View From The Couch - 31/Jul/2016

Frontier Gaol For Juvies Goes Guantanamo (And People Wonder Why)

I finally caught up with the Four Corners program about the juvenile detention in Northern Territory. It was as bad as the media has been carrying on about. The footage of youths in 'restraining chairs' looked like something straight out of Abu Ghraib. The images that have been leaked clearly show the full effects of Dr. Phil Zimbardo's experiment prison guards in real life. The Scottish born lawyer in the Four Corners presentation likens the handling to Guantanamo Bay - a kind of torturer's wonderland without much legal oversight. It certainly looks that way from the images we're shown.

What's really surprising is that people think that it would have gone any other way. Even after everything we know in this day and age, you have from our Prime Minister down, human rights people and children's welfare people, all holding public office wondering how on earth this could be happening in our very own 'civilised' country. Yet, lately I've been wondering if the kind prison system we have is anything remotely civilised. Let's not forget this nation was founded as a penal colony. The whole premise of this civilisation was founded on incarceration.

This must be the year for this discussion because I keep watching programs about incarceration one way or another. There's 'Orange Is The New Black' which anatomises the experience of US inmates in minimum security correctional; there's The Stanford Prison Experiment' which shows how guards come to behave the way they do because it is what they imagine the job means; 'Suits' Season 6 where Mike is in a white collar criminal prison and he is still vulnerable to corruption of guards; 'The Boss' where Melissa McCarthy's titular character goes to prison; all of them feature the prison experience well enough. In all of them, it is clear that guards behave badly but have the full backing of the state to do so, and so in a positive feedback of compounding moral hazard, they continue to find ways of behaving badly. And while that is all American content, there is nothing fundamentally different in the working structure of those prisons to ours. Our prisons are mostly doing the same stuff. Ours are equally brutal and overly focused on punishment.

Now, I'm not going to go and become some advocate for prison reform, but it has to be said there's something deeply wrong about the structure of the prison system whereby juvenile detention ends up looking like the Abu Ghraib - and we all know there was nothing right about what went on at Abu Ghraib. It was beyond the pail that Abu Ghraib happened in Iraq under our watch. For the exact same thing to be going on in peacetime Australia, directed at indigenous youths? We're rightfully scandalised, but where is the rational analysis? Why can't our politicians put two and two together?

The Royal Commission that has been announced appears to have very limited terms of reference. It is getting soundly rebuked by the Aboriginal community for its choice of commissioner, and it looks like it won't really do much that might be politically damaging. This suggests that Malcolm Turnbull knows that this isn't an isolated problem - after all, why would he limit the scope to the degree that he has, if he didn't want other things dug up. The obvious answer to that rhetorical question is that the Federal Government itself has children in custody, incarcerated in Nauru and Manus. And anybody with half a brain and education would be well familiar with the ramification of Dr. Philip Zimbardo's findings that more likely than not, the Federal Government has rogue 'prison guards' fully possessed by the jobs they have, bullying and torturing people in the name of the Australian people.

Yet our political ranks fear no hypocrisy when it comes to wagging its fingers at other nations on the planet when it comes to how they run their prisons, whether be Indonesia or Lebanon.
We're the civilised people, we love to claim. You can just tell the Royal Commission is going to do sweet fuck-all to curtail the institutional racism that layers itself over the Northern Territory prison system, nor will it have single suggestion on how to abate the 'prison guard' effect that turns otherwise normal people into institutional sadists. It's not like this is rocket science - it's just practical psychology - but because the Coalition government is socially conservative to the core it won't countenance any notion as to rethink the entire prison system from the top down. What will happen is that there will be a lot of crying testimonies and media carry-on but in a quarter of a century's time be all forgotten.

Brace yourselves for malarkey is coming.

The Bubble That Won't Pop

A couple items popped up this week about the property bubble. The first was over at the ABC where they interviewed Prof. Steve Keen.

"We have borrowed ourselves so much to the hilt that we are now dependent on that continuing to rise over time and it simply won't," he told the ABC's The Business. 

Many believe the Reserve Bank has been a steady guiding hand to the Australian economy in the years since the GFC, but Professor Keen believes it has guided the economy "straight toward the shoals" by encouraging households to borrow with low rates which has led to asset bubbles. 

"They don't know what they're doing," he said. 

"Our debt level according to the Bank of International Settlements, private debt level, has gone from 150 per cent of GDP to 210 per cent of GDP." 

He argued that means a large part of the growth that Australia has enjoyed since the GFC, while many other countries plunged into recession, has been fuelled by a 60 per cent rise in household debt. 

