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If one really wanted to fix this shite!; Require investors to have a VERY high deposit
Topic Started: 10 Oct 2013, 07:37 PM (1,290 Views)
herbie
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peter fraser
10 Oct 2013, 08:29 PM
I think that investors get a bum wrap. I don't see them affecting prices except when prices drop they come in and put a floor in the market, but they pull out when the market gets hot. They need a return and they need a chance of capital gains. They don't get that if they pay too much.
They weren't doing much of a job 'putting a floor under it' until policy makers dropped rates though remains my take on it Peter?

But anyway yes, agreed that they need a return - But why do they need capital gains returns above inflation? When they are getting their rent anyway???
Edited by herbie, 10 Oct 2013, 10:09 PM.
A Professional Demographer to an amateur demographer: "negative natural increase will never outweigh the positive net migration"
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miw
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herbie
10 Oct 2013, 08:17 PM
Suppose they could be 'sharpened' - Made specific to asset classes? George Soros suggested that. But the powers that be have shown no interest in it to date that I'm aware of?
Yeah. I've seen some discussion of this. Mainly from people who tend more towards Hayek and Minsky than towards Keynes, but definitely not wild-eyed nutters or fearmongering spruikers like Schiff and Faber.

Essentially there are three uses for credit:

a) Investment - i.e. construction of houses, building factories, buying machines etc
b) Consumption - buying stuff on tick. Mostly credit card and personal loan type debt.
c) Leverage to purchase existing assets. (most real estate investment falls into this category)

The problem is, interest rates have a different effect on each of the credit classes.

Class (a) credit will happen when a creditworthy borrower deems that they can invest with a marginal return higher that the interest rate they can get.
Class (b) happens when a creditworthy borrower wants something and thinks they can service the debt.
Class (c) would seem to be a bit of both, but since there is real security, the interest rate you can get is lower.

So you can get a situation where (c) is growing while (a) is not. This is not a problem if it is OK for (c) to grow as big as it likes, because (c) doesn't drive output and cause inflation. You just lower interest rates until (a) activity is high enough to get the "right" amount of growth.

But (c) growing endlessly probably means you have an asset-price bubble, and when the bubble bursts, you'll get a balance sheet recession, (b) will shut down, causing (a) to shut down as well.

Note that these people are not concerned so much about capital being kept away from "productive investment". They agree that as much debt can be created as there are creditworthy borrowers. But if you raise interest rates to control (c) you risk squeezing the life out of the real economy. Greenspan did that in 1999, and he didn't even stop the asset bubble rising and subsequently popping.

So how to drive (a) without (c) getting out of control when you can only have one overnight interest rate/cash rate/CB rate?

Some suggestions have been: (not all from the Minsky/Hayek guys I am referring to)

1) Macro-prudential controls.
2) Raise interest rates, but at the same time do some unfunded deficit spending.
3) Let the central bank control the rate of GST as well as the interest rates. --> leads to unfunded deficits, but not in the control of the pollies.
4) Financial repression. Push all the credit towards infrastructure building, industry and construction. Australia used to do this by rationing credit. The Japanese and Koreans did this in a big way through the 50s, 60s and 70s. The Chinese are doing it now. Basically you get an economy skewed away from consumption towards investment.

All of these have their own problems. But it is interesting to think about them.
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--Gloria Steinem
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mel
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^not to mention the situation is complicated further by the great variance in market driving forces in different states..
APF - a place where serious people don't take themselves too seriously. There's nothing else like it.
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miw
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mel
10 Oct 2013, 10:31 PM
^not to mention the situation is complicated further by the great variance in market driving forces in different states..
Indeed. But that is what fiscal transfers are for.
The truth will set you free. But first, it will piss you off.
--Gloria Steinem
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