Tony Jones asked Will Hutton last night whether the interbank credit market was “run by cowboys or run by reputable people?” But between these two moral poles is enormous material and cultural complexity:
If a bank wants to borrow money, a broker needs quickly to find someone prepared to lend at an attractive rate; if a bank wants to lend, he – it’s a predominantly male profession – needs to find a borrower ready to pay a good rate. So a broker needs continuously to know who wants to borrow, who is prepared to lend, and on what terms. As one of them said to me, a broker might ‘speak to his big clients … have conversations with them maybe twenty-five times a day, which is twenty-five times as often as they speak to their wives’.
A broker needs to pass information to his clients as well as to receive it: that’s a major part of what they want from him, and a good reason to use the voicebox rather than the screen.
The brokers’ code of conduct prohibits passing on private knowledge of what a named bank is trying to do (unless a client is about to borrow from it or lend to it), but that restriction leaves plenty room for brokers to tell traders what has just happened and to convey the ‘feel’ of the market. There’s a grey area in which euphemisms can be used: in context, a broker and a trader might both know which bank is meant when the broker says that ‘the usual German’ has just done something.
That’s from Edinburgh Sociologist Don Mackenzie’s extraordinarily rich account of brokerage in the Current London Review of Books (the broader project of which it’s a part is outlined in this 2005 paper). As they say, read the whole thing. However, as Krugman pointed out yesterday, even if these and other credit markets are ‘unlocked’ (which – if the easing of the LIBOR price is anything to go by – they look like they will be) there is still ‘real world’ economic contractions to take place: GM will close plants, regardless of how politicians ‘talk up’ or ‘talk down’ the economy.
Elsewhere: Andrew Bartlett on Boosting First Home Owners Grant:
Why spend $1.5 billion dollars of taxpayer money to push up the price of housing? There may be downward pressure on house prices in some parts of Australia, but it is from a seriously overvalued level. We should try to let the air out of that bubble slowly, not use public money to keep pumping it up, especially when there are still so many problems with housing affordability in other parts of our housing markets.
Update: Will Hutton: The nightmare continues – on a high street near you
In reference to Andrew Barlett’s comments, I was wondering the same thing myself when I heard the news about the stimulus package. It does make the govt looks like it is doing something, but if that something is only going to make the problem worse (housing affordability) then why?
We need to stop house prices collapsing because that is the type of thing that sends an economy into a tailspin. It’s what broke the US economy in the first place.
House prices are indeed inflated but it’s best to let inflation take the wind out of them over time rather than let them burst.
Rayedish
Maybe the 1.5BN isn’t nearly enough to keep the values up and it’s just an attempt at cushioning?
There’s also an employment issue of all that semi(un)skilled building industry labour force hitting the dole queues in a hurry.
As far as I can see, there are massive variations in the building industry at the moment – where I am you can’t lease a commercial building for quids and both purchase and lease values in the residential market are plummeting. The big boys will be fine, but the middle and lower tier players are in a panic.
What we don’t need at the end of all this fallout is less diversity and competition, but there are plenty of forces pushing in that direction.
I think Tanner was pretty clear about what they’re trying to achieve with this – it seems pretty clunky and uneducated to me. That’s probably means it’s the right strategy for this country; that’s the real problem.
If I am reading the package correctly, Andrew Barlett has got his figures a little wrong. Not all of the $1.5 billion will be devoted to the failed demand-side grant for existing dwellings. Some (most?) will go to the supply-side subsidy for new housing (the grant will be $21,000 for newly-constructed homes). There is a time limit (mid-next-year I think), so the net effects are to pull a whole lot of housing construction forward and to boost absolute supply. Still, the broader critique is spot on. It would have been better to keep the grant for existing homes at $7000 and put all the new cash (so far as it concerns housing) into a higher new home grant.