"Ireland did the same thing when they called themselves the Celtic Tiger and they don't call themselves that anymore," he said. 

"Spain was doing the same thing during its housing bubble and we've replicated the same mistakes.

I like the bit where he flat out says the RBA doesn't know what it's doing. He may even be right. If the Private sector debt has blown out to the level as described, it could only have happened under the watch of the RBA which has bee cutting interest rates steadily. And because the RBA is doing so on a mistaken logical principle they will end up at ZIRP, just like other central banks have done in the developed world.

There's an interesting phenomenon about banking that we're seeing whereby in pursuit of yield banks have devised the casino capitalism we see today. In a sense the banks became casinos, betting on houses as it issued mortgage bonds. When the subprime crisis hit American banks, it effectively meant the "bank" was wiped out, in the same ways some people bust casinos. So the US government of the day bailed out the banks using tax payers' money but has pretended that the bank never went bust ever since. In order keep up this facade so thereon't be a run on the banks, the US Fed has printed money by buying up all the bad debt and putting them into a kind of moratorium limbo - an in so doing kit asset prices up.

And that is how Australia's property bubble never quite popped, even during the GFC. The kind of stimulus spending and quantitative easing has nickname in Japan where these methods have been tied for two decades: PKO as in 'Price-Keeping Operation'. The central purpose of a PKO is not to let asset prices drop because that leads to a market rout right across the economy and that way lies the great depression.

And so the RBA, like all the other central banks keeps lining out money for very little interest and most people can't think of anything better to do than to stick it into the real estate market, which brings us to the Crikey article about the property bubble.

The main driver of housing prices remains the taxpayer-backed big four banks, whose balance sheets are so overloaded with housing debt that they have no choice but to keep the charade going as long as possible. Bank executives are paid based on profitability and shareholder return — short-term profitability, that is. The fact that a chunk of the loans being made are based on prices that bear no real semblance to a discounted cash flow valuation is seemingly unimportant. Eventually the music will stop, but by then, bank CEOs will have been paid $50 million and the clueless directors who allowed it all will be frantically checking the terms of the indemnity insurance. 

House prices are no longer a function of value but rather of how much people are prepared to pay. That in turn is determined by how much banks are willing to lend. And that amount continues to rise. Before the current boom started in 1997, the ratio of household debt to GDP was around 40% — it’s now more than 100 percent (it’s the same story for household income to household debt). In short, the banks are lending Australians a whole load of cash, and we’re using that cash to bid up the price of an unproductive asset (established housing).

It's really strange how anybody who looks at the structure of our economy can spot this, but Domain's still printing stories about houses being bought at high prices.
Yet there are people still out there busily buying into the Australian property market as an investment. It's not even making sense as an investment according to the article:

CoreLogic found that Australian dwellings increased in price by 10 percent in the past year. In Sydney and Melbourne the price rises were even more significant, with Sydney increasing by 13% and Melbourne by 13.9%. If the market had any degree of rationality, given the market is already expensive, rentals would have needed to rise by around 20% during the year to justify those price increases. However, CoreLogic also reported that Sydney rents were up a mere 0.4% and Melbourne up by 1.7% (both well below the inflation rate). 

That means if the market was insane a year ago, it’s even worse now. Already overprice property is increasing, in Sydney’s case, 20 times as fast as underlying income.
The problem is no one seems to care what the banks do (least of all the government, even though taxpayers are on the hook if any of the big banks fall over, which if the history of banking is anything to go by is a virtual certainty at some point). Moreover, successive governments’ taxation policies (negative gearing, no capital gains tax, minimal land tax) serve to exacerbate the insanity.

In a way, this massive property bubble is the price of keeping our asset prices up in things like our Superannuation accounts which, by rights should have been wiped out into oblivion in 2008. We all have some assets of some worth, some more than others, all held by banks. The RBA is doing its best to make sure we get to keep our winnings, big and small in the casino of world banking. But it would be crazy to think that the current LIRP environment on the road to ZIRP is anything but kicking the can down the road. One of these days the reckoning is going to come, probably from China having its day of reckoning. We don't even know how the Australian property market would respond in light of a recession because we haven't had one in like 25years. One of these days we'll find out. As Warren Buffett says, when the tide goes out, you get to find out who is not wearing any garments.

Quick Shots 01/Jan/2014

Hey, First Post Of the Year From Me

I've been busy watching a few silly movies on FetchTV in between the seasonal obligations. It's pretty cool watching on FetchTV because it saves the on the trip to the video store if nothing else and it sure beats buying more media. I've been stuck in the bad habit of buying stuff because I still have the carry-over from the ear when DVDs were actually worth something. It was ever so brief, but they were important for a good half a decade there until Blu-Ray came along and scotched that little bubble.

