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Who Predicted The GFC Global Financial Crisis: Nouriel Roubini, Steve Keen, Peter Schiff, Marc Faber; Harry Dent, Robert Shiller, Paul Krugman, George Soros, Jeremy Grantham, Dean Baker, Gary Shilling, Nassim Taleb
Topic Started: 14 Mar 2012, 07:46 AM (13,279 Views)
genX
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I did think the way he communicates it (that spec investing has a 'positive feedback loop' Ponzi-like impact) is a good way of framing the concept for others. Basically in a nutshell - spec investing exaggerates market instability - it pushes the natural market highs so much higher, and the subsequent market lows are (or seem in comparison) therefore so much lower.
Speculative investing is the outcome, not the initial cause. Keen has an excellent summary of Minsky's Instability Hypothesis on his website, I suggest everyone read it. In a nutshell, it is this: During difficult economic times, credit lending becomes conservative and relatively stable in terms of the ratio of leverage to economic activity. During those times, successful corporations have little difficulty servicing their debt, and as tough economic times give way to prosperity, those businesses/business units that used debt to grow were more successful than those that did not. In other words, it paid to lever. This leads to a change in lending practices as prudence gives way to aggressive expansion.

In the early stages of this transition, it appears to be working. More debt equals more growth equals more profits. However, at some point, a tipping point, the expansion of debt begins to outpace the expansion of economic growth, and at that point there is excess capital chasing limited economic activity, and that excess capital (which has to find a home and return a yield) finds it's way to financial assets.

Because the excess capital flowing into financial assets does not represent any additional economic activity, ongoing price rises are a function of the amount of excess capital in the system and not any fundamental change to the underlying business or economy. That is, too much cash chasing too little equity. This quickly degenerates into something that exactly resembles a ponzi scheme, where the prices of yesterday are driven even higher by the excess capital of today.

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Isn't it therefore in our country's best interest to not have policies which promote economic instability - ie not promote speculative investing? I'm not saying it should be outlawed - I'm just saying our laws shouldn't promote it as a beneficial option.
Minsky claimed that this instability was an intrinsic feature of capitalism itself. To speak out against this instability is to be branded anti-capitalist (or communist). This is not something you wanted to be branded in the last 20 years.

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Possibly since this is, after all, a property forum, some of you might have already guessed where I'm heading. Negative gearing.
Negative gearing, as much as it distorts the property market, is not primary driver of our ponzi housing market. Financialisation and the expansion of credit is.

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Should we be demanding that runners for seats in the next federal election declare their positions on policies which can ultimately in the long-term heighten economic instability? Demand they take some action on current negative gearing policy?
It is too late, that horse has already bolted. The time to take action on negative gearing was in 1988.

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The thing is - if you asked a politician "Are you for or against policies which promote economic instability?" They'd answer "AGAINST!@#!" and try to hug the nearest baby in case there was a camera aimed at them. But if you asked the for or against question specifically in relation to negative gearing I think you'd be hard-pressed to find a politician who was against it. There seems to be this disconnect with how negative gearing is seen to be and what it actually is. Why?
Because retrospective tax law is the worst kind of legislative change there is and if announced in advance, a guaranteed loser at the poll booth.
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miw
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genX
3 Jun 2012, 11:36 AM
Negative gearing, as much as it distorts the property market, is not primary driver of our ponzi housing market. Financialisation and the expansion of credit is.
Bang on. Negative gearing is at best a sideshow. Negative gearing needs to be fed with an actual free cashflow and is self-limiting. Keen was pointing to a different phenomenon whereby credit was going to inflate asset prices. There was a whole 2 levels of pathology that went on top of that leading up to the Lehmann collapse. The first was when the institutions ran out of MBS to sell and started lending to people who could never afford to pay off their loans unless housing prices continued to rise fairly fast, and then another level when even this source of mortgages dried up and they started creating synthetic CDOs using credit default swaps.

Look a little more closely at the second part of that pathology (the subprime) and those loans were mostly structured with low repayments at the start, capitalising interest), higher interest later on and balloon payments at the end. i.e. they were structured so very little cashflow was required to sustain the debt *at first* because the borrowers could never have afforded to sustain the debt without interest capitalisation. The only way out was if the house increased in value. It was really the *opposite* of negative gearing.

Then in 2006 there was a highly-correlated peak in house prices across the US, then the subprime loans started to fall over and in Europe there was the credit crisis and the credit default swaps started to pay off en masse, except that the CDS sellers had not expected the regions of the US to be correlated, couldn't pay up, and hence the synthetic CDOs fell over as well and the rest is history. There was an enforced sharp deleveraging, and just as Keen predicted this caused a collapse in aggregate demand.

The truth will set you free. But first, it will piss you off.
--Gloria Steinem
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genX
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Then in 2006 there was a highly-correlated peak in house prices across the US, then the subprime loans started to fall over
This didn't "just happen", Greenspan lowered interest rates to 1% after the dot-com-wreck to stimulate the economy and 'stick save' wall street. While this restarted the casino, it also caused the dollar index to slide from ~120 in December 2001 to a low of 81 December 2004, at which time Greenspan began aggresively raising interest rates again, raising the funds rate from 1% to 5% between July 2004 and July 2006, at which point the spread between the funds rate and subprime had tightened to the point of unprofitability, and the expansion of subprime lending came to an end, and MBS became worthless pieces of paper (because the risk adjusted return was now lower than the funds rate).

