards imposed on commercial banks, they would need to hold $82 billion in capital "“ or double their current amount. In their current condition, the Federal Reserve would deem them "significantly under-capitalized" "“ and they would face serious risk of closure. These institutions simply are woefully undercapitalized "“ a situation that becomes more perilous during a recession.

The GSEs attempt to mitigate the risk associated with their debt through extensive reliance on derivatives. From 1995 to 2000, the GSEs' derivatives exposure increased over 400%. At the end of last year, the GSEs had $749 billion in such exposure. This is a massive amount of derivatives exposure.

As stated above, recent events underscore the riskiness of a derivatives strategy. In the third quarter of 2001, Fannie Mae reported a startling write-down of $10.6 billion in shareholder equity, reducing its equity by 29 percent from where it stood just three months earlier. Fannie Mae took a big position in the derivatives market and bet wrong. As a result, Fannie Mae's debt/equity ratio shot up to 53:1. This approaches a doubling of the GSEs' year-end 2000 leverage ratio of 30:1"¦"¦

""¦"¦"¦. I think the FED is providing liquidity mainly to keep this market solvent. The problem is, the constant increase in credit money continues to distort the capital markets. Eventually, monetary inflation will produce price inflation. Long-term interest rates will then rise to compensate lenders for the expected decline in the dollar's future purchasing power. Equity in mortgages already held by investors will fall. There will be a derivatives-based, Enron-type event, on a scale vastly larger than Enron.

Congress worries about another Enron, yet its own policies are creating the biggest potential Enron-type event in history.

Housing got through the recession of 2001 unscathed. Any time an investment market is perceived as low-risk, capital flows into it. On the one hand, consumers are willing to borrow. On the other hand, lenders are willing to lend long-term. Liquidity looks permanent. The win-win nature of the arrangement is still widely perceived as low-risk. This is the classic mark of a bubble"¦"¦.."

Philbest...........

They aren't listening because they are not conscious.

We are all living in our own reality and cognitive dissonance provides the bubble.

Numbers never lie but they can be manipulated for a long time.

But here is where it really goes pear shaped,

"Consumers believe that the housing market will always rise"......

This nonsense continues to be peddled here in NZ (by "financial" journalists...not you Bernard!!)....the papers just keep trotting it out in the Sunday rags as a mantra......."in the long term"......some guy was talking about the stock market making new highs "at some point"....

Our beliefs determine our reality........it's those beliefs that need changing.

But how?

raf, you understand.

On the global financial markets, the Rothschild signature is all over the place. The US National Debt is skyrocketing which must lead to the collapse of the US dollar. Intro the Amero.
With a collapsing US dollar the Chinese exploding wallets must get their bargains where ever they want. The short term greedy multi nationals get what they bargained for: short term profit and long term cost (local job losses, rising wellfare etc.)
The high governmental spending resulting in National Debt is a trade mark of the Rothschild lobby.
Helen Clark knew what she was doing, but couldn't care less.
"Confessions of economic hit man"...learn.

the buy gold idea.. and we don;t need chinses diggers.. just go do it urself.
its everywhere. i am not happy bout the nevis how they want to build a dam on it.. if they put the money towards emplying people and equipment they would be able to earn more than they would if they built a dam over it. gold mining is easy .. is hard work and lets u see the country in more depth.