My New Years resolution last year was that I shouldn't just buy more media, but a) sometimes it is easier to just buy the box set and b) sometimes it's better to own than rent and c) it's impossible to stick to arbitrary rules meant that I bought my fair share of stuff. It's a bit of a worry if you can't remember if you've bought something or simply watched it on a rented bit of media, but if I think I'm going to go, "you have to watch this scene!?" or "you just have to hear this guitar solo!" then it's better to own this stuff.

Still, it's weird having a pile of this media that grew to be irrelevant so quickly. At least with LPs and CDs, there's an argument to be made that mp3s are a their best worse than either LPs or CDs, and that moving on to just data on hard disks isn't really an improvement in your listening pleasure. Besides which, you can squeeze a hello of a lot more out of LPs and CDs by having better speakers and amplifiers. Video is different.

With 4k TV looming in the not too distant future, even the marvelous Blu-Ray 1080p format is going to look pretty outdated in the next few years. I'm sure there's 8k and 16k TVs beyond that, and without an NBN pumping at last 50mbps it's going to be difficult to run the IPTV services on 4k and up download services, so maybe buying media won't become totally extinct. Let me just say, 4k is gorgeous. You're going to want this much more than the time you went from SD PAL or NTSC to HDTV. (That being said, I do seriously  wonder if there's any joy in seeing 4k TV footage of Kanye West or Miley Cyrus twerking.)

Getting Bad Advice

The news this week that's been most grating has been this business of Maurice Newman proclaiming that climate science on global warming is delusional.

In an opinion piece in The Australian newspaper, Maurice Newman, the Prime Minister's pick as head of his Business Advisory Council, claimed high energy costs caused by the carbon tax and the renewable energy target, introduced by the Howard government, had eroded Australia's competitiveness. Under Labor and the Greens, Australia had been taken ''hostage'' by ''climate change madness'', Mr Newman wrote.

"Newman!!"

It's really no big deal except for the fact that it's wrong and willfully wrong, and that he is slated to offer up advice to the Prime Minister based on this kind of idiotic denialism. If nothing else, it shows Tony Abbott still thinks the science on this is 'complete crap'. What's even weirder is that because the first 100days of Tony Abbott's time in office was 'complete crap', we're not surprised in the least bit find that his business advisor is a highly motivated climate change denialist.

Can We Please Stop With The Government Debt Hysteria?

This one came in from Skarp last week but I've been a bit preoccupied. Paul Sheehan - he of the rather squeaky voice and reflexively right-leaning views - wrote this rather tawdry column.

At 12.30 on Tuesday, Hockey, who has also been the stand-out thespian of the new federal parliament, will unveil the real horror, dysfunction and narcissism of Kevin Rudd's contribution to Australian political history, disably assisted by Julia Gillard. Hockey will release the mid-year economic and fiscal outlook, known in the trade as MYEFO, which will show a budget deficit much worse than Labor led us to believe, probably close to $50 billion, debt obligations much higher than Labor led us to believe, and unfunded liabilities that are so irresponsibly crushing the government will have to walk away from many of them. The most monumental folly is the National Broadband Network, whose economic rationale was worked out on a piece of paper by Rudd. The scheme subsequently created by former communications minister Stephen Conroy would cost more than $70 billion and never recover its cost of capital. The Abbott government will have to start again.

The way that paragraph is written, you'd think that the sky was going to cave in. Fortunately, professor Steve Keen had this article as a retort:

I’m not going to debate (or defend) Kevin Rudd’s personality, but getting this hysterical over a $50 billion deficit in a $1.5 trillion economy? Oh come on: that is slightly less than 3 per cent of GDP (the precise GDP figure is $1.525 trillion, according to the Australian Bureau of Statistics). Comparable figures for some of our trading partners are 5.5 per cent for the USA, 6 per cent for the UK, and 10 per cent for Japan. Australia’s deficit for 2013 is almost 50 per cent below the expected average for the OECD of 4.8 per cent of GDP.

Of course, finding that out doesn’t require a trip overseas: all you have to do is search the web. But what a trip overseas might alert Sheehan to is the economic performance of the rest of the planet – and especially of those parts of it that, as he does, make the size of the government deficit the only stick by which economic performance is measured.

The rest of the article is Keen dismantling Sheehan's stated position that all this debt is somehow crippling and wrong.Austerity i a terrible thing; not to mention the fact that it doesn't work.