If Greenspan had not defended the dollar, the party could have gone on for much longer, but high inflation is not an election winner, and dancing monkey boy (GWB) was at the end of his second 4 year golfing holiday, so it's possible he was doing the GOP a favour (or so he thought). Central Bankers always tend to do too much too late anyway.

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Kate
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genX
3 Jun 2012, 11:36 AM
Minsky claimed that this instability was an intrinsic feature of capitalism itself. To speak out against this instability is to be branded anti-capitalist (or communist). This is not something you wanted to be branded in the last 20 years.


Negative gearing, as much as it distorts the property market, is not primary driver of our ponzi housing market. Financialisation and the expansion of credit is.


It is too late, that horse has already bolted. The time to take action on negative gearing was in 1988.


Because retrospective tax law is the worst kind of legislative change there is and if announced in advance, a guaranteed loser at the poll booth.
I never do get why people have to branded anti- anything. It's so inflammatory and 'mob rule'-like. It assumes whatever it is they are complaining about is perfect. Capitalism is not a perfect system. Greed is not always good ^^. That's not to say I'm for leaving Capitalism by the roadside and driving on - just that, like all other things in life, we have to recognise where it's limits are.

I don't lack an understanding of how and why the GFC started, and while I'm all for some re-regulation of the financial sector to reign in their excesses of the past few decades, it seems there is a lack of any political will to do anything about it - even when many people have protested against it. You think of negative gearing as not that important as it isn't a 'primary' driver - but the point is it IS still a driver. Why should we gloss over it just because the monster that is financialisation looms high above everything else?

I also don't see why halting negative gearing needs to necessarily be a retrospective tax law. Simply stop allowing people to claim negative gearing on property purchases from the date of the law implementation, and allow grandfathering laws for people who had factored negative gearing into their 'investment' decisions prior to that date. It's not like those grandfathered scenarios would be around for long. Most properties would be flipped in a few years. A few lingering ones might last until either the person reaches retirement/ceases to have sufficient income to productively negatively gear against. I completely agree that people shouldn't be financially penalised by changes in law when they made their investment decisions based on the laws that had existed prior.

It's never too late. The horse can always be recaptured.

I still think we need to hold politicians feet to the flame in regards to negative gearing tax concessions - as well as looking into other things such as the finance industry.

But then, as someone else put it - we do seem to have an over-abundance of politicians at the moment, and not enough statesmen.
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jester77
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Kate
3 Jun 2012, 08:29 PM
I never do get why people have to branded anti- anything. It's so inflammatory and 'mob rule'-like. It assumes whatever it is they are complaining about is perfect. Capitalism is not a perfect system. Greed is not always good ^^. That's not to say I'm for leaving Capitalism by the roadside and driving on - just that, like all other things in life, we have to recognise where it's limits are.

I don't lack an understanding of how and why the GFC started, and while I'm all for some re-regulation of the financial sector to reign in their excesses of the past few decades, it seems there is a lack of any political will to do anything about it - even when many people have protested against it. You think of negative gearing as not that important as it isn't a 'primary' driver - but the point is it IS still a driver. Why should we gloss over it just because the monster that is financialisation looms high above everything else?

I also don't see why halting negative gearing needs to necessarily be a retrospective tax law. Simply stop allowing people to claim negative gearing on property purchases from the date of the law implementation, and allow grandfathering laws for people who had factored negative gearing into their 'investment' decisions prior to that date. It's not like those grandfathered scenarios would be around for long. Most properties would be flipped in a few years. A few lingering ones might last until either the person reaches retirement/ceases to have sufficient income to productively negatively gear against. I completely agree that people shouldn't be financially penalised by changes in law when they made their investment decisions based on the laws that had existed prior.

It's never too late. The horse can always be recaptured.

I still think we need to hold politicians feet to the flame in regards to negative gearing tax concessions - as well as looking into other things such as the finance industry.

But then, as someone else put it - we do seem to have an over-abundance of politicians at the moment, and not enough statesmen.
Well said Kate.

All that is lacking is political courage. There is always pain in change, but we know the current system, doesnt work and we need to do something better, not just shrug our shoulders and give up because it doesn't suit certain people.
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miw
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Kate
3 Jun 2012, 08:29 PM
I also don't see why halting negative gearing needs to necessarily be a retrospective tax law. Simply stop allowing people to claim negative gearing on property purchases from the date of the law implementation, and allow grandfathering laws for people who had factored negative gearing into their 'investment' decisions prior to that date. It's not like those grandfathered scenarios would be around for long. Most properties would be flipped in a few years. A few lingering ones might last until either the person reaches retirement/ceases to have sufficient income to productively negatively gear against. I completely agree that people shouldn't be financially penalised by changes in law when they made their investment decisions based on the laws that had existed prior.
You're right. Halting negative gearing could be done in a non-disruptive way that allowed people to unwind gracefully without causing a lot of hardship.