BBB
“It would have been better to keep the grant for existing homes at $7000 and put all the new cash (so far as it concerns housing) into a higher new home grant.” Actually, no. It would have been MUCH better to put it into a supply subsidy to fix the private rental market and bring in affordable rental. FHOG will push up the price of housing which won’t help affordability for renters or, sadly for them, first time buyers.
But it will pump a whole lot of cash into the market.
Actually it won’t fix supply of new housing either because it is so short term there isn’t enough time to stimulate forward demand. So – we’ll get a whole lot of buyers into an existing market.
Angharad, so are you saying that temporarily subsidising new entry to the market to the tune of $21,000 a house will not bring forward any construction contracts into the 08/09 year? I’d respectfully disagree. I mean, it’s just under 50% of an average deposit. I wouldn’t want to put a figure on it, but a decent number of people at the margins will be pulled across the line, both in temporal terms and absolute terms. But of course it’s no silver bullet for the chronic undersupply of housing. And it’s true though that the $7,000 grant is a failed policy which should be done away with. Unfortunately, due to the politics of housing policy, it isn’t going anywhere.
BBB
BBB, an average deposit before the recession. An average deposit now and for the next few years would have to be at least 15-20% yes?
Frozen lending?
A local agent was discussing this problem with regard to the local real estate market and banks here ( rural NSW) want 50% deposit. It is creating the lowest turnover in 15 years .
If the banks can start to source funds on the international interbank market this may decrease but until that time expect little turnover activity in rural parts unless you are very close to your banker or have very substantial funds .
And the absence of buyers with such funds will possibly lead to those buyers sitting it out and waiting for prices to decline .Why rush ? There won’t be many competing to buy for a while .
“Frozen lending?”
link
Could it be that they’re worried about an Australian “sub-prime” problem? I’m not suggesting we have the same dodgy borrowing practices – but we do have LOTS of leverage.
I’ve been to a number of “investment seminars” in recent years and the basic premise they’re pitching goes like this:
Leverage equity in your house to buy stock
When your stocks go up in value, you can leverage that equity and buy more stock
Rinse, Spin & Repeat …
The ramerfercation here should be obvious. Put any downwards pressure on housing prices and we have another house of cards. The equity used to buy the original stock becomes undermined and it all becomes unstable. Throw someone out of a job and it’s a smoking heap left lying on the ground.
Up here in regional Queensland, these “investment seminars” have been churning through 20-30 people a week for the last 3-4 years. Spread that across the country and, even with a small uptake, we’re talking about a significant problem.
The Hutton article warns about the risks of deflation. The japanese banking system after the 1989 crash had similar problems related to asset bubble prices and they are worth studying to see how to really stuff up your banking system by pretending there isn’t a problem.
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So it is also interesting to see the esteemed holiness of Ben Bernanke signalling that the Greenspan hands-off approach to bubbles may be over. If this signals a change to central bank behaviour at a global level then a substantial change is in store for us. And it is all aimed at unfreezing the credit markets.
BBB you said “Angharad, so are you saying that temporarily subsidising new entry to the market to the tune of $21,000 a house will not bring forward any construction contracts into the 08/09 year?”
Well yes actually. Contracts have to be entered into before June 2009 on a new house. Now, you may be a developer with a strong pipeline of developments ready to go, just press the button. But that isn’t the case for most the industry. It takes a while to gear up., get council approvals and get finance (impossible right now).
Alot may depend on how much lenders are prepared to allow borrowers to commit to forward contracts and how far forward.
Interesting article from Micheal West in the SMH who for my money has provided the best analysis of the credit crunch in the MSM.
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“The practical initiatives that Rudd is undertaking now and what Bush has been doing through tax cuts for the past eight years are similar to what Roosevelt in the US, Jack Lang in Australia, and other leaders did in the 1930s, and while in the popular view this is a Keynesian policy, it was not core Keynesianism.
It is Keynesian to give money to people who need it most, where their propensity to consume is high and their propensity (or ability) to hoard that money is low.”
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http://business.smh.com.au/business/keynes-is-dead-lets-bury-him-20081016-5205.html?page=fullpage#contentSwap1