You sort of wonder how people like Paul Sheehan keep jobs as columnists. It's like he gets paid not for his thinking and critical faculties - which on the whole seem faulty anyway - but for how hard his blowhard entries blow. And they really blow. Sheehan's symptomatic of what's making the media market worse in this era. You just can't trust what any of these sloppy commentators write.  but somehow they're up there with a public soapbox on the SMH masthead spreading his kind of nonsense. I mean really! Why do they have to give 'equal time' to stupidity and misinformation?

But back to Keen's take home message about Government debt:

I would far rather see governments acknowledging the problem of private debt, and doing something concrete to reduce it – since the financial sector should never have been allowed to create much of that debt in the first place. But as a second best policy, government spending should buffer the impact of the decline in private sector deleveraging. To do otherwise is to turn a serious recession into a genuine Depression – as Europe has done.

Behind the veneer of apparent fiscal prudence, that is what hysterical articles like Sheehan’s are encouraging – in utter denial both of the actual cause of the crisis and, more importantly for a journalist, in ignorance of what even casual empiricism shows has been the actual impact of austerity.

That, just about sums it all up.

Steve Keen Says...

Some Sobering Graphs

Pleiades pointed me towards this last week and this week. Having read through the 2 installments I couldn't tell you which one was more frightening. Lets try a taste from the first week first:

While wages have risen, the 2.8 times increase in loan repayments means that mortgage payments on an average first home loan have gone from taking 40 per cent of after-tax income of the average worker in the 1990s to 64 per cent now – after reaching a peak of 74 per cent in late 2008 before the RBA slashed interest rates (the ratio fell to 53 per cent, and it would have fallen further had the first home vendors boost not caused house prices to skyrocket again).

In the early 1990s, a young wage earner could aspire to financing a house purchase using his or her income alone. Now, that’s out of the question.

Faced with this level of potential debt-servicing costs, young would-be house-buyers are giving up on the dream of home ownership – and its attendant nightmare of debt peonage. Recently there have been calls for a first home buyers' strike. A 'buyers’ strike', whether organised or not, is what will end the Ponzi scheme of debt-inflated house prices, because like all Ponzi schemes it only continues to work so long as new entrants outweigh those trying to cash out.

That's it in a nutshell. There are some interesting graphs that follow but the take home point of the first article is that yes, there's a bubble going on, and it's gettng to the point where the bubble can't be supported by the willing participation of the market. Cutting to the chase, the growth in mortgage debt is at once the secret of our banking sector's success. Here's the elaboration in the second article:

Looking back over past data there are several consistent patterns that can be seen.

Firstly, house prices and bank shares are correlated. There was one aberration – the 1970s – but that was marked by peculiar dynamics arising from the historically high inflation at the time. Generally, bank shares go up when house prices rise, and fall when the fall.

Partly, this is the general correlation of asset prices with each other, but partly also it’s the causal relationship between bank lending, house prices, and bank profits: banks make money by creating debt, rising mortgage debt causes house prices to rise, and rising house prices set off the Ponzi scheme that encourages more mortgage borrowing. The bubble bursts when the entry price to the Ponzi scheme becomes prohibitive, or when early entrants try to take their profits and run.

Secondly, the fall in the bank share price is normally very steep, and it occurs shortly after house prices have passed their peaks. Holding bank shares when house prices are falling is a good way to lose money – and conversely, if you get the timing right, betting against them can be profitable. That’s why Jeremy Grantham – and many other hedge fund managers from around the world – is paying close attention to Australian house prices.

Thirdly, house prices and bank shares are driven by rising debt, and when debt starts to fall, not only do house prices and bank shares fall, the economy also normally falls into a very deep recession or depression. This is the crucial role of deleveraging in causing economic downturns, including the serious ones where debt falls not just during a short cycle prior to another upward trend, but in an extended secular decline.

There is also one cautionary note about the current bubble: though history would imply that there is a very large downside to bank shares now, it’s also obvious that bank shares fell a great deal in 2007-09, so that much of the downside may already have been factored in.

It's well worth checking into those pages to have a good look at the graphs because they're very scary. The graphs bear very close inspection. The numbers clearly tell us we're in one big mighty property bubble. The rest of what is said to describe it is window-dressing.

I'm wondering how all this leveraging into mortgages is going to get de-leveraged when we fully switch into the 2speed economy where miners will  boom and drive inflation while the rest of the economy gets taken for a ride. There's some pain up ahead if you aren't somehow hooked into the mining sector, and if your career's all about finance and banking, then you may well be in for a mighty wallop when the bubble bursts. It's going to be the Australian financial crisis. We're going to hate every bit of it, just as people  in the rest of the developed world are hating their post-GFC medicine right now.