I am a little skeptical that you could frame the legislation to do it in a way that would both be effective and not have other unwanted consequences. In any business that has leverage, interest costs are a legitimate cost of doing business. How do you distinguish? I have never seen a solution to the equation that isn't worse than the disease. I think the best I have seen is the French solution where they cap deductible interest costs at gross rent for any rental property business, whether you are an individual PI with a real job or you are a vast rental conglomerate. Effectively it is a cap on LVR. Not perfect, but a workable compromise. On the other hand the benefit to doing this would be small compared to the political fallout, so it won't happen.
The truth will set you free. But first, it will piss you off.
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genX
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I never do get why people have to branded anti- anything.
Because you are outside of two standard deviations from the general population.

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It's so inflammatory and 'mob rule'-like. It assumes whatever it is they are complaining about is perfect.
Correct, because that is so much easier than using your brain to think about things.

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Capitalism is not a perfect system. Greed is not always good ^^. That's not to say I'm for leaving Capitalism by the roadside and driving on - just that, like all other things in life, we have to recognise where it's limits are.
It is what we have until something better comes along. Much as Communism and Socialism sound great on paper, they haven't worked out that well in the long term. Neither has capitalism, but where does that leave us?

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I don't lack an understanding of how and why the GFC started, and while I'm all for some re-regulation of the financial sector to reign in their excesses of the past few decades, it seems there is a lack of any political will to do anything about it - even when many people have protested against it. You think of negative gearing as not that important as it isn't a 'primary' driver - but the point is it IS still a driver. Why should we gloss over it just because the monster that is financialisation looms high above everything else?
Because negative gearing may just be a necessary incentive to build houses when you have well formed capital markets. The biggest problem I have with real estate is the claim that houses are assets. Urban houses are not assets in any sense of the word. They produce no income and they deteriorate. Like a restaurant that needs a location to serve food, the location and the house are a 'fixed cost', to the restaurant and the economy respectively.
If we could be honest and plainly admit that housing is a cost, and as a cost it will never attract capital when you have well formed capital markets, then the argument could be made that it needs to be subsidised, and the natural way to do that is through the Commonwealth. Instead we have an industry touting property as an 'investment' and negative gearing is seen as a hidden subsidy.
Similarly with the First Home Owners Grant. It would have been much more productive to subsidise house builders directly than to monetize the sale and re-sale of existing homes.
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I also don't see why halting negative gearing needs to necessarily be a retrospective tax law. Simply stop allowing people to claim negative gearing on property purchases from the date of the law implementation, and allow grandfathering laws for people who had factored negative gearing into their 'investment' decisions prior to that date.
No politician would make that change while property prices are falling. If anything they will boost it. It is just to politically sensitive to touch. If we had a PM with some guts rather than the spineless muppets that inhabit Canberra right now, it would be feasible, but difficult to get rid of it. I just don't know what you would gain though. We are already passed the peak of the bubble. Excrement is already approaching spinning air flow object.

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I still think we need to hold politicians feet to the flame in regards to negative gearing tax concessions - as well as looking into other things such as the finance industry.
I think 'we' are a tiny fraction of the population, and in a democracy, tiny minorities don't count for much. I think disruption is coming regardless. Chaos is a good time to change things, so maybe there is an opportunity on the horizon.

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But then, as someone else put it - we do seem to have an over-abundance of politicians at the moment, and not enough statesmen.

"A democracy cannot exist as a permanent form of government. It can only exist until the majority discovers it can vote itself largess out of the public treasury. After that, the majority always votes for the candidate promising the most benefits with the result the democracy collapses because of the loose fiscal policy ensuing, always to be followed by a dictatorship, then a monarchy. "
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peter fraser
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genX
3 Jun 2012, 10:22 PM

I think 'we' are a tiny fraction of the population, and in a democracy, tiny minorities don't count for much. I think disruption is coming regardless. Chaos is a good time to change things, so maybe there is an opportunity on the horizon.

It's not maybe, it's a given, and the opportunities will be a "once in a lifetime event" - We won't even have to get the entry point exact to do quite well, but courage will let most people down.

"We" have been lucky enough to have years of advanced warning - if we aren't ready we have no one else to blame.



Any expressed market opinion is my own and is not to be taken as financial advice
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jester77
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peter fraser
3 Jun 2012, 10:43 PM
It's not maybe, it's a given, and the opportunities will be a "once in a lifetime event" - We won't even have to get the entry point exact to do quite well, but courage will let most people down.

"We" have been lucky enough to have years of advanced warning - if we aren't ready we have no one else to blame.


Courage, keeping your job! and avoiding a war. No more reserves...
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genX
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peter fraser
3 Jun 2012, 10:43 PM
It's not maybe, it's a given, and the opportunities will be a "once in a lifetime event" - We won't even have to get the entry point exact to do quite well, but courage will let most people down.

"We" have been lucky enough to have years of advanced warning - if we aren't ready we have no one else to blame.


I'm cashed up, how about you?
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