SMH on Prof. Steve Keen (1 Viewer)

beefnoodle

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Source: Jessica Irvine
Walking on a wire stretched between stimulus and debt

JESSICA IRVINE

February 19, 2010



You've got to hand it to Steve Keen, the mild-mannered house price Cassandra of Sydney's western suburbs: he knows how to get a headline and he sticks to his guns. If only his predictions were so reliable.
The 57-year-old academic will embark on a 224-kilometre hike from Canberra to the top of Mount Kosciuszko in April, wearing a T-shirt reading ''I was hopelessly wrong on house prices. Ask me how!'' He lost a bet against a Macquarie Bank economist, Rory Robertson, that house prices would fall.
Keen was so convinced in late 2008 that prices were about to fall precipitously, he sold his house and moved to a nearby rental, only to watch prices climb more than 10 per cent last year. Keen insists that in 15 years, he'll have been proved correct.
Robertson is not having a bar of it. ''To humour Dr Keen, I've said that if Australian house prices fall by 40 per cent from any new peak in my lifetime, I will follow in his footsteps. Similarly, if Dr Keen proves the existence of the Loch Ness monster, I will take the same long tedious walk.''
If every economist was as convinced of their predictions as Keen and Robertson, Paddy Pallin would be Australia's most profitable retailer.
Forecasting economists have not covered themselves in glory recently. Every major bank economist in Australia got it wrong when they tipped the Reserve Bank would raise interest rates again this month.
But there's reason for sympathy. Despite the thick veil of complacency and optimism which has descended over the Australian political economy, the economic outlook remains deeply uncertain.
Blindsided by the global financial crisis, policymakers around the world, including the Rudd government, engaged in an unprecedented experiment with fiscal policy, spending big to head off a sharp dip in economic activity. It has never been attempted before, so it's hard to know the consequences. We're in uncharted waters.
Globally, the outlook is particularly cloudy. Concern among investors about the stability of the world banking system has been replaced with concern about sovereign debts - or fears governments will default on their repayments.
Barack Obama this week celebrated the one year anniversary of his $US787 billion stimulus package by crediting it with staving off another Great Depression and creating 2 million American jobs. However, the US jobless rate stubbornly remains at 10 per cent. Despite this, support for further stimulus is waning amid forecasts that US gross government debt will next year equal America's entire annual economic output. The immediate risk is that demands to cut spending will cut short the nascent recovery.
In Europe, the situation is worse. Policymakers are scrambling to work out what to do if the Greek government defaults, having kept fraudulent accounts to disguise the size of its debts. In the long term, the only real answer is to cut spending or raise taxes. But workers in Athens have taken to the streets to protest against such moves. Europeans seem to find it harder than Americans to stomach lower government spending when the jobless rate is still at double digits.
In China, government stimulus has also primed the economy. Policymakers there are now wondering how to rein in lax credit controls without threatening recovery.
Back home, despite the growing confidence that we are out of the woods, risks also remain.
I don't think Australia is on the precipice of a 40 per cent fall in house prices, but some bursting of the first-home buyers' bubble remains possible after the grant boost ended on New Year's Eve. How will these buyers cope as interest rates rise? Similarly, the retail sector faces a hard slog in the absence of cash handouts and amid a new mood to pay down debts.
The Reserve Bank kept interest rates on ice this month to give it more time to assess the impact of its moves last year and the government's withdrawal of stimulus. Clearly it expects to lift rates further, but not every month and possibly not even next month.
All of this uncertainty puts the Rudd government, preparing its election-year budget battle plan, in a difficult spot.
As growth hysteria grips popular debate, it faces calls to wind back its stimulus and introduce tough-love measures in the May budget to begin pulling it into balance. But Treasury has calculated the stimulus began acting as a drag on growth from January this year, having peaked in impact in the middle of last year. If this is correct, an overly austere budget could crunch the economic recovery and risk a ''double dip'' in growth.
On the other hand (economists have more hands than Ganesh), if Australia is firmly on the road to recovery, not to mention a second mineral boom buoyed by a resurgent Chinese economy, the boom will automatically restock budget deficits, reducing the need for harsh budget cuts.
The most difficult outcome for the government would be if economic growth returns quickly to trend, but then stagnates, strong enough to force it to keep to its promise to keep real spending growth to 2 per cent, but not high enough to significantly reduce budget deficits by itself. If I had to hazard a guess, it is this last scenario that looks most likely.
If I'm wrong, I'll walk from the Silo bakery in Kingston, Canberra, to the top of Mount Ainslie wearing a Kevin 07 T-shirt … which sounds quite pleasant, now I think of it.
He is kinda right, if it was not for the government intervening in the markets, house prices could have (or should have) dropped by 40%. :)
 

kagura

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Why are you up this early in the morning?! Considering I still haven't slept yet, I'm not going to bother reading that article Lol. Damn tute rego... ;)
 

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